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Redemption Or Repurchase Of Charged Interest

Topic Redemption TopicsRepurchaseRedemption

PAGE SUMMARY

Charging orders function as the primary post-judgment mechanism for attaching a debtor's transferable interest in limited liability companies and partnerships, primarily entitling the creditor to distributions rather than management rights. Under the Kansas Revised Limited Liability Company Act, charging orders are established as the exclusive remedy for reaching such interests, a principle consistently upheld by Kansas federal courts to protect entity operations from creditor interference. In contrast, New York provides a more expansive remedial framework under CPLR 5225 and the Partnership Law, allowing for receivership and turnover procedures alongside charging orders. A significant legal tension exists where entity agreements include redemption or repurchase provisions intended to preserve internal control or family ownership. The New York decision in Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership clarifies that although such contractual buy-back rights are enforceable among the parties, they cannot statutorily bar a judgment creditor from executing a sheriff's sale. Instead, courts may balance these competing interests by staying enforcement to permit the exercise of redemption rights, thereby honoring the contract without defeating the judgment. Despite these procedures, the practical utility of a charging order remains contingent upon the entity's distribution activity, as managing partners' discretion to accumulate profits or reinvest capital can render the remedy ineffectual for immediate collection. Furthermore, while the general rule limits creditors to economic interests, an exception often applies in sole-member LLC contexts where the creditor may acquire full membership rights. Jurisdictional analysis suggests that while the specific enforcement mechanisms vary between the exclusivity of Kansas law and the multi-faceted approach of New York, statutory creditor rights generally subordinate internal entity restrictions during the execution process.

Redemption Or Repurchase Of Interests Subject To Charging Orders

♦ Introduction

Charging orders provide judgment creditors a lien on a debtor’s transferable interest in a limited liability company (LLC), partnership, or limited partnership, allowing creditors to collect distributions that would otherwise be paid to the judgment debtor. This remedy generally restricts creditors from obtaining management or governance rights in the entity or accelerating distributions. Under many statutes, including the Uniform Limited Liability Company Act (ULLCA) and Revised Uniform Partnership Act (RUPA), charging orders are the exclusive remedy against a member’s or partner’s interest, reinforcing the protection of the entity’s operations and other owners while enabling limited creditor recourse. Courts may appoint receivers to collect distributions, and foreclosure of the charging order can occur if distributions do not satisfy the judgment timely, with foreclosure purchasers obtaining only transferable interests except in sole-member LLC cases, where full membership rights may transfer and the original member dissociates.

The debtor, other members, or the entity itself may redeem the interest before foreclosure by paying the judgment creditor the due amount. Importantly, charging orders do not enable creditors to control timing or amount of distributions; if no distributions are made, the remedy yields little. Jurisdictional issues affect enforceability, especially across states. Courts sometimes refuse to enforce charging orders in single-member LLCs or seek equitable remedies like veil piercing to prevent injustice or misuse of the charging order protection. The cases referenced (Eighth & Jackson and Leasing Innovations) illustrate judicial approaches to charging orders respecting entity governance and redemption rights within Kansas federal and New York jurisdictions.

Charging orders remain enforceable against debtor interests in partnerships and LLCs even when those interests are subject to repurchase or redemption provisions, though the specific enforcement mechanisms differ between Kansas and New York jurisdictions. In New York, courts have held that while partnership redemption rights are enforceable contractual provisions, they cannot prevent creditors from pursuing collection through sheriff's sales or other available legal remedies. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). Kansas federal courts applying state law limit creditors to charging orders as the exclusive remedy against LLC membership interests. Both jurisdictions allow redemption provisions to be asserted during the enforcement process, but subordinate these rights to creditors' collection efforts.

Statutory Framework and Jurisdictional Approaches

Kansas federal district courts apply state law under Federal Rule of Civil Procedure 69(a)(1) for post-judgment collection procedures. Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015); Oberg v. Lowe, Not Reported in Fed. Supp. (2022). Under Kansas law, K.S.A. § 17-76,113 provides that "[o]n application by a judgment creditor of a member or of a member's assignee, a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment". Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015); Oberg v. Lowe, Not Reported in Fed. Supp. (2022). The Kansas Revised Limited Liability Company Act establishes charging orders as "the only remedy by which a judgment creditor of a member can reach the member's interest in the LLC". Meyer v. Christie, Not Reported in F.Supp.2d (2011). This exclusivity principle distinguishes Kansas law from partnership law, where additional remedies may be available.

New York state law provides multiple statutory frameworks for charging orders depending on the entity type. For general partnerships, New York Partnership Law § 54 allows courts to "charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon" and permits courts to "appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership". NY PARTNER § 54. For limited partnerships, Partnership Law § 111 provides that courts "may charge the interest of the indebted limited partner with payment of the unsatisfied amount of the judgment debt; and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). For limited liability companies, Limited Liability Company Law § 607 establishes that courts "may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest". NY Limit Liab Co § 607.

