Charging Orders for General Partnerships

General partnership law as reflected in the Uniform Partnership Act (UPA) has always embraced the liquidation view--the doctrine that the personal creditor with a charging order may foreclose on the debtor's partnership interest if the creditor can prove that it isn't fair and equitable to allow the debtor to carry on the business, with the creditor acting as a mere assignee of the business interest. This usually will not be difficult to prove in a small business setting.

The UPA also specifically allows the courts to make all orders necessary to enforce this right, including an order forcing a liquidation of the business to satisfy the owner's personal debt liability. Specifically, the courts are empowered in these states to make all orders, directions, accounts and inquiries which the debtor owner might have made, or which the circumstances of the case may require. This is a very broad power.

Most states have enacted the UPA to govern general partnerships. A few states have enacted the Revised Uniform Partnership Act (RUPA) to govern general partnerships. However, even this version of general partnership law reflects the liquidation view.

Note that in the general partnership, the law deems the relationship among the partners to be a personal one. Thus, even there, the personal creditor with a charging order cannot become a partner (without the unanimous consent of the other partners) and, accordingly, cannot vote or participate in management. More importantly, however, general partnership law does not take the extra step afforded by limited partnership law with respect to charging orders. Thus, despite the personal relationship, the personal creditors who attach a general partnership interest can foreclose on the partner's interest and force a liquidation of the business.

In a small business, this is more of a possibility, because the courts will look at the size of the creditor's debt in relation to the size of the business, as well as the effect a forced liquidation would have on the other owners, before deciding whether or not a liquidation is equitable. In the case of larger businesses, or ones with multiple owners, forced liquidation is less likely to be deemed equitable. However, the power is broad enough to allow the court to take all actions that the owner could have taken, including voting, or selling, his interest to a third party.