Source: https://www.lonestarlandlaw.com/charging.html
Timestamp: 2019-04-24 12:42:54+00:00

Document:
Much is made in asset protection circles about charging orders and the circumstances in which they may occur. What is a charging order? It is a judge's order enabling a creditor to intercept and receive any distributions, payments, or proceeds from a specific entity to the judgment debtor. The judgment creditor becomes, in effect, a court-ordered lienholder and assignee of any such funds. It is important to distinguish the applicability and effect of a charging order from the outright attachment or seizure of a judgment debtor's interest in the entity. It is similarly important to identify which entities may be subject to a charging order. In Texas, these are limited liability companies and partnerships (general and limited).
Unlike an LLC membership interest or partnership interest which is only subject to a charging order, corporate stock may be seized and sold at public auction. Stock in a corporation is non-exempt personal property, Tex. Bus. Orgs. Code § 21.801, that can be subject to levy, Tex. R. Civ. P. 641; Tex. Bus. & Com. Code § 8.112, garnishment, Tex. R. Civ. P. 669, or turnover, Tex. Civ. Prac. & Rem. Code § 31.002.
(a) On application by a judgment creditor a member of a limited liability company or of any other owner of a membership interest in a limited liability company, a court having jurisdiction may charge the membership interest of the judgment debtor to satisfy the judgment.
(c) A charging order constitutes a lien on the judgment debtor's membership interest. The charging order may not be foreclosed on under this code or any other law.
The charging order is an exclusive remedy. In other words, the judgment creditor gets paid if and when distributions from the LLC occur. The charging order is therefore not tantamount to taking over the membership interest of a debtor or seizing control of the company. Moreover, the creditor may not attach the debtor's membership interest; force its sale or transfer; or (absent a judgment piercing the veil) reach any assets of the LLC itself.
What if the LLC pays a member a salary for services? Is this a "distribution" subject to a charging order? Probably not. Such a salary would not be subject to garnishment since it is exempt under Property Code section 42.001(b)(1) which provides that "current wages for personal services, except for the enforcement of court-ordered child support payments" is exempt "from garnishment, attachment, execution, and other seizure." This includes severance pay.
The exclusive nature of a charging order does not limit a creditor's remedies once a distribution has been carried out. Distributed funds or assets become non-exempt personal property once they are received the debtor and may therefore be reached by attachment, garnishment, or turnover. Stanley v. Reef Secs., Inc., 314 S.W.3d 659 (Tex. App.—Dallas 2010, no pet.).
The rationale behind the exclusivity of the charging order remedy is to avoid undue disruption to the operation of the entity's business; after all, the creditor involved has a judgment against a member, not the entity itself, so the entity should not (at least in theory) be adversely affected. This principle has been eroded somewhat by Heckert v. Heckert, No. 02-16-00213-CV, 2017 WL 5184840 (Tex. App.—Fort Worth Nov. 9, 2017, no pet. h.). The Heckert case involved persons who were formerly married and the entity involved merely owned stock and did not operate a business, so the ruling allowing turnover should be viewed within these narrow circumstances.
It is important to note that a "judgment against a partnership is not by itself a judgment against a partner, so a creditor must obtain a judgment against the partner individually. A creditor may attempt to do so in the suit against the partnership or in a separate suit. It may not, however, seek satisfaction of the judgment against a partner until a judgment is rendered against the partnership." American Star Energy & Minerals Corp. v. Stowers, 457 S.W.3d 427, 429-30 (Tex. 2015).
Sound asset protection practice requires that planning and strategy take place well in advance. Once a lawsuit is threatened or filed, it is more challenging to find legitimate ways of reorganizing or redistributing one's assets so as to reduce vulnerability to post-judgment collection efforts. One method of pre-suit planning is to form an LLC with two classes of membership: Class A and Class B. The company agreement should define Class B as any membership interest that has been substantially influenced or made subject to a collection device or court order, including a charging order. The conversion of Class A to Class B occurs automatically if that occurs. The effect? Class B members have no power to vote or serve as managers. Under such circumstances, it is difficult to see how a Class B member could force the liquidation of assets in order to benefit its own interests. Accordingly, Class B membership is of limited value unless the LLC is dissolved.
Property Code section 42.004 seeks to restrain fraudulent transfers, including the pay-down of exempt assets, if undertaken "with the intent to defraud, delay, or hinder" a creditor. This reaches back two years for liquidated claims, one year for unliquidated or contingent claims. However, proving intent may be a difficult task if the judgment debtor goes about his or her business in an orderly, incremental fashion that can plausibly be described as normal, or at least justifiable on grounds independent of litigation concerns. Tex. Prop. Code § 42.004(c).
Copyright © 2019 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.

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