Site /

Management And Voting Rights Of Creditors

Topic Management_Voting TopicsManagementVotingRights

PAGE SUMMARY

A charging order serves as the exclusive judicial remedy for judgment creditors seeking to satisfy obligations from a debtor’s interest in a limited liability company or partnership. Under prevailing state statutes modeled after the Uniform Acts, such as those in Delaware, California, and New York, the order functions strictly as a lien on the debtor’s transferable economic interest, entitling the creditor only to distributions and allocations of profits or losses. Crucially, the creditor occupies the status of an assignee or transferee, a role that explicitly precludes the exercise of management, voting, or governance rights. Jurisprudence, notably in Green v. Bellerive and Gaslowitz v. Stabilis Fund I, reinforces this distinction to prevent involuntary creditor interference in business operations and to protect the autonomy of non-debtor members. While federal law via FRCP 69 defers to state execution procedures, the general consensus remains that creditors cannot compel distributions or access confidential internal information. However, significant jurisdictional nuances exist: Missouri law suggests court-appointed receivers may occasionally exercise broader discretionary authority, and certain jurisdictions, including Florida and Connecticut, permit the foreclosure of charged interests. Such foreclosure can potentially transfer full membership and management rights to a purchaser, particularly in single-member LLC contexts. Despite these exceptions, the charging order typically remains a "wait and see" remedy, providing creditors with economic benefits while shielding the entity from governance disruption. This framework effectively balances creditor collection rights against the fundamental "pick-your-partner" principle essential to the stability of unincorporated business entities.

Charging Order Management, Voting And Asset Rights

Summary

A charging order is the exclusive remedy available to a judgment creditor seeking to satisfy a judgment from a debtor’s interest in an LLC or partnership, providing a lien on the debtor’s transferable economic interest, typically limited to distributions and allocations of profits and losses. Crucially, the charging order does not confer management or voting rights to the creditor, who remains an assignee entitled only to receive distributions the debtor would have otherwise received. Courts emphasize that allowing creditors to assume management or voting rights would disrupt the entity’s operations and infringe on the rights of other members or partners, thus preserving entity stability and autonomy. In partnerships, the courts have generally held that the judgment creditor can access distributional rights and, in some cases, information rights only when clearly necessary, but may not interfere with management or partnership decisions absent extraordinary circumstances.

Under LLC statutes modeled on the Uniform Limited Liability Company Act, charging orders similarly grant only economic rights without management participation, requiring unanimous member consent for admission of foreclosing purchasers as members or for the creditor’s participation in management. Foreclosure of charging order liens generally transfers only the economic interest without conferring membership or voting rights, except in single-member LLCs where foreclosure may transfer full membership rights to the purchaser. The creditor's right is thus limited to receiving distributions while lacking control over the LLC’s business and affairs.

Tax implications arise as creditors holding charging orders may be allocated taxable income from the interest without necessarily receiving corresponding distributions, a disparity heightened by the creditor's lack of management control. Courts and commentators note that these protections mitigate involuntary disruptions to members’ rights and entity operations by creditors.

Judgment creditors holding charging orders against debtor interests in LLCs or partnerships have no management rights or voting rights. Under both federal and state law, charging order holders are limited exclusively to economic rights—specifically, the right to receive distributions that would otherwise be paid to the judgment debtor. Courts consistently hold that charging orders grant creditors only the rights of an assignee or transferee, which explicitly exclude participation in management decisions, voting on entity matters, or access to confidential business information. This limitation protects the integrity of business operations and prevents unwanted creditor interference in entity governance.

Federal Framework

Federal law does not directly govern charging orders but instead relies on state procedures for judgment execution. Federal Rule of Civil Procedure 69 provides that "The procedure on execution--and in proceedings supplementary to and in aid of judgment or execution--must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies." This delegation means that charging order rights are determined by the law of the state where the court sits, with no independent federal framework governing creditor management or voting rights in business entities.

LLC Charging Orders: Economic Rights Only

State statutes governing LLC charging orders uniformly limit judgment creditors to economic interests without any management or voting participation. Delaware's Limited Liability Company Act exemplifies this approach, stating that when a court charges an LLC interest, "the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled". DE ST TI 6 § 18-703. The statute further prohibits creditors from obtaining "possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company". DE ST TI 6 § 18-703.

California's approach mirrors Delaware's restrictive framework. California Corporations Code Section 17705.03 provides that "a charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor". CA CORP § 17705.03. Notably, California's definition of "membership interest" includes "any right to vote or participate in management," but these governance rights are explicitly excluded from the "transferable interest" subject to charging orders. CA CORP § 17701.02.

