Seeking a Charging Order against Corporate Interests in Maryland
Once one obtains a judgment in an effort to collect a debt, a creditor may find that the battle has only begun. In many instances, the debtor will not voluntarily pay the debt upon entry of judgment and many debtors will go as far as take affirmative actions to avoid paying that debt.
Maryland, like most states, offers many post-judgment remedies to allow creditors to enforce judgments. Some of these tools are very useful, such as the wage garnishment or the bank account garnishment, which allows you to obtain a court order mandating an employer pay the creditor a portion of a debtor’s wages or mandating a bank pay the creditor funds from the debtor’s bank account.
Another less used post-judgment remedy is the charging order. A charging order is an order from the court ordering a company to withhold all profits and/or distributions owed to an owner-debtor and pay the creditor from those distributions. The charging order is generally less used because in many situations debtors do not own interests in a company; however, when a debtor’s income is solely from self-employment, the wage garnishment is rendered useless and creditors must seek alternative enforcement remedies such as the charging order.
Under Maryland’s charging order Rules and Statutes, the charging order is available for creditors to seek satisfaction of their debts from partnerships and limited liability companies. Maryland Rule 2-649 states: “Upon the written request of a judgment creditor of a partner, the court where the judgment was entered or recorded may issue an order charging the partnership interest of the judgment debtor with payment of all amounts due on the judgment.” Likewise Md. Code, Corps. & Ass’ns § 4A-607 states “On application by a creditor of a debtor holding an economic interest in a limited liability company, a court having jurisdiction may charge the economic interest of the debtor in the limited liability company for the unsatisfied amount of the debt.” Finally, Md. Code, Corps. & Ass’ns § 9A-504 states: “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.”
Noticeably absent from the Corporations and Associations Article is any reference to the availability of a charging order against an owner of interest in a corporation. This absence is peculiar given the fact the General Assembly actively chose to grant this power to creditors against not only partnerships, but limited liability companies. This absence invariably was asserted as a defense when this issue arose in the Court of Special Appeals in Burnett v. Spencer, 230 Md. Ap. 24, 146 A.3d 560 (Md. Ct. Spec. App. 2016).
In addressing the issue of whether a debtor’s corporate interest was subject to enforcement under a charging order, the Court of Special Appeals decided it indeed was. See Burnett, 230 Md. Ap. at 35, 146 A.3d at 566. The Court held that under Md. Rule 2-651, titled “Ancillary Relief in Aid of Enforcement,” which the Court dubbed the “wild card” provision for collecting judgments, the circuit courts have the power to issue charging orders against a debtor’s corporate interest. See Burnett, 230 Md. Ap. at 35, 146 A.3d at 566. This Rule states “Upon motion and proof of service, a court in which a judgment has been entered or recorded may order such relief regarding property subject to enforcement of the judgment as may be deemed necessary and appropriate to aid enforcement of the judgment pursuant to these rules . . .” and lists some general options for enforcement.
This opinion by the Court of Special Appeals is clear and concise in its holding in deeming charging orders against corporate interests appropriate, providing a helpful tool to judgment creditors that the General Assembly should have provided by statute years ago.
If you have a judgment against a debtor who you believe has an ownership stake in a corporation, contact us today to discuss your matter.