PROBATE & PROPERTY � NOVEMBER/DECEMBER 2003 57

Creditors’ Rights Against Limited PartnershipInterests in General

Ask any practitioner what remedies are available to acreditor against a debtor’s interest in a limited partnershipand that practitioner will undoubtedly say that a “charg-ing order” (which allows a creditor to receive any profitsor other money payable to the debtor partner directly

from the partnership) is the exclusive remedy against thedebtor’s limited partnership interest. This certainty aboutremedies is likely because of the wording of Section 703 ofthe Revised Uniform Limited Partnership Act (1976) asamended in 1985 (the “1976 Act”), which says the following:

§ 703 Rights of Creditor

On application to a court of competent jurisdiction byany judgment creditor of a partner, the court maycharge the partnership interest of the partner withpayment of the unsatisfied amount of the judgmentwith interest. To the extent so charged, the judgment

Elizabeth M. Schurig is a partner and Amy P. Jetel is anassociate with Giordani, Schurig, Beckett & Tackett,L.L.P. in Austin, Texas.

debtor’s partnership interest. Byexplicitly stating that a court may fore-close upon a partnership interest thatis subject to a charging order, the 2001Act allows no room for an argumentthat a charging order is an exclusiveremedy against a partnership interest.Thus, from an asset protection per-spective, the 2001 Act is considerablyless protective of a partner’s partner-ship interest than the 1976 Act.

The Most- andLeast-Protective States

Forty-eight states and the District ofColumbia have enacted the 1976 Actin some form. Nine of those stateshave altered Section 703 to provideeither more or less protection to adebtor’s partnership interest. In 2000,Delaware rewrote its version ofSection 703 to be substantially similarto the 2001 Act’s Section 703, andNevada followed suit in 2001. Hawaiirepealed its version of the 1976 Actentirely on June 26, 2003, and replacedit with the 2001 Act, to be effectiveJuly 1, 2004.

The table on pages 60 and 61 com-pares the states’ and D.C.’s variousversions of Section 703. In short,Alaska, Arizona, Oklahoma, andTexas have the most protectivestatutes, but California, Delaware,Georgia, Nevada, Wisconsin, and nowHawaii have the least protective part-nership laws.

The Charging Order May NotBe the Exclusive Remedy

in Every StateAs stated above, many practitionersbelieve that under the 1976 Act thecharging order is the exclusive remedyfor a judgment creditor to satisfy adebt out of a judgment debtor’s part-nership interest. This is, in fact, themajority view, despite the fact that thestate statutes of all but a few states failto specifically limit the remedy to acharging order. But the majority viewmay not be correct in all states thathave adopted the Act. See, e.g., In reAllen, 228 B.R. 115 (Bankr. W.D. Pa.,1998) (interpreting Pennsylvania’sRULPA provision in light of otherremedies available to judgment credi-

tors under Pa. R. Civ. P. 3108(a)(3)).Without explicitly limiting a creditor’sremedy to a charging order, Section703’s language stating that a court“may” charge the partner’s interestcould arguably allow the impositionof other remedies normally availableto a judgment creditor under otherprovisions of state law. Although ananalysis of whether jurisdictions thathave adopted the 1976 Act provideadditional remedies to judgment cred-itors is outside the scope of this article,it is worth saying that the civil laws ofmost jurisdictions allow for foreclo-sure of a creditor’s lien if the lien isnot otherwise satisfied. See, e.g., TEX.CIV. PRAC. & REM. CODE § 31.002. Forthis reason, practitioners should bewary of advising clients that thecharging order is the exclusive remedyof a creditor against a partnershipinterest without first researching thisfact themselves. In addition, practi-tioners should consider carefullywhether a partnership is the mosteffective protection vehicle for theirclients, and, if a partnership is thedesired vehicle, they should furtherdetermine which jurisdiction providesthe best forum for the resolution ofcreditor disputes.

Case Study: How Texas’s StatuteCompares to the Other Debtor-

Protective StatesTexas is generally an attractive juris-diction for partnerships because it hasno state income tax, Texas partner-ships are not currently subject to afranchise tax, and a charging order isthe sole remedy available against apartnership interest. But two threats toTexas’s position as a leading jurisdic-tion for attracting partnerships exist.

The first threat is the possibilitythat the Texas legislature will reviewthe new Uniform Limited PartnershipAct and adopt the new Section 703 ofthe 2001 Act. If it does, then Texas willfall into the category of the least-pro-tective states.

The second threat is that recentamendments to the LimitedPartnership Acts in other jurisdictionsare more clearly drafted than Texas’sstatute and thus arguably provide

58 PROBATE & PROPERTY � NOVEMBER/DECEMBER 2003

creditor has only the rights of anassignee of the partnership inter-est. This [Act] does not depriveany partner of the benefit of anyexemption laws applicable to his[or her] partnership interest.

