I attended a seminar for judgment professionals this week given by Chris Riser concerning charging orders. Some of you will recognize the name as the co-author with Jay Adkisson of Asset Protection:Strategies and Concepts. This duo has moved to the other side of the isle and now focus on collections and creditor strategies.
Here are two points I found very interesting. Many of the DIY kits have an LLC operating agreement that actually requires the LLC to distribute available funds. That makes charging order protection useless as you are forced to distribute funds to your creditor rather than hold them in the LLC and wait out the creditor.
Chris told us about a recent case in NC where the judge granted an overly aggressive charging order. He managed to prevent the LLC from making distributions to members without his say, from making loans to anyone without his say, and from making large purchases without his say. Without any kind of management rights, he prevented the LLC from conducting business and forced a settlement on his terms.
Creditors of a c-corp can seize the shares, vote for a board that will appoint a management team that will liquidate the company and use the funds to pay the judgment. Compare to a charging order that limits a creditor to distributions of an LLC or partnership. They have no management rights and cannot force a distribution. They must wait for the LLC/partnership to decide to pay and that doesn’t happen if the management is sympathetic to the debtor. The charging order forces the creditor to settle on the debtor’s terms if he wants anything. That is the theory. Given what I have posted, creditor attorneys are getting charging orders that are impacting the LLC/partnership’s ability to operate and forcing a more favorable settlement.
The other point was a deficiency in the DIY kits people buy from the Internet or a low cost provider. They have language that requires the LLC/partnership to make distributions if possible. That means the creditor gets paid and has no reason to settle.