Perception - v. - Case Law:
Just How Protective For Assets of the
Entity is the Charging Order Limitation?

Reprinted from Developments, April 2005

Even though there is concern that partnership management rights may be reached by creditors of individual partners through a charging order, case law indicates that the partnership as an entity is well-protected from creditors pursuant to the Uniform Partnership Act (UPA) and the Uniform Limited Partnership Act (ULPA).

The charging order was created in order to balance the interests of creditors and partnerships. Prior to the enactment of the UPA in 1914 and the UPLA in 1916, when a debtor had an interest in a partnership, his creditor could attach the interests of the entire partnership with a writ of execution. Such an attachment often created confusion and chaos, forcing the partnership to halt business operations.

With the enactment of the UPA and UPLA, the charging order allowed creditors to obtain only an individual debtor partner’s interest in profits and surpluses of the partnership, not the assets of the partnership. Section 703 of the Revised Uniform Limited Partnership Act (RULPA)(1976) states, in part, “the judgment creditor [with a charging order] has only the rights of an assignee of the partnership interest.” However, the creditor does not actually have the rights of an assignee because the creditor owns no part of the charged interest. Under RULPA, even an assignee of a partnership interest is not a partner and may not exercise a partner’s management rights or meddle in the affairs of the partnership. §702. The latest version of RULPA (”Re-RULPA”) substitutes the word “transferee” for “assignee,” but, nonetheless, provides that a creditor does not have the right to manage operations of the partnership. Comment to UPLA § 703. Thus, the operations of a partnership may remain intact despite the obligations of individual partners.

Although every version of the UPA or UPLA prohibits the creditor from stepping into the shoes of the debtor partner as a manager or to vote, the statutes nonetheless give the court issuing a charging order broad discretion to enforce satisfaction of the judgment. The language of Maryland’s version of the UPA about the court’s authority with regard to charging orders is a good example of what most jurisdictions have adopted:

On due application to a competent court of any judgment creditor of a partner, the court which entered the judgment, order or decree, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of the judgment debt with interest thereon; and may then or later 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, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which circumstances of the case may require.

91st Street Venture v. Goldstein, 114 Md.App. 561 (1997), quoting § 9-505 of the Corporations and Associations Article (1995 Repl. Vol., 1996 Supp.) (court held UPA gives court issuing charging order broad enough discretion to order a judicial sale of debtor’s partnership interest subject to a right of redemption).

Protective Nature of Charging Orders

An earlier charging order case, Windom National Bank of Windom, et. al., v. Charles H. Klein, et. al., 254 N.W. 602 (Minn. April, 27, 1934), emphasized that individual partners may not assign the partnership’s interests to their individual creditors, indicating the charging order’s protective origins.

The Minnesota Supreme Court held that the charging creditor of a debtor partner’s interest in a partnership may obtain an annulment of a mortgage on partnership property that was assigned by individual partners without the agreement of the entire partnership. Pursuant to the Minn. UPA, individual partners may not assign partnership property, except for the partnership purposes.

Howard and Gottlob Bender were debtors and two of four partners in the Bender Brothers Partnership. Windom National Bank obtained a charging order against the debtors, and a receiver was appointed to collect the judgment. Charles Klein was the mortgagee of partnership real and personal property. Both mortgages were executed by Howard and Gottlob Bender individually and not by the partnership.

Windom brought this suit to annul the mortgages given to Klein by the two individual debtors. Klein objected to Windom’s complaint, and the trial court sustained it. Windom appealed.

The appellate court ruled that the two individual debtor partners had no right to dispose or assign partnership property under the Uniform Partnership Act, which was adopted in Minn. The court noted that the purpose of the UPA and the charging order was to eliminate the confusion and fraud linked with regarding partners in partnerships as joint tenants with the partnership in real property. Under the UPA, the partners only have the right to assign partnership property for partnership purposes, not for individual purposes.

Thus, the charging order pursuant to the UPA began as a tool for creditors to reach the interests of debtors in a partnership while continuing to protect the partnership itself from creditors.

The charging order also protects a partnership from dissolution by allowing the creditor to reach only the debtor’s individual interest in the partnership.

The New Hampshire Supreme Court held pursuant to the New Hampshire ULPA and UPA, that dissolution of a limited partnership is not a remedy for charging creditors. Baybank v. Catamount Construction, 1997 N.H.36 (N.H. April 24, 1997). The court explained that the purpose of charging orders is to allow creditors to reach the debtor partner’s economic interests in a partnership without causing dissolution of the partnership.

