10.1 The Charging Order
The use of family partnerships, and to a lesser degree, family limited liability companies, have been largely driven by the valuation discount possibilities. An additional benefit is the asset protection aspects of these entities.
A creditor of a partner has limited ability to attach partnership property or to affect partnership operations. The creditor’s initial recourse is by obtaining a charging order:
“A charging order is the statutory means by which a judgment creditor may reach the partnership interest of a judgment debtor. Bank of Bethesda v. Koch, 44 Md. App. 350, 354, 408 A.2d 767 (1979). Prior to its availability, the courts would resort to common law procedures for collection that were ill-suited for reaching partnership interests. Gose, The Charging Order Under the Uniform Partnership Act, 28 Wash. L. Rev. 1 (1953). Typically, despite the fact that individual partners do not have title in partnership property, partnership property would be seized under writs of execution; the debtor partner’s interest in the partnership would be sold, often to the judgment creditor, subject to the payment of partnership debts and prior claims of the partnership against the debtor partners; and the sale of the debtor partner’s interest would result in compulsory dissolution and winding up of the partnership. Id. As noted by at least one jurist, ‘[a] more clumsy method of proceeding could hardly have grown up.’ Id. (quoting Lord Justice Lindley of the English Court of Appeal, Brown Janson & Co. v. Hutchinson & Co., 1 Q.B. 737 (1895)).”
91st Street Joint Venture v. Goldstein, 114 Md. App. 561, 567, 691 A.2d 272, 275 (1997).
For limited partnerships, a creditor’s remedies against a partner are set out at Corps & Ass’ns § 10-705:
“On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partnership interest. This title does not deprive any partner of the benefit of any exemption laws applicable to his partnership interest.”
An assignee of a partnership is not admitted as a partner unless all partners agree or it is otherwise permitted by the partnership agreement. Corps & Ass’ns § 10-703.
The rights of creditors of a general partner are governed by Corps & Ass’ns § 9A-504 (post-2002 law):
“(a) As satisfaction of judgment. – On application by a judgment creditor of a partner or of a partner’s transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require.
(b) Charging order constitutes a lien. – A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.
(c) Redemption. – At any time before foreclosure, an interest charged may be redeemed:
(1) By the judgment debtor;
(2) With property other than partnership property, by one or more of the other partners; or
(3) With partnership property, by one or more of the other partners with the consent of all of the partners whose interests are not so charged.
(d) Exemption. – This title does not deprive a partner of a right under exemption laws with respect to the partner’s interest in the partnership.
(e) Exclusivity. – This section provides the exclusive remedy by which a judgment creditor of a partner or partner’s transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership. (1997, ch. 654, § 2; 1998, ch. 743, § 1.)”
Prior to the changes in § 9A-504, old Corps & Ass’ns § 9-504 provided a similar, although not identical, scheme for the enforcement of a judgment. Both set out more detail as to the enforcement mechanisms of a charging order in contrast to the provision governing limited partnership interests. Corps & Ass’ns § 9A-504 permits a foreclosure of a debtor partner’s “transferable interest in the partnership.” This phrase is defined as a partner’s “share of the profits and losses of the partnership and the partner’s right to receive distributions.” Corps & Ass’ns § 9A-502. Under the old law, foreclosure of a debtor partner’s general partnership interest was likewise a recognized enforcement technique.
Forced sale of a debtor partner’s interest is also a remedy for the general and limited partnership interests in a limited partnership. Lauer Construction, Inc. v. Schrift, 123 Md. App. 112, 716 A.2d 1096 (1998).
Thus for both general and limited partnerships, a charging order “provides two basic collection methods: (1) the diversion of the debtor partner’s profits to the judgment creditors; and (2) the ultimate transfer of the debtor partner’s interest should the first collection method prove unsatisfactory.” 91st Street Joint Venture v. Goldstein, 114 Md. App. 561, 572, 691 A.2d 272, 278 (1997). In either case, it is only the partner’s financial interest in profits or distributions that is subject of the charging order. Those receiving benefits under a charging order possess rights only of an assignee not as a partner.