A charging order is the statutory vehicle which enables an Oregon judgment creditor to reach their debtor’s limited liability company membership or partnership interest to satisfy a judgment debt. ORS 63.259; 67.205; and, 70.295. In a recent decision, Law v. Zemp, 276 Or App 652 (2016), the Oregon Court of Appeals disregarded the applicable statutory language creating more confusion than clarity concerning the proper nature and permissible scope of charging orders in Oregon.
The judgment debtor in Zemp belonged to four limited partnerships and was a member in a limited liability company. The trial court had entered a charging order on the creditor’s ex parte motion which, among other things, required the limited partnerships and limited liability company to: (1) pay all distributions and amounts otherwise due from the entity to its debtor-member to the judgment creditor; (2) refrain from making any loans to members, partners or third parties; (3) refrain from any transfer between or among members, partners or the business entities of any equity interests without the approval of the creditor or the court; and, (4) give the judgment creditor certified copies of financial and tax documents concerning past and future ongoing financial affairs of each entity.
The Court of Appeals in Zemp held that the trial court had no authority to prohibit the limited partnerships and limited liability company from making loans or to forbid their members from transferring or encumbering their membership interests. Ibid. at 669. However, the Court of Appeals held that the trial court had correctly ordered the limited partnerships to give the judgment creditor certified copies of all of the specified past and future financial information while holding that the trial court lacked the authority to order the limited liability company to give the judgment creditor any such financial information. Ibid. 669-670.
The distinction between the permissible scope of the charging order against the limited liability partnerships and the limited liability company is odd because the governing statutory language is almost identical. That is, in the case of both a limited liability partnership and a limited liability company, the judgment creditor of a limited partner or of a member simply holds the rights of an assignee of the debtor’s interest. ORS 63.259; 70.295. An assignee of a member’s limited liability company membership has “. . . the assignor’s right to receive and retain, to the extent assigned, the distributions, as and when made, and allocations of profits and losses to which the assignor would be entitled, but shall not exercise any other rights of a member, including without limitation, the right to vote or otherwise participate in the management and affairs of the limited liability company.” ORS 63.249(3) (emphasis added)
In almost identical terms ORS 70.290 governing the assignability of limited partnership interests states that, “An assignment of a partnership interest does not dissolve a limited partnership or entitle the assignee to become or to exercise any rights of a partner. An assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled.” Emphasis added.
Among the rights of a limited partner is the right to obtain true and full financial information concerning the partnership’s affairs. ORS 70.145. That the judgment creditor who obtains a charging order against a limited partnership interest, thus becoming an “assignee” of their debtor’s interest, is statutorily barred from obtaining the financial information to which the member, as a member, has a statutory right, seems obvious.
The limited liability partnership statutes do not specifically define the permissible scope of a charging order against a limited partner’s interest. The Zemp court, relying on ORS 70.615 which directs a court to apply the general partnership statute, ORS Chapter 67, to resolve any case “not provided for” in the limited liability partnership statute, therefore applied ORS 67.205, defining the permissible scope of a charging order against a general partnership interest, to also define the permissible scope of a charging order against a limited partnership interest. Ibid. at 667.
Yet even ORS 67.205 limits the permissible scope of a charging order against a general partner’s partnership interest to the debtor’s “transferable interest”. In a general partnership, a partner’s only “transferable interest” is: “. . . the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions.” ORS 67.005(17). So too, with respect to a limited partnership, the limited partner’s only transferable interest is the right to receive such distributions as their assignor would be entitled to receive. ORS 70.290. The limited partner’s right as a partner to gain access to the partnership’s financial records is not “transferable” and thus not properly subject to any charging order if the language of ORS 67.205 is strictly applied.
Finally, the Court in Zemp wholly ignored the importance of contract in determining the rights of both the creditor and, more importantly, the limited liability company and the limited liability partnerships. Yet both the limited liability company’s operating agreement and the limited partnerships’ partnership agreements are the primary source defining the rights and obligations of the members in those entities. ORS 63.057 explicitly notes the primacy of the operating agreement in defining the rights and obligations of members in an LLC. Although the limited liability partnership statute, ORS Chapter 70, is not so concisely explicit, it is nonetheless permeated with the recognition that the statute is generally subordinate to the provisions of the partnership agreement: e.g., ORS 70.130 (voting rights); 70.175 (admission of additional general partners); 70.185 (rights, restrictions and liabilities of general partner); 70.230 (Obligation of partner); 70.235 (allocation of profits and losses); etc.
In short, the Court of Appeals in Zemp created a muddle inconsistent with the statutory language on which it based its conclusion. It did not coherently apply the applicable statutes nor did it even acknowledge the contractual provisions governing the rights of members belonging to entities which are uniquely creatures of contract. Hopefully a cure for this decision waits in the future. In the meantime, it seems as though Oregon courts will be more respectful of LLCs than of limited partnerships, at least in crafting the scope of charging orders to such entities.