The charging order is an arcane legal construct that will be getting a lot more attention as the increasing popularity of LLCs meets the new economic realities. Many judgment creditors will be surprised and disappointed to learn that their judgment entitles them to nothing more than the distributions (if any) from an LLC. That is why you see challenges to the charging order like the one I wrote about yesterday.
One of the first cases to deal with charging orders and the single-member LLC was In re Albright, 2003 Bankr. LEXIS 291 (April 4, 2003). Ashby Albright was the sole member of a Colorado LLC. She was also its manager. The LLC owned Colorado real estate. Ashby, not the LLC, was the debtor in bankruptcy.
The bankruptcy trustee wanted to take control of the LLC and sell the real estate to satisfy Ashby's debts. Albright contended that the trustee was acting on behalf of her creditors and was entitled to nothing more than a charging order under Colorado law (the Colorado charging order provision at the time was almost identical to the current Iowa provision). Of course, this was a case about the bankruptcy trustee's authority, not that of a judgment creditor.
The bankruptcy court rejected Albright's argument. The court concluded that (1) the LLC membership interest was personal property transferred to the bankruptcy estate when she filed for bankruptcy (including both the governance rights as well as economic rights even though Colorado law made it clear that a membership interest meant only economic rights), (2) because she was a sole member of the LLC, a transferee/assignee of an LLC membership interest could become a member without the consent of the members (as required by Colorado law), and (3) the charging order serves no useful purpose with respect to single-member LLCs. The court granted control of the LLC to the bankruptcy trustee.
Albright is an example of a reverse piercing case. Piercing the corporate/LLC veil is achieved by going through an entity to get to the assets of the owners to satisfy the entity's debts. In a reverse piercing the creditor goes through an individual to get to the entity's assets to satisfy the individual's debts.
Albright also raises a lot of issues regarding the treatment of single-member LLCs in the context of charging orders and bankruptcy of the single member. To be continued...