A judgment debtor who owns a profitable LLC looks like a collection opportunity until you read the statute. New York does not let a creditor seize a membership interest, vote it, or take over the business. What the creditor gets is a charging order, and the value of that remedy depends almost entirely on whether the debtor controls distributions. The enforcement attorneys at Warner & Scheuerman treat the charging order as the opening position in a longer strategy rather than the endpoint, because a lien on distributions that never get made collects nothing.
What is a charging order under New York law?
A charging order is a court order that places a lien on a judgment debtor’s membership interest in a limited liability company, directing that any distributions otherwise payable to the debtor be paid instead to the judgment creditor. It is authorized by New York Limited Liability Company Law section 607, with a parallel provision for partnerships at Partnership Law section 54.
The order reaches economic rights only. The creditor does not become a member, acquires no voting or management rights, cannot inspect books as a member, and cannot compel the company to do anything. LLC Law 607(b) states that the charging order is the exclusive remedy by which a judgment creditor of a member may satisfy the judgment out of the member’s interest.
Why is the charging order called an exclusive remedy?
Because the statute forecloses other enforcement devices aimed at the same interest. A creditor cannot levy on the membership interest, force a sale of it, or obtain a turnover of the debtor’s LLC stake under CPLR 5225 as an end run around section 607.
The policy behind the rule is protection of the other members. A business partner who chose to go into business with one person should not wake up in business with that person’s creditor. Every state with an LLC act has some version of this protection, though states differ on whether foreclosure of the charged interest is available. New York’s statute contains no express foreclosure provision, and the exclusivity language cuts against reading one in.
Exclusivity has limits worth understanding. It protects the membership interest, not the debtor personally. Claims that the LLC is a mere alter ego of the debtor, that assets were fraudulently transferred into it, or that the debtor holds property individually rather than through the entity all proceed outside section 607.
How do you obtain a charging order?
The application is made by motion in the court that entered the judgment, on notice to the judgment debtor and typically to the LLC.
- Confirm the debtor’s membership through the operating agreement, K-1 schedules from tax returns, or the Department of State entity filing, keeping in mind that New York does not require members to be publicly listed.
- Serve an information subpoena under CPLR 5224 on the LLC and its managers to obtain the operating agreement, distribution history, capital account balances, and financial statements.
- Move for the charging order, identifying the interest and the amount of the judgment with accrued interest.
- Serve the signed order on the LLC and its managers, which is what obligates the company to redirect distributions.
- Monitor compliance, since a company that pays the debtor after receiving the order exposes itself to liability for the diverted funds.
What happens with a single-member LLC?
This is where New York law is less settled than creditors would like. The other-member policy justification disappears when there is only one member, since no innocent partner needs protecting, and several states have amended their statutes to expressly permit foreclosure or additional remedies against single-member LLCs.
New York’s LLC Law 607 draws no distinction on its face. The practical result is that a debtor holding a wholly owned LLC can, at least in theory, decline to declare distributions indefinitely while the charging order sits idle. Creditors facing that scenario generally argue one of three things: that the entity is the debtor’s alter ego and should be disregarded, that undistributed earnings and salary or draws taken outside a formal distribution are reachable, or that a receiver should be appointed under CPLR 5228 with authority over the interest.
Because the law here is developing and outcomes are fact-driven, single-member LLC enforcement usually calls for building a factual record on commingling, personal use of company accounts, and the absence of corporate formalities.
How does the Warner & Scheuerman approach add leverage to a charging order?
By pairing it with pressure that operates on the debtor rather than the entity. A charging order alone rewards inaction. Combined with other tools, it creates a problem the debtor has to solve.
Useful pairings include an installment payment order under CPLR 5226, which reaches income from any source and can capture draws that never carry the label of a distribution, and a receiver under CPLR 5228, which can be granted power to collect what the charging order captures. Post-judgment discovery into the LLC’s books frequently surfaces personal expenses run through the company, which supports both alter ego arguments and voidable transfer claims under the Debtor and Creditor Law provisions New York revised in 2020.
There is also a tax dimension worth raising in negotiation. A charging order holder may be treated as an assignee of the economic interest, which can carry allocation of taxable income, so the pressure does not run only one way.
A charging order is a permanent lien on a moving target. Used alone it often produces nothing. Used as one piece of a strategy built on discovery, alter ego analysis, and parallel enforcement devices, it becomes the reason debtors come to the table. Warner & Scheuerman represents judgment creditors in New York enforcement proceedings involving closely held entities. Contact the firm through wslaw.nyc to evaluate what your debtor’s LLC interest is actually worth.
