Kentucky Law Journal
What do you do? As a lawyer (or prospective lawyer), I mean – what do you do (or what will you do) in exchange for a salary or hourly fee? You will probably be expecting a lot of money for your services; so what, exactly, is it that you will do to justify that payment?
The answer, of course, is varied because lawyers do lots of different things. And, among these activities, there are some things that only lawyers can do. Chief among those is suing people. Suing people is something that only lawyers do because states do not generally permit non-lawyers to appear in court or file pleadings. Accordingly, doing so – whether in pursuit of injunctive relief, declaratory relief, or a monetary remedy – is a significant part of the current legal market. Indeed, it is the professional focus of the many lawyers who practice commercial litigation or who perform collections work. In these areas of the law, lawyers sue people in an attempt to validate their clients’ rights and causes of actions with a money judgment.
So what you do very likely comes down to getting money. This is not novel, of course: many people spend their time arguing about, dealing with, or negotiating over money. What is somewhat unique, however, is just how clean and abrupt a lawyer’s role is in this context: your job is (or will be) to take property belonging to someone else and convert it into property belonging to your client – in other words, to create a property interest for your client.
Creditors have a unique ability in our legal system to acquire property rights in assets belonging to debtors. This paper examines these “creditor property rights,” in general, and those granted to creditors of debtors that own interests in partnerships, limited partnerships, and limited liability companies, in particular. More specifically, this paper examines charging orders – the redress granted to a creditor vis-à-vis a debtor’s interest in a partnership entity – and argues that this remedy is a much more significant, useful, and choate right than is generally acknowledged by either the academy or the bar.
Part I begins this examination by looking at the history of creditor property rights and the manner in which they have developed over the years, culminating in our current system, which allows creditors to “convert” debtor property to creditor property via execution. This redress represents the ultimate creditor right, but it does not stand alone. Rather, the courts have fashioned a number of remedies that grant to creditors a “partial” property right. Of chief interest here is the charging order, which is reviewed in detail in Part II. Therein, the function, history, and evolution of this remedy from its inception is explained. The charging order initially developed in the partnership context, in response to a perceived unfairness existing when a creditor gained unfettered rights in the partnership interest of a debtor-partner and the partnership’s underlying assets. Based on this inequity, the courts granted creditors a provisional right in partnership property (a “quasi” property right) by permitting the creditor to intercept certain distributions that would otherwise flow from the partnership to the partner but prohibiting any interference with the partnership itself. The remedy quickly spread to limited partnerships and was incorporated into LLC law from its inception. This is particularly important given the explosive popularity of the LLC over the last thirty-five years and the fact that the charging order – and its attendant limitation on creditors (whether real or perceived) – has had an enormous effect on planning, on transactional work, and on litigation in general.
Part III expands upon Part II’s examination of the charging order remedy and argues that that creditors of partnership entity owners are not as limited as is widely believed and that the perception of the charging order as an effective barrier to collection is exaggerated. Part III focuses on the underlying purpose of creditor property rights and charging orders and analyzes the language of some of the statutes that create the charging order remedy. By placing charging orders in their proper context (as a type of creditor property interest) and by focusing on actual statutory language, this Part highlights the options available to holders charging orders. These options are substantial and should be more aggressively utilized by courts and lawyers. If that occurs, the charging order will assume a more rightful place in the hierarchy of creditor rights and afford much greater creditor protection than they presently do.
The Article concludes, then, that most lawyers’ belief that a charging order effectively precludes creditor recovery is significantly overstated and that, given the extraordinary prevalence of partnership entities today, this is an important point that lawyers, teachers, and students overlook at their own peril.
Chad J. Pomeroy, Think Twice: Charging Orders and Creditor Property Rights, 102 Ky. L.J. 705 (2014).