Analysis of Key Cases

Eighth & Jackson Investment Group v. Kaw Valley Bank

The Eighth & Jackson Investment Group v. Kaw Valley Bank case provides limited direct guidance on charging orders in redemption contexts because the charging order claimant defaulted in the interpleader proceedings. Eighth & Jackson Inv. Group v. Kaw Valley Bank, Not Reported in F.Supp.2d (2013). The case involved competing claims to funds where George Hersh had pledged his membership interest in Eighth & Jackson Investment Group to Kaw Valley Bank as security, Paul agreed to purchase Hersh's interest for $110,000 contingent on obtaining a release of the security interest, and a charging order was served against Hersh's interests in favor of creditor O'Neil. Eighth & Jackson Inv. Group v. Kaw Valley Bank, Not Reported in F.Supp.2d (2013).

The court noted that "plaintiff Eighth & Jackson received service of a charging order charging Hersh's interests in a number of Kansas entities—including Eighth & Jackson—with payment of a judgment entered in favor of defendant O'Neil and against Hersh". Eighth & Jackson Inv. Group v. Kaw Valley Bank, Not Reported in F.Supp.2d (2013). However, because default judgments were entered against O'Neil, Hersh, and unknown creditors, the court concluded that "a default judgment entered against a claimant in an interpleader action terminates that party's interest in the fund at issue". Eighth & Jackson Inv. Group v. Kaw Valley Bank, Not Reported in F.Supp.2d (2013). The case primarily resolved through interpleader law rather than analyzing the intersection of charging orders with membership purchase agreements.

Leasing Innovations, Inc. v. R&D Maidman Family Limited Partnership

The Leasing Innovations decision provides the most comprehensive analysis of charging orders in redemption contexts within the researched jurisdictions. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). Judgment creditor Leasing Innovations sought enforcement against David Maidman's limited partnership interests in family partnerships that contained specific redemption provisions. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). The partnership agreements included paragraph 18(g), which provided that "in case any transfer shall be made without permission of the Managing General Partner . . . the non-transferring Limited Partners may require the sale of such interest to them at the allocable pro-rata book value of the Partnership's assets (including depreciation taken) less the pro-rata allocable liabilities of the Partnership first [sic] less a 20% discount for limited marketability and then less a further 20% discount because of the minority of the interest" with specified discounts for limited marketability and minority interest. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).

The court established several key principles. First, "pursuant to section 111 of the Partnership Law and section 121-703 of the Revised Limited Partnership Act, petitioner is entitled to a charging order directing the Maidman Family Partnerships to pay the judgment out of Maidman's limited partnership interest". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). Second, the court distinguished between enforceability of redemption provisions and their ability to prevent creditor collection: "The terms of those agreements restricting ownership to family members are enforceable, but the terms authorizing those partnerships to buy back Maidman's interests at no cost, assuming without deciding, that such terms are enforceable, do not empower the partnerships to prevent the sale of Maidman's limited partnership interest". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).

The court adopted a balanced enforcement approach, stating that "The Maidman Family Partnerships may assert their claimed contractual right to the sheriff. This court expresses no opinion as to the validity or effect of the buy-back provisions. Petitioner has a right to enforce its judgment through a sheriff's sale". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). The court implemented this balance by directing entry of a charging order, staying enforcement for 90 days to allow potential exercise of redemption rights, and enjoining direct payments to the debtor during the pendency of the judgment Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).

Practical Enforcement Considerations.

The effectiveness of charging orders can be significantly limited when entities have discretion over distributions. In Leasing Innovations, the court noted that "According to the Hazin reply affirmation, the Maidman Family Partnerships made distributions in 2014, but not in 2015, and that Maidman may not receive distributions thereafter because the general partner is empowered to accumulate profits for capital costs or additional investments (Hazin reply affirmation, ¶¶ 6-8). Thus, the charging order will be entirely ineffectual for so long as no distributions are made". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016). This observation highlights a fundamental limitation of charging orders as collection mechanisms.

Kansas federal courts have clarified the scope and application of charging order statutes in several decisions. In Vision Marketing Research, Inc. v. McMillin Group, LLC, the court determined that K.S.A. § 17-76,113 applies to non-Kansas LLCs, reasoning that "limiting the issuance of charging orders under K.S.A. 16-76,113 [sic] to judgment debtor interests in Kansas-formed LLCs would...significantly hinder a judgment creditor in Kansas from attempting to collect its judgment from a debtor with interests in foreign LLCs". Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015). The court emphasized that charging orders serve the purpose of execution and collection, functioning as "a post-judgment remedy by which the judgment creditor attempts to collect its judgment from future LLC distributions that may flow to the judgment debtor by diverting any such future distributions to the creditor". Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015).

In Meyer v. Christie, the Kansas federal court, drawing on partnership law principles under the Uniform Partnership Act, explained that after entry of a charging order under the UPA, "After the entry of a charging order, the debtor partner continues to be a partner and retains all rights and obligations of a partner except the right to receive partnership distributions until the creditor has been paid its judgment and interest thereon. The creditor is not not entitled to participate in the management of the partnership." Meyer v. Christie, Not Reported in F.Supp.2d (2011). The court noted that it believed these principles apply to charging orders under Kansas LLC law, and cited an important exception: "where the member/debtor is the sole member of the LLC at the time of the assignment under the charging order, the assignee/creditor shall have the right to participate in the management of the business and affairs of the LLC as a member". Meyer v. Christie, Not Reported in F.Supp.2d (2011).