The creditor, Baybank, obtained a charging order against debtor’s interest in two limited partnerships. The trial court issued a charging order, granted dissolution of one of the limited partnerships if the judgment was not satisfied within fourteen days of the order, and appointed a receiver for dissolution.

The debtors appealed. The appellate court reversed the trial court’s order of dissolution and appointment of a receiver. The appellate court held that Baybank has no standing to seek judicial dissolution of the limited partnership because the purpose of the charging order under the ULPA and UPA is to allow creditors to reach the debtor partner’s interest in distributions and profits without changing the partnership.

Management Rights Granted to Creditors

While most courts have adhered to the protective nature of the charging order by allowing the appointment of a receiver to force a judicial sale on a partner’s economic interest, some courts have gone as far as giving the receiver management powers of the debtor in order to satisfy the judgment. However, cases where courts have granted management rights to the creditor involve unusual circumstances, where the creditors are often also partners in the same partnership with the debtor. Thus, despite the appearance of a breach of the protections of the charging order for the partnership, these cases prove unique and rare in their grant of unusually broad powers to creditors.

The Missouri Court of Appeals granted the receiver management rights to collect a judgment on behalf of the creditor where the debtor was a general partner who engaged in fraudulent acts against the limited partner and the partnership. Deutsch v. Wolff, 7 S.W.3d (Mo.App.W.D. 1999).

In Deutsch v. Wolff, Eugene Wolff and Marvin Deutsch entered into business ventures together, including the formation of D & W Scheutz Road Limited Partnership (D&W). After Deutsch’s death, Wolff and a Deutsch family trust were partners in D&W. Wolff was the general partner, and the trust was the limited partner. Wolff was also the co-trustee of the trust and used his powers to engage in self-dealing.

The Deutsches obtained a charging order from the trial court against Wolff’s interest in D&W with a receiver to administer Wolff’s interest in D&W and to assume any management duties with respect to the partnership. Wolff appealed.

The appellate court affirmed the trial court’s decision, reasoning that the UPA gives the court broad discretion to order a sale of a debtor-partner’s interest in profits and surplus of a partnership to satisfy the partner’s debt and appoint a receiver for the administration of the sale. The court noted that the UPA statute empowers a receiver to “make all orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.”

The court acknowledged that, normally, charging orders do not entitle the creditor to assume any management rights in order to protect the remaining partners. However, the court distinguished Deutsch by explaining that the debtor is the sole general partner who breached his fiduciary duty to the partnership and to the limited partner-creditor. Thus, the limited partner-creditor here would want the receiver to have management powers to ensure that the debtor will not use his management powers to vote against paying the creditor. In other words, the limited partner seeks protection from the general partner by asking the receiver to manage the partnership.

Finally, the court noted that, even though management rights may not be transferred to the receiver as an assignee, the management rights may be given to the receiver as an agent of the court for the purpose of satisfying the judgment to the creditor.

Similarly, the Nevada Supreme Court held that when a the creditor is a limited partner in the same partnership with the debtor, a general partner, a court may issue a charging order with the appointment of a receiver to sell and collect the proceeds of the debtor partner’s interest in the partnership (profits and surplus) and manage the profits and surplus. However, when the receivership terminates, the debtor partner’s non-economic interests, including his management rights, are restored. Tupper v. Kroc, 88 Nev. 146 (Nev. March 2, 1972).

Lloyd Tupper was the general partner of three limited partnerships. Ray Kroc was the limited partner in the same three partnerships. Each partner had a 50% interest in each limited partnership. Kroc paid some of the partnerships’ liabilities in exchange for promissory notes from Tupper, which Tupper failed to pay. Kroc obtained a charging order from the district court that ordered a sale of Tupper’s interests in the partnerships which were to be conducted by the sheriff. The sale was conducted by the sheriff and the partnership interests were purchased by Kroc for $2,500. Subsequently, the receivership was terminated. Tupper appealed, arguing that his interest in the partnership was not subject to sale, and, because Tupper retained equity in the partnership, the receivership needed to continue to protect Tupper’s interests.

The appellate court affirmed the trial court’s decision, reasoning that the court was authorized pursuant NRS 87.280(1) to make all orders necessary to satisfy the judgment through the charging order, including sale of Tupper’s partnership interests. Further, the court found it unnecessary to reinstate a receiver to protect Tupper’s non-economic interests. The court stated that, even though Tupper did retain a right to participate in management of the partnership, a receiver was not necessary to protect those rights because Tupper’s management rights were restored as soon as the receivership was terminated. Thus, when the receiver was given the authority to sell Tupper’s partnership interests in profits and surplus, the receiver probably also had the management powers necessary to ensure the profits and surplus were paid to Kroc.

Just as in Deutsch and in Tupper, the Ohio Court of Appeals granted management rights to the creditor in Webster v. Dalcoma Limited Partnership. No. CA2000-11-028 (Ohio App. Oct. 17, 2001). However, the creditor in Webster was a third party, and the debtors owned 100% of the partnership interests in the partnership. Thus, all three partners in the partnership were debtors to the same creditor, and the creditor obtained a charging order against all three debtor-partners. The court held 100% of the partnership’s management rights were assignable through a charging order because the 1/3 interest of each partner was transferable to the creditor, thus giving the creditor interest in the entire partnership

No Management Rights Granted

Unlike the previous cases, most courts have outright refused to allow creditors to step into the shoes of the debtor partner by receiving management rights.

For example, the Maryland Court of Appeals outlined the parameters of a charging creditor’s rights by holding that the general partners of a limited partnership do not have the duty to notify a receiver for a charging creditor, who has the interest of the debtor partner in the partnership, about the opportunity to purchase the partnership’s debt. Green v. Bellerive Condominiums LP, 135 Md.App. 563 (Nov. 3, 2000). Further, the court ruled that the receiver for the charging creditor, even if assigned the interest of a partner in the partnership, does not have standing to assert the partners’ management rights to participate in or object to such a purchase.

In Green, Arnold Wolfe was a limited partner in Bellrive Condominiums limited partnership. A corporation controlled by Wolfe, the U.S. Investment Group, Inc. (USIG), was one of three of Bellrive’s general partners. Wolfe borrowed $50,000 from the creditor, who obtained a charging order against Wolfe and USIG’s interests in the Bellrive partnership. Plaintiff in this case, Carlton Green, was appointed as receiver for the creditor.

The partnership’s asset was a piece of real property, which it planned to develop and sell. Bellrive was also indebted to another creditor, a bank. The bank sought to foreclose, and the FDIC scheduled a foreclosure date. Two general partners of Bellrive, wanting to stop the foreclosure, offered to purchase the debt from the bank. They sent out a letter notifying all the partners of the opportunity to buy the debt, including Wolfe and USIG. Wolf and USIG did not respond. Several partners participated in buying the debt. Finally, the partnership successfully sold the property, and paid off the debt.

Green, the receiver, brought suit against Bellrive, seeking repayment of the $50,000. Green alleged that Bellrive breached its fiduciary duties by failing to notify him of the opportunity to purchase the note and failing to obtain the consent of Wolfe and USIG to the purchase. The trial court held that Green did not have the right to receive notice of partnership opportunities and did not have standing to demand consent on behalf of Wolfe and USIG. The appellate court affirmed.

The court reasoned that the charging order only transfers collection or distribution rights to the creditor, but does not confer management rights to the creditor. Relying on case law and the RULPA §§ 10-702 and 10-705, the court determined that a receiver has the rights of an assignee, and the fundamental rights to obtain partnership information are not transferred to a creditor by a charging order. The only rights transferred by a charging order are financial rights. The court also relied on this provision of the RULPA, “An assignee who does not become a substituted limited partner has no right to require any information or account of the partnership transactions.” § 10-118.

Broad Economic and Foreclosure Rights Granted,
but Management Rights Denied

Typically, courts have only allowed creditors to receive economic rights in partnerships via a charging order. That is, the creditor may only receive profits and distributions. While most courts allow creditors to reach the profits of a partnership interest through a foreclosure sale, other courts do not allow foreclosure on a partnership interest if it unduly interferes with the partnership’s business. Further, even if foreclosure is allowed, most courts do not allow management rights to be transferred to the creditor.

The California Court of Appeals held that, although foreclosure of a charged partnership interest (share of profits and surplus) is statutorily lawful without the consent of the innocent partner(s), under the California UPA, a creditor may not foreclose on a debtor’s interest in a partnership to enforce a money judgment against debtor in his individual capacity if such foreclosure unduly interferes with the partnership business. The court ruled that whether a foreclosure sale unduly interferes with the partnership business should be determined on a case-by-case basis. Hellman v. Anderson, 233 Cal. App. 3d (Aug. 26, 1991).

The debtor, John Anderson, owned a partnership interest in Rancho Murieta Investors(RMI). The creditor, Fred Hellman, obtained a charging order against Anderson’s partnership interest in RMI. However, since the charging order, Hellman has not received any monies in satisfaction of the judgment. Thus, Hellman obtained an order from the trial court in this case authorizing and directing a foreclosure sale of Anderson’s charged partnership interest. The trial court ordered that Anderson’s partnership interest in profits and surplus of RMI would be sold at a public sale.

Anderson and his partner, Eric Tallstrom, appealed by arguing that foreclosure of a partnership interest is exempt under California law, and, even if foreclosure were an option, the consent of the nondebtor partner is required in the foreclosure. Eureka, Anderson’s largest debtor, also appealed the trial court’s order. The appellate court disagreed with the appellants, but the court remanded the case to the trial court in order to determine whether foreclosure in this case would unduly interfere with the partnership business because the court decided interference should be determined on a case-by-case basis.

The Connecticut Court of Appeals went even further than the California court by holding, pursuant to the Connecticut ULPA, that a limited partnership may enforce a charging order against a partner’s interest in the limited partnership through strict foreclosure. Madison Hills LTD v. Madison Hills, Inc., 644 A.2d 363 (Conn.App. June 6, 1994. The court noted that even though the ULPA does not expressly provide strict foreclosure as a remedy for charging creditors, the UPA does provide so and may be applied to cases governed by the ULPA.

Plaintiff Madison Hills LTD was a limited partnership that obtained a judgment against defendant Madison Hills, Inc., a general partner of plaintiff partnership, after Madison Hills Inc. defaulted on several promissory notes held by plaintiff.

Plaintiff moved for a charging order against defendant and immediate strict foreclosure of defendant’s partnership interest. The trial court granted plaintiff’s motion and charged defendant’s partnership interest with the judgment of $186,841.54. However, the court denied plaintiff’s motion for immediate strict foreclosure, but ordered that the partnership interest be foreclosed unless redeemed by defendant prior to a certain date. The Appellate Court of Connecticut affirmed.

After evaluating the language of both statutes, the appellate court ruled that the UPA and the UPLA are not inconsistent with one another. Thus, the appellate court applied the remedies provision under the UPA allowing strict foreclosure as a remedy to charging creditors to this case (which involves a limited partnership and is governed by the ULPA).

Just as in Madison Hills, the Maryland Court of Appeals noted that the UPA may supplement gaps in RULPA. Lauer Construction Inc. v. Schrift, 123 Md.App. 112 (Md.Sp.App. Sept. 2, 1998). In Lauer, the court held that a charging creditor has the power to force a sale of the debtor general partner’s interest in a limited partnership, pursuant to the UPA.

Lauer Construction had a charging order against the debtors, Claude and Carol Schrift’s, interest in Gibsons Lodging Limited Partnership. The Schrifts were the general partners of Gibsons Lodging. Lauer sought to force sale of the Schrifts’ partnership interest. The trial court denied Lauer’s request, and Lauer appealed.

The appellate court ruled that the UPA and the RULPA allows a forced sale of debtors’ interests in limited partnerships as a remedy to creditors. Pursuant to both the UPA and the RULPA, a creditor may charge the partnership interest of a debtor partner. The UPA allows force sale of the debtor’s partnership interest as an enforcement mechanism. However, the RULPA is silent as to whether a force sale of the partnership interest is a method of enforcing the charging order. A Maryland statute, CA-10-108 provides that the UPA shall apply to limited partnerships, except to the extent that the provisions are inconsistent. Because the RULPA and its predecessor gave courts broad powers to issue and enforce charging orders and the court found no inconsistencies between the UPA and RULPA, the court applied the section of the UPA that allows force sale to satisfy the judgment of a charging creditor.

Similarly, the Georgia Court of Appeals held that a charging creditor may obtain his charged interest in a limited partnership pursuant to a foreclosure by sale. Nigri v. Lotz, 453 S.E.2d 780 (Ga.App. Feb. 1, 1995). The court noted that the foreclosure sale does not place the creditor-purchaser (if the creditor under the charging order is the purchaser) in the position of a limited partner because the creditor only has rights of an assignee, and the sale only entitles creditor to receive distributions to which the debtor limited partner would have been entitled. That is, the creditor owns all of the partner’s financial interest in the partnership, including all amounts ultimately due to the partner on dissolution after settlement of liabilities.

In Nigri, the creditor sought to charge Lotz’s partnership interests in two limited partnerships through an order transferring Lotz’s partnership interests to him as a partial satisfaction of debt.

The trial court entered an order charging Lotz’s partnership interest and provided Nigri be paid with distributions from the partnership to satisfy the debt. However, the court refused to transfer Lotz’s partnership interests to Nigri. Nigri appealed, claiming that the trial court erred in holding that Lotz’s interests in the partnership were isolated from Nigri’s claim as creditor and by refusing to transfer Lotz’s partnership interests to him in satisfaction of the judgment debt.

The appellate court affirmed the trial court’s judgment. The court stated that Nigri should have asked for a transfer of interest through a foreclosure by sale pursuant to the ULPA, instead of an outright transfer of interest in the partnership to Nigri, which is not a remedy under the ULPA.

No Right to Foreclose Granted to Creditor

Unlike most jurisdictions, Florida courts have held that a creditor may not foreclose on a debtor-partner’s interest in a partnership in order to satisfy a judgment.

The Florida Court of Appeals held, pursuant to Florida’s RULPA, a creditor with a charging order against a debtor’s interest in a limited partnership does not have the right to foreclose against the debtor partner’s interest in the limited partnership. Givens v. National Loan Investors, L.P., 724 So.2d (Fla.App. Dec. 18, 1998).

In Givens, National Loan Investors was the creditor that obtained a charging order against Charles Givens’ interest in two limited partnerships. National Loan sought an execution of sale of the limited partnership interest. The trial court ruled an execution of the sale of a limited partnership interest is lawful under Florida law.

The appellate court reversed, ruling that Florida RULPA does not allow charging creditors to foreclose on the debtor’s interest in a limited partnership because the RULPA only gives creditors the rights of an assignee. The court noted, however, that a creditor with a charging order in the interest of a general partnership may foreclose on a debtor partner’s interest in the partnership.

Further, the court noted that practitioners who are concerned with asset protection generally should counsel their clients to consider operation as a limited partnership rather than a general partnership because a judgment creditor’s rights against a debtor partner’s interest in a general partnership are greater than the rights against a partner’s interest in a limited partnership.

Similarly, the North Carolina Court of Appeals held that a charging creditor may receive distributions and allocations from the limited liability company of a debtor-partner in order to satisfy a judgment debt. However, pursuant to N.C.G.S. § 57C-3-03, a creditor may not force the sale of a debtor-partner’s membership interest in a limited liability company to satisfy the debt. Herring v. Keasler, 563 S.E.2d 614 (N.C.App. June 4, 2002).

Court’s Power to Terminate Receiverships

Just as courts may grant foreclosure and other economic powers to creditors, courts also have the broad discretion to terminate powers given to a receiver when the judgment is satisfied.

In 91st Street Joint Venture v. Goldstein, 691 A.2s 272 (Md.Sp.App. March 1997), the Maryland Special Court of Appeals held that a trial court has the discretion to set aside a previous transfer of debtor’s partnership interest to creditor by the receiver and vacate a previous charging order, if the debtor has satisfied the debt by posting a cash bond. The court stated that a trial court has broad discretion to charge a debtor partner’s interest in a partnership, appoint a receiver of monies, and make all other orders, directions, accounts, and inquiries which the debtor partner might have made on his/her interest, or which circumstances may require.

Edward Goldstein was the debtor and had a 0.2022% interest in the 91st Street Joint Venture. 91st Street was Goldstein’s creditor with a charging order from the trial court against Goldstein’s interest in the joint venture.

The trial court appointed receiver for the purpose of effectuating a transfer, assignment, and/or conveyance of Goldstein’s interest to the joint venture if the judgment remained unsatisfied for fifteen (15) days after the charging order was served on Goldstein. Goldstein appealed the charging order within the fifteen days, and the court stayed enforcement of the judgment and fixed a bond of $56,000. Thereafter, the trial court amended its order staying the judgment and increased the bond to $61,600. Goldstein posted a cash bond in the amount of $61,600, and the trial court dismissed Goldstein’s appeal.

Subsequently, the joint venture obtained an order dissolving the stay of enforcement on the judgment, and the receiver transferred Goldstein’s interest in the joint venture, amounting to $28,950 to the joint venture, in partial satisfaction of the judgment. The joint venture filed a petition to release part of Goldstein’s bond to satisfy the rest of the judgment. Goldstein filed an opposition to the joint venture’s position, asking the court to release the bond, distribute the funds, and vacate the charging order and receivership. The trial court granted Goldstein’s motions.

The joint venture appealed, presenting the issue of whether the trial court abused its discretion by setting aside the receiver’s transfer of Goldstein’s partnership interest and in vacating the charging order and terminating the receivership. The appellate court ruled that the trial court has broad discretion to revise the charging order, and the receiver’s assignment was subject to ratification by the trial court. Further, the court found that Goldstein was free to challenge the charging order under Maryland law.

As demonstrated by the cases above, the charging order is an effective tool for creditors to satisfy judgments against debtors by obtaining debtors’ interests in partnerships and LLCs. Despite its usefulness for creditors, the charging order also balances out the interests of the so-called “innocent” non-debtor owners and entities by preserving management rights and restoring any rights transferred to a receiver after a judgment is satisfied.