Although the 1976 Act says only that acourt “may” charge the partnershipinterest with the payment of a judg-ment, some courts have interpretedthis section to mean that a chargingorder is the exclusive remedy againsta partnership interest. See, e.g., 91stStreet Joint Venture v. Goldstein, 691A.2d 272 (Md. Ct. Spec. App. 1997); Inre Pischke, 11 B.R. 913 (Bankr. E.D. Va.1981); Myrick v. Second National Bank ofClearwater, 335 So. 2d 343 (Fla. Dist. Ct.App. 1976).

From the creditor’s perspective, acharging order is an unattractive rem-edy because the creditor will receivenothing if there are no distributions tothe debtor partner. A more attractiveremedy is available to creditors, how-ever, under the civil statutes of moststates. This remedy is “foreclosure”upon the interest that is subject to thecharging order. A charging order dif-fers from a foreclosure: a foreclosure ispermanent, but a charging order is inplace only long enough to pay off thedebt. A further difference is that thepurchaser at a foreclosure enjoys theright to a proportionate share of thepartnership’s assets upon dissolu-tion—increasing the creditor’s chancesof having the debt satisfied out of thepartnership interest.

Changes to Creditors’ Rights inthe Uniform Limited Partnership

Act of 2001

Section 703 of the 1976 Act is currentlysubject to amendment by Section 703of the new Uniform LimitedPartnership Act (2001) (the “2001Act”). Section 703 of the 2001 Act pro-vides for creditors’ remedies against adebtor’s partnership interest. For com-parison purposes, the full text of bothsections is provided on page 59.

The most significant change thatthe 2001 Act makes to Section 703 isthat, unlike the 1976 Act, it explicitlyallows foreclosure upon a judgment

PROBATE & PROPERTY � NOVEMBER/DECEMBER 2003 59

Creditors’ Remedies Against a Debtor’s Partnership InterestUnder the 1976 Act and the 2001 Act

more protection against judgmentcreditors than does the Texas statute.These changes could draw businessaway from Texas and toward theseother states. An analysis of the Texasstatute will illustrate this point.

Texas’s version of the 1976 Act’sSection 703, in what appears to be aninternal inconsistency in the statute,provides that the charging order is acreditor’s exclusive remedy, yet itstates that a charged partnership inter-est may be redeemed before a foreclo-sure occurs. TEX. REV. CIV. STAT. ANN.art. 6132a-1, § 7.03. It is difficult not toquestion why the Texas legislatureallowed for redemption of a partner-ship interest before a foreclosure whenthe statute explicitly states that thecharging order is the exclusive reme-dy. It is helpful to remember, however,that the Texas statute is one of the firstto deviate from the language of the1976 Act by providing more protectionto partnership interests. Notice that,on pages 60 and 61, the jurisdictionsthat make the charging order theexclusive remedy adopted this lan-guage fairly recently (Alaska, 2000;Arizona, 1997; Oklahoma, 1998), butTexas adopted this language when itadopted the Act in 1987. The Texasdrafters were faced with a provisionin the Texas Civil Practice andRemedies Code that allows a court to“otherwise” apply a judgmentdebtor’s property to the satisfaction ofthe judgment. TEX. CIV. PRAC. & REM.CODE § 31.002. This broad languagewould typically allow foreclosure as aremedy. As pioneers into a relativelyunexplored area at the time, it couldbe that the drafters envisioned a casein which a creditor, despite the provi-sion that the charging order is theexclusive remedy, would be able towin an argument that foreclosure isstill available against a partnershipinterest under the Civil Practice andRemedies Code—in which case, thelegislators wanted to allow the part-nership to redeem the charged inter-est. But when compared to thestatutes of the other debtor-protectivestates, Texas’s belt-and-suspendersapproach becomes apparentlycreditor-friendly.

For instance, Arizona andOklahoma have amended theirstatutes to clearly state that a chargingorder is a judgment creditor’s soleremedy against a debtor’s partnershipinterest. Unlike Texas’s statute, neitherof these states’ statutes mentions aforeclosure, which weakens a credi-tor’s argument that foreclosure is stillavailable under other provisions oflaw. And Alaska made an even clearerstatement in its version of Section 703by further stating that a court may notorder a foreclosure against a partner’s

partnership interest. This straightfor-ward statute certainly pushes Alaskaahead of Texas in attracting the forma-tion of partnerships.

In sum, practitioners in any statewho are interested in the protectivenature of partnerships should petitiontheir respective legislatures not toadopt the 2001 Act and to furtherreword the current statute to be simi-lar to Alaska’s to make it absolutelyclear that a charging order is theexclusive remedy against a debtor’sinterest in a limited partnership. �

60 PROBATE & PROPERTY � NOVEMBER/DECEMBER 2003

* Statutes designated as the “same” as the 1976 Act are eitheridentical to the Uniform Act’s § 703 or have nonsubstantive varia-tions to that section.

Variations of § 703 in States That Have Adopted the Revised Uniform LimitedPartnership Act (1976) as Amended in 1985

PROBATE & PROPERTY � NOVEMBER/DECEMBER 2003 61

Variations of § 703 in States That Have Adopted the Revised Uniform LimitedPartnership Act (1976) as Amended in 1985

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