Earning Withholding And Charging Orders

I am not an attorney, I am a judgment referral specialist (Judgment Broker). This article is based on my experience in California. Laws vary in every state, and nothing in any of my articles can ever be considered legal advice. This article is my opinion on enforcing judgments from judgment debtors who are members of partnerships and LLCs in California.

In this article, when LLC is used, it stands for LLCs or partnerships. What if you get a judgment debtor that makes their living, or gets assets from an LLC? How does one recover from a member of a LLC, or a LLC member's distributions of income?

In California, a charging order is the exclusive method of reaching a judgment debtor's interest in a LLC. The laws concerning California charging orders are near CCP: 708.310 et seq. (et seq. means that law, and those following it).

A LLC can pay people as employees. Wages and salary are subject to garnishment. A wage garnishment is the exclusive way of enforcement against earnings. (CCP 706.020.)

LLCs can also pay non-wage income, that is called K1 income. If non-wage income originates from LLCs, corporations, estates and trusts, the IRS tax code defines it as K1 income. One example of K1 income is stock dividends. A charging order is required to intercept K1 distributions.

If a LLC member receives non-K1 funds, for example earnings, an Earnings Withholding Order (EWO) is required because such earnings are not the kind of "economic interests" that get attached using a charging order.

Potential problems for judgment owners, are that the LLC may stop paying salaries, and instead internally accrue dividends, without actually distributing them to members. Or, the LLC may decide to make loans to the judgment debtor, which bypasses both charging orders and garnishments.

One thing that can be done to help stop LLC games, is to have both an assignment (charging) order and an EWO served on the LLC at the same time. It costs about $40 more to serve both, and have both hearings heard on the same date.

Many debtors having an ownership interest in the entity will intentionally ignore an EWO. This can be an opportunity to relax, and let the execution lien accumulate against the employer. Then you can sue the employer directly for the amount that should have been levied over the time you waited.

If a judgment debtor controls the company, they could simply stop paying wages to themselves. They could accrue distribution money without disbursing it. They could pay themselves in other ways - for example as a consultant, or some other kind of other non-employment income.

A creditor may be able to overcome these kind of shenanigans, with an assignment (charging) order. Such an order could be worded broadly to get to whatever funds the judgment debtor is receiving from the LLC. It should not be limited to employment income. The assignment (charging) order can also capture distributions, and any other K-1 income there may be. Charging orders include civil liability, for failure to obey the court's order to pay, similar to wage garnishments.

A charging order can be written to charge the judgment debtor's interests, and levy the debtor's wages. It could include wording to ask the court to prohibit the LLC from making any loans, or paying or guaranteeing any obligations of the judgment debtor, etc.

One complication of this idea, is the "exclusive remedy" benefit (detriment) of the charging order. See Corporations Code 17302 (e). However this applies only to the debtor member's "transferable interest".

The charging order is the exclusive remedy to recover against judgment debtor's actual interest in the LLC, however it's not the exclusive remedy for going after income flowing to debtor from the LLC. Assignment (charging) orders can be broadly written to catch everything - but only if a judge signs it.

Convincing a court judge to agree with a wide list of remedies in an assignment (charging) order is not easy. In your papers, it may be a good idea to prove to the judge that you tried conventional levy, garnishment, and examination procedures already, with little or no results.

Another complication is that the owners of a LLC, who manage it are often not considered employees by the IRS. Usually, only those with no ownership of a LLC are considered employees. Also, there are asset protection strategies that may make the creditor pay taxes on LLC income without ever receiving a dollar of actual income, if they force a charging order.

One idea I have heard several times from lawyers at judgment conferences, is to form a new corporation intended to own the assets and liabilities of the LLC debtor member's interest. The new corporation would include an attorney as an officer, and would be disposable, if things went south.

The theory is when the new corporation accomplishes a charging order, and it is discovered that the assets are toxic, one could close it down and have no personal liability.

The big boys may be able to get away with this, however I doubt the average person could get away with this and also avoid big problems and liabilities. In my opinion, forming a corporation only to diffuse a liability raises red flags.

Be careful to not grab a liability when you perform a charging order. A good site to learn more about this is http://www.chargingorder.com.


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Mark Shapiro - Judgment Broker - Free leads for Judgment Enforcers and contingency collection attorneys.

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