P R O B A T E   &   P R O P E R T Y
March/April 2004
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Articles from other issues of Probate and Property

Department

Letters to the Editor

A Charging Order and Foreclosure

After my co-author and I submitted our article (Elizabeth M. Schurig & Amy P. Jetel, A Charging Order Is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?, Prob. & Prop. 57 (Nov./Dec. 2003)) for publication, it came to our attention that Nevada revised its partnership statute in the way that we suggested in our article is more protective. Nevada’s law now explicitly states that the charging order is the exclusive remedy against a partnership interest, thus placing Nevada in the category of states with the most protective partnership laws.

Because our goal in writing the article was to sensitize attorneys to the fact that partnership interests may not be as protected as many attorneys think, and to promote discourse that could possibly lead to legislative change, we were pleased at the response we received from your readers. The discussions that resulted from these inquiries revealed, however, that a further explanation of the difference between a charging order and a foreclosure is merited.

To understand the core difference between the remedy of a charging order and the remedy of foreclosure, it is helpful to reflect on what happens when a creditor has a charging order and what happens when the creditor forecloses on the interest that is subject to the charging order. “A charging order entitles the judgment creditor to whatever distributions would otherwise be due to the partner . . . whose interest is subject to the [charging] order. The charging order does not entitle the creditor to accelerate any distributions or to otherwise interfere with the management and activities of the limited partnership.” Alan Bromberg & Larry Ribstein, Limited Liability Partnerships, The Revised Uniform Partnership Act, and The Uniform Limited Partnership Act (2001) (2002 ed.), at 940. The charging order only allows distributions that would otherwise be made to the limited partner to be made to the creditor until the debt is paid. Once the debt is paid, the charging order is fulfilled and extinguished. On the other hand, “foreclosure of a charging order effects a permanent transfer of the charged transferable interest to the purchaser” (or creditor if the creditor forecloses on the 2001 Act’s Section 703(b) lien). Id.

It is the permanency of the foreclosure that makes it a more onerous remedy. For the debtor, paying the debt by way of a charging order so that only the debt is paid does not materially change the position of the debtor. Once the debt is paid, the debtor will be free of the order, and life will go on as it did before the charging order came into effect. In a foreclosure situation, however, the debtor loses the partnership interest and all of the future benefit in that interest forever (even if that benefit greatly exceeds the debt amount), including a right to that partner’s pro rata share of the net assets of the partnership at liquidation. Uniform Limited Partnership Act§ 702(b) (2001). In addition, upon foreclosure, the debtor-partner may also lose the managerial rights afforded him by Section 702(b) if the other partners consent to expel him in accordance with Section 601(b)(4). Depending on the relationship with the other partners, this could be incentive for the partner to settle with the creditor instead of forcing a settlement the other way around.

These differences reveal that a statute that is silent as to foreclosure and has been interpreted in some states to allow only a charging order (the 1976 Act) is still more protective than a statute that explicitly allows foreclosure (the 2001 Act).

 

Elizabeth M. Schurig
Giordani, Schurig, Beckett & Tackett, LLP
Austin, Texas

 

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