A charging order is basically a judgment creditor’s remedy that is available by court order, when the judgment debtor owns an interest in a general or limited partnership. The charging order is directed to the partnership, for the benefit of the creditor and entitles the judgment creditor to whatever distributions would be due to the debtor partner whose interest is subject to the order.

Charging orders came about through the passage of the 1890 Act which was the first statute to codify English partnership law, and was intended to protect the partnership from being disrupted at the hands of the creditors of an individual partner. The protection was necessary because of the prevailing “aggregate” view of a partnership and the confusion over the rights of partners (and their separate creditors) in partnership property.

Under the aggregate view, the firm had no legal status separate from its individual members and therefore could not own property in its own right. Assets in the firm were seen as those owned collectively by the partners. This construct complicated things when a creditor of the partnership sought to levy on the partnership assets. When a creditor of a partner took action against partnership assets, it resulted in chaos. What happened was when a creditor obtained a judgment against one partner and wanted to obtain the benefit of that judgment against the share of that partner in the firm, all he had to do was issue a writ of execution, and the sheriff then went to the partnership’s place of business, seized everything, closed the down the business, and caused the execution creditor to get an injunction to take an account and pay well over that was due by the execution debtor.

This kind of chaos existed under U.S. law, and the drafters of the 1914 and 1916 U.S. acts copied the English innovation. The design of the charging order was to prevent a judgment creditor of an individual partner from obtaining access to the underlying partnership assets giving value to an individual partner’s interest in the firm. The charging order then became the judgment creditor’s access to those assets. That is, a judgment creditor of a partner had no rights in the assets of the firm but was exclusively remitted to collect whatever income stream those assets might produce for the judgment debtor.

So, the charging order was created as a tool for “entity asset protection” not “partner asset protection,” and that is still the rule.

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