Jurisdictional Differences in Creditor Remedies

A significant distinction exists between Kansas and New York regarding available creditor remedies. Kansas law treats charging orders as the exclusive remedy for reaching LLC membership interests. Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015); Meyer v. Christie, Not Reported in F.Supp.2d (2011). The Kansas Revised Limited Liability Company Act makes clear that charging orders are "the only remedy by which a judgment creditor of a member can reach the member's interest in the LLC". Meyer v. Christie, Not Reported in F.Supp.2d (2011).

New York law permits broader enforcement mechanisms. Under CPLR 5225, courts may order judgment debtors to "pay the money, or so much of it as is sufficient to satisfy the judgment, to the judgment creditor and, if the amount to be so paid is insufficient to satisfy the judgment, to deliver any other personal property, or so much of it as is of sufficient value to satisfy the judgment, to a designated sheriff". NY CPLR § 5225. The Leasing Innovations court utilized both charging order relief and turnover procedures, demonstrating New York's more expansive approach to creditor collection against partnership interests. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).

Arguments and Rebuttals

Arguments Supporting Creditor Rights

Statutory Supremacy Over Contractual Provisions

Courts possess statutory authority under Partnership Law § 111 to issue charging orders against limited partnership interests regardless of contractual redemption provisions. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
The Leasing Innovations court held that redemption provisions "do not empower the partnerships to prevent the sale of Maidman's limited partnership interest" despite their contractual enforceability. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
Anticipated Rebuttals: Partnership agreements represent voluntary contractual arrangements that should be honored, and redemption rights protect legitimate business relationships and entity continuity from external creditor interference.

Public Policy Favoring Creditor Collection

Allowing redemption provisions to block creditor enforcement would undermine the fundamental principle that debtors cannot shield assets from legitimate collection efforts.
The Leasing Innovations court emphasized that "petitioner has a right to enforce its judgment through a sheriff's sale" as a matter of law. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
Anticipated Rebuttals: Partnership law has historically protected entity integrity through limited creditor remedies, and redemption provisions serve legitimate business purposes beyond debtor protection.

Limited Nature of Charging Order Rights

Creditors through charging orders acquire only "the rights of an assignee of the member's interest in the LLC" without management rights or entity disruption. Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015) NY Limit Liab Co § 607.
The Leasing Innovations court stated that redemption rights can be "asserted to the sheriff" during enforcement proceedings without preventing the sale. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
Anticipated Rebuttals: Even limited creditor rights can disrupt entity operations and family business arrangements, and redemption provisions were specifically designed to prevent such external interference.

Arguments Supporting Entity/Member Rights

Contractual Freedom and Redemption Right Enforceability

The Leasing Innovations court acknowledged that "terms of those agreements restricting ownership to family members are enforceable". Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
Partnership agreements represent voluntary contractual arrangements that should be given effect according to their terms.
Anticipated Rebuttals: Contractual provisions cannot override statutory creditor rights, and allowing such provisions to block collection would encourage debtor asset protection schemes.

Entity Protection Principles

Partnership and LLC law have traditionally protected entity assets from individual partner or member creditors through limited collection mechanisms.
Kansas law's exclusive charging order remedy for LLC interests reflects the statutory framework that limits creditor collection to distributions flowing from the LLC. Vision Marketing Resources, Inc. v. McMillin Group, LLC, Not Reported in F.Supp.3d (2015) Meyer v. Christie, Not Reported in F.Supp.2d (2011).
Anticipated Rebuttals: Creditor protection remains paramount in commercial law, and entity protection should not extend to shielding assets from legitimate collection efforts.

Business Continuity and Family Entity Protection

Redemption provisions serve legitimate purposes of maintaining family control and business continuity beyond mere debtor protection.
The 90-day stay granted in Leasing Innovations demonstrates judicial recognition of the need to balance creditor rights with redemption procedures. Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016).
Anticipated Rebuttals: Business continuity concerns cannot justify preventing creditors from collecting on valid judgments, and alternative arrangements can protect legitimate business interests.

Cases on Both Sides

Supporting Creditor Enforcement Rights

Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016) — The court held that while partnership redemption provisions are enforceable, they cannot prevent creditors from pursuing sheriff's sales of partnership interests to satisfy judgments. The court reasoned that creditors have statutory rights to enforce judgments through available legal remedies, and contractual provisions cannot override these fundamental collection rights.

Recognizing Redemption Right Validity

Leasing Innovations, Inc. v. R&D Maidman Family Ltd. Partnership, 2016 WL 3773629 (2016) — The same court acknowledged that partnership agreement terms "restricting ownership to family members are enforceable" and that redemption rights can be asserted to the sheriff during enforcement proceedings. The court balanced these competing interests by providing a 90-day stay to allow redemption procedures while ultimately permitting creditor enforcement. ♦