New York similarly restricts charging order holders to assignee status. Under New York Limited Liability Company Law Section 607, judgment creditors receiving charging orders "has only the rights of an assignee of the membership interest". NY Limit Liab Co § 607. Since assignees lack management and voting rights unless admitted as members, charging order holders cannot participate in LLC governance.

Case law reinforces these statutory limitations. In Gaslowitz v. Stabilis Fund I, LP, the Georgia Court of Appeals emphasized that "a judgment creditor does not become a member of a limited liability company by reason of a charging order, but only accedes to the 'rights of an assignee' of a limited liability company interest, and the rights of an assignee of such interest are expressly limited and do not include a right to an accounting of company assets". Gaslowitz v. Stabilis Fund I, LP, 331 Ga.App. 152 (2015). The court held that charging order holders cannot even obtain basic financial information about the LLC, much less participate in management decisions.

Partnership Charging Orders: Parallel Restrictions

Partnership charging order statutes follow the same restrictive approach as LLC provisions. Delaware's Revised Uniform Partnership Act Section 15-504 limits judgment creditors to economic interests, providing that "the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled" .DE ST TI 6 § 15-504. This mirrors the LLC framework by excluding all governance rights.

California's Uniform Limited Partnership Act Section 15907.03 grants judgment creditors charging orders but specifies that "the judgment creditor has only the rights of a transferee". CA CORP § 15907.03. Under partnership law, transferees receive only economic benefits without management participation unless specifically admitted as partners.

New York Partnership Law Section 54 authorizes courts to "charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt" and to appoint receivers of the partner's share of profits. The statute grants courts authority to "make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require". NY PARTNER § 54.

The Maryland Court of Special Appeals provided the most detailed analysis of partnership charging order limitations in Green v. Bellerive Condominiums LP, 135 Md.App. 563 (2000). The court distinguished between "collection rights" and "management rights," holding that charging orders transfer only the former. The court explained that "The 'rights of a partner' include the right to information and the right to participate in partnership decisions that the receiver is demanding in this instance." but concluded that "these rights are fundamental 'management rights of a partner' that were not transferred to the receiver by the Charging Order". Green v. Bellerive Condominiums LP, 135 Md.App. 563 (2000).

Distinction Between Charging Orders and Full Assignment

The critical distinction lies between charging orders (which grant only economic rights) and full assignment of membership or partnership interests (which may include governance rights subject to operating agreement provisions). Delaware's LLC statute illustrates this difference: Section 18-702 governs assignments and provides that assignees have "no right to participate in the management of the business and affairs of a limited liability company except as provided in a limited liability company agreement or, unless otherwise provided in the limited liability company agreement, upon the vote or consent of all of the members". DE ST TI 6 § 18-702.

This statutory framework creates three tiers of rights: (1) charging order holders receive only distribution rights, (2) assignees receive distribution rights and potentially management rights if the operating agreement permits or other members consent, and (3) full members receive both economic and governance rights. Courts have consistently held that charging orders place creditors in the most restrictive category.

Foreclosure Exception: Potential Path to Full Rights

Some jurisdictions allow foreclosure of charged interests, which can potentially transfer full membership rights including management and voting authority. In Wells Fargo Bank, N.A. v. Barber, a federal district court applying Florida law noted that "the purchaser of the member's interest at a foreclosure sale steps into the shoes of the member for all purposes and the member loses all interests and rights in the company". Wells Fargo Bank, N.A. v. Barber, 85 F.Supp.3d 1308 (2015). However, foreclosure represents a separate legal remedy distinct from the charging order itself.

Connecticut explicitly authorizes foreclosure in its partnership statute, with the Connecticut Appellate Court holding in Madison Hills Ltd. Partnership II v. Madison Hills, Inc. that "Foreclosure is one of the orders available to charging creditors" Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994). The court explained that "the purchaser at the foreclosure sale has the rights of a transferee", Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994), which may include governance rights depending on the partnership agreement.

Arguments and Rebuttals

Arguments Against Charging Order Holders Having Management/Voting Rights

Statutory Express Limitations

Delaware's LLC Act Section 18-703(a) restricts creditors to "only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled". DE ST TI 6 § 18-703.

The word "only" creates an exclusive limitation that courts interpret to exclude all non-economic rights.

Anticipated Rebuttals: Creditors might argue that distribution rights implicitly include information access necessary to monitor the investment, but courts have rejected this interpretation, holding that even accounting rights are excluded. Gaslowitz v. Stabilis Fund I, LP, 331 Ga.App. 152 (2015).

Assignee Status Excludes Governance Rights

Delaware Code Section 18-702(a) provides that assignees have "no right to participate in the management of the business and affairs" unless admitted as members. DE ST TI 6 § 18-702.

Since charging order holders receive only assignee rights, they cannot participate in management decisions.

