In the face of creditor attack, a charging order is a court order that limits the relief offered to a creditor to distributions from the LLC or LP. which its members would otherwise be entitled to receive. The creditor will not have rights to a membership interest in the company, or to the company’s assets. Furthermore, a properly worded operating agreement will help insure that an LLC manager has control over whether or not to make any distributions in the first place. Let’s look at the relevant statutes in the New Mexico LLC Act that govern a charging order:
53-19-33. Right of assignee to become a member. (1993)
A. Except as otherwise provided in the articles of organization or an operating agreement, an assignee may become a member only if the other members unanimously consent.
A charging order assignee is a creditor that is assigned an interest in an LLC in order to satisfy a judgment. However, as we see there are some restrictions to what an assignee can get from this arrangement. The first restriction, according to the above statute, is that an assignee cannot become a member of an LLC without your consent. The judge cannot force you to “consent” to them becoming a member. (Consent means voluntarily agree.) Note that this type of statutory protection is not offered to corporations. Here is some more relevant statute law:
53-19-32. Assignment of interests. (1993)
(3) an assignment does not of itself dissolve the limited liability company;
(4) until the assignee of a membership interest becomes a member, the assignor continues to be a member and to have the power to exercise all rights of a member
Here we see some further protection as relates to charging orders. A judge cannot dissolve an LLC in order to allow a creditor to get to the LLC’s assets, merely to collect on a judgment. Now, if an LLC engages in fraud, fails to maintain its resident agent, or does something else that would warrant it being dissolved, it may still be dissolved; yet the LLC members, so as to avoid the dissolution of their LLC, can control all of these things. We also read here that a creditor cannot gain control of an LLC, unless it becomes a member in concordance with NMSA 53-19-33(A) (which can only happen with the existing members’ unanimous consent.) Here is the final nail in the coffin:
53-19-32. Assignment of interests. (1993)
(2) until the assignee becomes a member in accordance with the provisions of Subsection A of Section 33 [53-19-33 NMSA 1978] of the Limited Liability Company Act, an assignment entitles the assignee to receive only the distributions and return of capital to which the assignor would be entitled with respect to the interest he assigned if he had not assigned such interest;
So these restrictions, according to statute law, are why LLC creditors are limited to charging orders. As long as you avoid a couple of pitfalls (the alter-ego ruling, or using the LLC for an unlawful purpose, which would allow the LLC’s veil to be “pierced”) your LLC will provide very good asset protection.
NOTE: It is important to realize the following:
- In some states, single member LLC’s may not have the full protection of charging orders that a multi-member LLC would have
- Charging order protection only protects against outside liability, where a creditor attempts to attach LLC property for a debt that does not belong to an LLC (typically this debt instead belongs to an LLC member.) If an LLC is sued directly, and a judgment is awarded against it, then this is known as inside liability. In this instance, an LLC limits liability very much like a corporation would. Assets in the LLC could be attached by a creditor to satisfy a debt, however the creditor cannot go after the LLC members’ personal assets, or assets held in other LLC’s. In other words, the LLC members benefit from the limited liability that a limited liability company provides. Structuring one’s affairs among different limited liability entities in order to take maximum advantage of this is known as liability encapsulation.