Collecting Accounts Receivable Part VII: Charging Orders Against a Debtor’s Business Interest
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This Blog is Part VII in a series of Blogs designed to provide business owners with a high-level overview of the legal process for collecting on past-due accounts receivables. Specifically, Part VII focuses on satisfying a creditor’s outstanding judgment balance by issuing a charging order against a debtor’s business interest.
Commercial creditors who obtain a judgment against a debtor often do so because of business deals and commercial contracts gone bad. It naturally follows that for those individual debtors there is more than likely a business entity that he or she has an interest in that led to them entering into that business deal or contract. This is good news for a judgment creditor as this presents another entity from which the creditor can attempt to collect the judgment balance owed by the debtor.
A charging order is the primary way to collect upon the debtor’s business interest in a partnership, limited partnership or limited liability company (LLC). See Fla. Stat. § 620.8504; Fla. Stat. § 620.1703; Fla. Stat. § 608.433(4)(a). Once a final judgment is entered, and the creditor has knowledge of the debtor’s various business interests, the creditor can petition the court for a charging order. This process involves filing a Motion for Charging Order along with a proposed Charging Order for the court to enter. Although a hearing is not necessary, some judges may require one.
Once the court enters the charging order, the creditor should serve it on the business’s registered agent. Under the charging order, the business must pay to the creditor the debtor’s interest in the business, which could be paid in the form of profit sharing, periodic distributions and/or capital gains distributions. If the business fails to pay the debtor’s interest to the creditor, this could result in an order of contempt against the business or the appointment of a receiver to oversee the business’s operations to ensure compliance with the charging order. See Fla. Stat. § 620.8504(1).
A charging order provides the creditor with only the rights of an assignee as to the debtor’s interest. This allows the creditor to receive the debtor’s distributions but does not allow the creditor to assert control over the business through the debtor’s interest. In the case of a partnership and a single-member LLC, however, the charging order creates a lien that the creditor can foreclose upon pursuant to a court-ordered foreclosure sale. See Fla. Stat. § 608.433(6); Fla. Stat. § 620.8504(2). A foreclosure sale via charging order is not available against an interest in a multi-member LLC or a limited partnership. Fla. Stat. § 620.1703(3).
For those judgment debtors who have an interest in a profitable partnership, limited partnership or LLC, a charging order is a very effective tool that the judgment creditor can use to satisfy the outstanding judgment debt. Stay tuned for Part VIII of this series, which will focus on levying and executing on a debtor’s personal property as another method for satisfying the final judgment balance.