Enforcing a Charging Order Against a Utah LLC Interest

You have a judgment. The debtor has no wages to garnish and no accounts in his own name. What he has is an LLC, and the LLC has a business account that pays his rent, his car, his groceries, and his subscriptions.

That pattern is common, and Utah law has an answer to it. The charging order is the creditor’s exclusive tool for reaching a debtor’s LLC interest. Used passively, it can be easy to evade. Used with a receiver and the court’s broad enforcement power, it can reach the money the debtor is routing around it.

1. What a charging order does

On application by a judgment creditor of a member or transferee, a court may enter a charging order against the judgment debtor’s transferable interest for the unsatisfied amount of the judgment. The order is a lien on that interest. Once the LLC is served, it must pay over to the creditor any distribution that otherwise would be paid to the debtor (§ 48-3a-503(1)).

The statute makes this the exclusive remedy by which a judgment creditor may satisfy a judgment from the debtor’s transferable interest (§ 48-3a-503(8)). The creditor cannot simply levy on the LLC’s bank account or seize its property because the debtor owns part of it. The route runs through the charging order.

2. The problem: distributions that never come

A charging order redirects distributions. It does not force the LLC to make any. A debtor who controls the LLC can stop declaring distributions and keep using company money for personal expenses. Payments that are distributions in substance get booked as something else: personal bills paid directly from the company account, transfers to the debtor’s own accounts, payments to family members.

Those payments are the evidence. Subpoenaed bank records that show the LLC paying the debtor’s living expenses after the charging order was served are what support the next step.

3. Receivers and orders that give the charging order effect

The statute gives the court two enforcement powers. To the extent necessary to effectuate the collection of distributions under the charging order, the court may (a) appoint a receiver of the distributions, with the power to make all inquiries the judgment debtor might have made, and (b) make all other orders necessary to give effect to the charging order (§ 48-3a-503(2)).

The Tenth Circuit has read subsection (2)(b) broadly. In Earthgrains Baking Cos. v. Sycamore Family LLC, the LLC failed to comply with a charging order. The district court appointed a receiver, who concluded that foreclosing on the debtor’s interest would not be effective, and the court ordered the LLC’s cash transferred and some of its real estate sold to make up for the distributions the LLC failed to pay. The Tenth Circuit affirmed that liquidating LLC assets fell within the statute’s grant of power to make all orders necessary to give effect to the charging order.

The same decision draws the boundary. The Tenth Circuit reversed the amount, because the district court built its figure mostly on a distribution that had not yet been made. Enforcement orders should be tied to distributions actually made, or diverted, after the charging order took effect, and proved with records.

4. Foreclosure, and the single-member exception

If the creditor shows that distributions under the charging order will not pay the judgment within a reasonable time, the court may foreclose the lien and order the sale of the transferable interest (§ 48-3a-503(3)). In the ordinary case, the purchaser acquires only the transferable interest. It does not become a member and does not gain management rights.

Single-member LLCs are different. When the charged interest is the entire membership interest of the sole member, the purchaser at foreclosure acquires the member’s entire interest, becomes the member, and the debtor is dissociated (§ 48-3a-503(6)). For a debtor whose single-member LLC holds real estate or an operating business, foreclosure can transfer control of the entire enterprise.

Two escape valves exist. The debtor may extinguish the charging order by satisfying the judgment before foreclosure (§ 48-3a-503(4)). And the LLC, or members whose interests are not charged, may pay the judgment in full and step into the creditor’s shoes (§ 48-3a-503(5)).

5. Out-of-state LLCs and interests

Debtors often hold interests in LLCs formed elsewhere. In AVT–New York, L.P. v. Olivet University, the federal district court in Utah, applying Utah’s statute through Federal Rule of Civil Procedure 69, entered a charging order against the debtor’s interests in New York and Delaware LLCs. The court rejected the argument that it needed personal jurisdiction over the foreign LLCs themselves. It treated a separate argument, that Utah law does not permit charging orders against LLCs formed in other states, as waived because it was raised too late.

That leaves the choice-of-law question open in Utah’s appellate courts. A creditor seeking to charge an out-of-state interest should brief it rather than assume it.

6. For LLCs and co-members served with a charging order

A charging order binds the LLC once it is served. Paying distributions to the debtor, or paying the debtor’s personal expenses in place of distributions, invites a receivership and an order to liquidate company assets. Co-members who want to protect the business have a statutory option: pay the judgment and succeed to the creditor’s rights. Ignoring the order is the most expensive choice.