Alabama’s charging order statute “provides the exclusive remedy by which a judgment creditor of a member [of a limited liability company] … may satisfy a judgment” out of the judgment debtor’s “transferable interest” in the limited liability company, See Ala. Code § 10A-5A-5.03(f), which the statute defines to mean “a member’s right to receive distributions from a limited liability company …” See Ala. Code § 10A-5A-1.02(t). In other words, if your client is a judgment creditor and the judgment debtor owns a membership interest in a limited liability company, the only way you can enforce your client’s judgment against the debtor’s membership interest is by obtaining a charging order. You can’t foreclose on the debtor’s membership interest; you can’t obtain possession of the limited liability company’s property, and you can’t pierce the limited liability company’s corporate veil. See Ala. Code § 10A-5A-5.03(f).
So what do you get from having a charging order against a debtor’s membership interest in a limited liability company then? Well, that depends. The charging order statute says that “the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise be entitled in respect of the transferable interest.” See Ala. Code § 10A-5A-5.03(a). That means if the limited liability company regularly distributes money to the judgment debtor, and it decides to continue doing so after your charging order is entered, then you can use your charging order to intercept or otherwise recover those cash distributions. But if the limited liability company rarely makes cash distributions or your judgment debtor is the only member and he/she doesn’t particularly want to pay your judgment, the result may be akin to a standoff whereby the debtor directs the limited liability company to not make any distributions and just lets the money accumulate for some undetermined amount of time so that you can’t take it. The debtor’s need to access the money, measured against your client’s desire to resolve the matter and recover something in its judgment, will dictate how long the standoff lasts.
Importantly, everything described up to this point depends upon the limited liability company being formed in Alabama. The reason is that the “limited liability company” described in the charging order statute is defined to mean only an Alabama limited liability company and not a “foreign limited liability company.” See Ala. Code §§ 10A-5A-1.02(k) and (i). While this has been described as a likely drafting “glitch” by at least one court outside of Alabama, See Vision Mktg. Res., Inc. v. McMillin Group, LLC, Case No. 10-2252-KHV-TJJ, 2015 U.S. Dist. LEXIS 91873, *18 (D. Kan., May 8, 2015), a review of current Alabama case law reveals disagreement among our courts regarding whether they can issue a charging order against a limited liability company formed outside of Alabama. See SE Prop. Holdings, LLC v. Unified Recovery Group, LLC, 2014 U.S. Dist. LEXIS 159254, 2014 WL 5846388 (S.D. Ala., November 12, 2014) (issuing charging order against judgment debtor’s membership interest in Louisiana limited liability companies). But see McElroy v. Sumrall, 2021 U.S. Dist. LEXIS 84121, 2021 WL 1741850 (S.D. Ala., May 3, 2021) (declining to issue charging order against judgment debtor’s membership interest in Louisiana limited liability company).
For this reason, the best practice is to obtain charging orders against Alabama limited liability companies from Alabama courts and to seek relief against a judgment debtor’s membership interest in foreign limited liability companies through the registration (for federal court judgments) and domestication (for state court judgments) processes in the courts where the foreign limited liability companies are formed. Example motions for charging orders, and their proposed orders, for federal and state court filings in Alabama, are appended to the version of this article available on the author’s website and may be accessed by clicking here: