Delaware Charging Orders: Powerful Remedy, Limited Reach
For a judgment creditor seeking to enforce against assets held through a Delaware limited liability company or partnership, the debtor’s membership or partnership interest can be an important enforcement target. But Delaware's statutory charging-order regime imposes a fundamental limitation: a creditor can reach the debtor's economic interest in the entity, not the underlying assets.
The statutory framework
Section 18-703 of the Delaware Limited Liability Company Act establishes the principal mechanism for enforcing a judgment against a Delaware LLC membership interest. Upon application by a judgment creditor, a court with jurisdiction may enter a charging order against the debtor's LLC interest. The creditor then receives the right to distributions to which the debtor would otherwise have been entitled. The charging order constitutes a lien on the debtor’s interest.
The statute is deliberately restrictive. It provides that a charging order is the exclusive remedy by which a judgment creditor may satisfy a judgment from the debtor’s LLC interest. Attachment, garnishment, foreclosure and other legal or equitable remedies are unavailable for that purpose. Just as importantly, the statute provides that a creditor of an LLC member has no right to obtain possession of, or exercise legal or equitable remedies against, property belonging to the LLC itself.
The result is a separation between three things that can easily be conflated in an asset-recovery investigation:
the judgment debtor’s membership interest;
distributions payable to that member; and
assets owned by the LLC.
A charging order ordinarily reaches the first two. It does not, by itself, permit the creditor to seize the third.
A debtor's interest in a limited partnership is governed by Section 17-703 of the Delaware Revised Uniform Limited Partnership Act, and a debtor's interest in other partnerships is governed by Section 15-504 of the Delaware Revised Uniform Partnership Act. They both operate like Section 18-703.
Economic rights without control
The practical effect of a charging order is therefore different from an ordinary levy on personal property. The creditor does not simply take the debtor’s units and sell them. Nor does the creditor become a member or partner of the entity. Instead, the creditor obtains a lien and the right to receive distributions that otherwise would have gone to the judgment debtor. This preserves the debtor's existing governance and management rights while diverting the economic proceeds of the charged interest to the creditor to the extent necessary to satisfy the judgment.
That distinction can be consequential where the entity owns a valuable operating business or investment portfolio. A creditor may know that the debtor's membership or partnership interest represents substantial value, yet still have no direct ability to take control of the business or liquidate its assets. The economic value of a charging order therefore depends heavily on the entity's distribution policy. If the entity makes regular distributions, the charging order can provide a relatively straightforward stream of recovery. But an entity that retains earnings, reinvests capital, or otherwise makes few distributions may produce little immediate recovery for the judgment creditor.
This raises concerns that, faced with a potential enforcement actions, a debtor will transfer its interest or try to modify the governance of the Delaware entity to avoid paying the judgment. Delaware courts offer some protections against this possibility, including status quo orders, which would prohibit any transfers and require that the debtor "maintain the [e]ntities in the ordinary course of business and not to take any action that would put assets out of reach of the" creditors pending the courts' ruling on the charging order. See, e.g., GMF ELCM Fund L.P. v. ELCM HCRE GP LLC, No. CV 2018-0840-SG, 2020 WL 2518000, at *2 (Del. Ch. May 18, 2020).
The cross-border problem: where is the interest?
The charging-order statute does not eliminate ordinary jurisdictional and due-process requirements. That issue becomes particularly acute where the judgment debtor is foreign, the creditor holds a foreign judgment, and the LLC interest is connected to several jurisdictions.
Deutsche Bank AG v. Devon Park Bioventures, L.P. provides a useful illustration. Deutsche Bank obtained an English judgment exceeding $235 million against Sebastian Holdings, Inc., a Turks and Caicos entity. One of Sebastian's assets was a limited partnership interest in a Delaware limited partnership. After the judgment, Sebastian purportedly transferred that interest to a Panamanian entity. Deutsche sought, among other relief, a charging order and sought to challenge the transfer as fraudulent.
The case demonstrates that the existence of a Delaware entity does not necessarily solve the jurisdictional problem. The Court of Chancery concluded that it lacked personal jurisdiction over the relevant foreign defendants because the holder of the LLC interest was not a debtor of the English judgment and declined to allow the charging-order theory to circumvent the constitutional requirements of personal jurisdiction and due process. The Court of Chancery also reminded the parties that Delaware courts have "consistently refused to assert in rem or quasi in rem jurisdiction over lawsuits related to allegedly fraudulent transfers of interests in Delaware entities."
Veil Piercing as an Alternative to Charging Orders
A charging order also should not be confused with veil piercing.
If a judgment creditor's objective is ultimately to reach assets held by the Delaware entity rather than distributions attributable to the debtor's membership or partnership interest, the creditor may need to pursue a different legal theory. Depending on the facts and governing law, that might include alter-ego or veil-piercing theories, fraudulent-transfer claims, or challenges to transactions involving the debtor's interest.
These theories present distinct substantive and procedural requirements. The fact that an individual owns 100% of an LLC does not, standing alone, eliminate the legal separation between the member and the LLC. Veil piercing requires a heightened showing and is a fact-intensive analysis of the facts.
Delaware Charging Orders May Not Bar Foreign Turnover Orders
New York courts have applied New York law and rejected arguments that they should be applying Delaware law when faced with a turnover motion requesting that a debtor be ordered to turn over his interest in a Delaware entity. For example, in 245 Park Member LLC v. HNA Grp. (Int'l) Co. Ltd., 674 F. Supp. 3d 28, 42 (S.D.N.Y. 2023), aff'd, No. 23-842-CV, 2024 WL 1506798 (2d Cir. Apr. 8, 2024), the district court ordered the debtor to turn over its interest in a Delaware LLC directly to the creditor (rather than delivered to the sheriff for a sale) in light of the uncertainty of the entity's value and prior obstructionist actions by the debtor trying to avoid enforcement. In light of this precedent, careful selection of the enforcement forum is advised.
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