Anticipated Rebuttals: Creditors could contend that charging orders create special assignee status with enhanced rights, but statutory language treats all assignees uniformly regardless of how the assignment arose.

Policy Protection of Business Continuity

The Maryland Court of Special Appeals in Green v. Bellerive emphasized that limitations prevent "third party creditors from using a charging order as a license to 'squeeze' other limited partners into paying off obligations of the debtor partner, as the necessary cost of eliminating the risk of such interference". Green v. Bellerive Condominiums LP, 135 Md.App. 563 (2000).

Management restrictions protect non-debtor members from unwanted creditor interference.

Anticipated Rebuttals: Creditors might argue that management participation is necessary to protect their investment, but courts prioritize entity stability and the expectations of non-debtor members who did not choose to associate with the creditor.

Arguments For Potential Expanded Rights

Court-Appointed Receiver Authority

Missouri allows receivers with management powers under certain circumstances, as held in Deutsch v. Wolff where the court found that "section 358.280 grants the court discretion to empower the receiver to 'make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.'" Deutsch v. Wolff, 7 S.W.3d 460 (1999).

Some jurisdictions grant courts broad discretionary authority to effectuate charging orders.

Anticipated Rebuttals: Most jurisdictions limit receiver powers to collection activities and prohibit management interference, viewing Missouri's approach as an outlier that undermines the fundamental purpose of charging order protection.

Foreclosure Rights Transfer Full Membership

Florida law allows foreclosure that transfers complete membership rights including management and voting authority. Wells Fargo Bank, N.A. v. Barber, 85 F.Supp.3d 1308 (2015).

Foreclosure represents a mechanism to convert limited charging order rights into full ownership rights.

Anticipated Rebuttals: Foreclosure constitutes a separate legal remedy requiring additional court proceedings and is unavailable in many states that prohibit foreclosure of charged interests, making it an exception rather than the rule.

Cases on Both Sides

Cases Limiting Charging Order Holders to Economic Rights Only

Gaslowitz v. Stabilis Fund I, LP, 331 Ga.App. 152 (2015) — The Georgia Court of Appeals held that charging order holders receive only assignee rights and cannot obtain LLC accounting information. The court reasoned that allowing information access would effectively grant management participation that statutes explicitly prohibit.
Green v. Bellerive Condominiums LP, 135 Md.App. 563 (2000) — The Maryland Court of Special Appeals distinguished between collection rights and management rights, holding that charging orders transfer only economic interests. The court emphasized that management rights are "fundamental 'management rights of a partner' that were not transferred to the receiver by the charging order."
JPMorgan Chase Bank, N.A. v. McClure, 393 P.3d 955 (2017) — The Colorado Supreme Court held that charging order holders "ha[ve] no right to compel a distribution or otherwise participate in the LLC's management." The court explained that creditors obtain "only the rights of a transferee or assignee" which exclude governance participation.

Cases Allowing Enhanced Rights Through Alternative Mechanisms

Deutsch v. Wolff, 7 S.W.3d 460 (1999) — The Missouri Court of Appeals permitted court-appointed receivers to exercise management powers over partnerships subject to charging orders. The court reasoned that receivers act as court agents rather than assignees and can be granted whatever powers the court deems necessary to effectuate collection.
Wells Fargo Bank, N.A. v. Barber, 85 F.Supp.3d 1308 (2015) — A federal district court applying Florida law recognized that foreclosure of charged LLC interests can transfer complete membership rights including management authority. The court noted that "the purchaser of the member's interest at a foreclosure sale steps into the shoes of the member for all purposes."

Practical Implications

The limitation of charging order holders to economic rights creates significant practical consequences for both creditors and business entities. For creditors, charging orders may provide limited collection value if the entity makes no distributions, effectively creating a "wait and see" remedy that depends entirely on the debtor entity's distribution policies. Since creditors cannot compel distributions or participate in management decisions about distribution timing, sophisticated debtors can potentially frustrate collection efforts by minimizing distributions while maintaining entity operations.

Business entities benefit from substantial operational continuity protection, as charging orders prevent creditor interference in management decisions and preserve the existing governance structure. This protection extends to non-debtor members who can continue operating without unwanted creditor participation in strategic decisions, voting on major transactions, or access to confidential business information. The clear separation of economic and governance rights makes LLCs and partnerships attractive vehicles for business owners concerned about personal liability exposure while maintaining control over entity operations.

The foreclosure exception creates important strategic considerations, as creditors in jurisdictions permitting foreclosure may ultimately obtain complete ownership rights including management and voting authority. However, foreclosure requires additional court proceedings, may face operating agreement restrictions, and is prohibited entirely in some states, making it an uncertain and potentially expensive remedy. The availability of foreclosure also creates planning opportunities for entity owners to structure their agreements with specific foreclosure protections or redemption rights.