My Partner’s Creditor Wants His Share of Our Company: How a Charging Order Works

When a creditor has a judgment against your business partner, one tool it can use against his stake in your company is a charging order. A charging order is a court order that puts a lien on your partner’s right to distributions, so the company pays the creditor instead of him. In a Florida LLC with more than one member, a charging order alone does not let the creditor take over your partner’s interest or your company.

This answer starts with LLCs. Partnerships and corporations follow different rules, covered below. If your partner’s creditor is looking at his other assets too, see our guide to what a creditor can take for a business debt.

What Does a Charging Order Do to Our Company?

A charging order is a lien on your partner’s transferable interest, which Florida defines as the right to receive distributions under the operating agreement. Once a court enters one, the company must pay the creditor any distribution that would otherwise go to your partner.

Has a creditor’s lawyer contacted your company about your partner’s judgment? Talk with a Jimerson Birr business litigation attorney before the company responds.

Here is what the order reaches, and what it does not:

• It reaches distributions. The lien attaches to your partner’s right to receive them, not to the company’s bank accounts, equipment, or contracts.
• It requires a judgment. Only a judgment creditor can apply for a charging order. A demand letter or a pending lawsuit is not enough.
• It adds no decision-maker. Section 605.0503 gives the creditor a lien on distributions. It says nothing about a vote or a management role, and in a multi-member LLC nothing in it removes your partner as a member. Your own LLC member rights depend on your operating agreement.
• A transferee is a useful comparison. Section 605.0502 says even a transferee, someone to whom part or all of a member’s distribution right is transferred, gets no right to manage the company and no general right to its records.

Can the Creditor Take Over or Sell My Partner’s Share?

Not through a charging order. In an LLC with more than one member, Florida bars foreclosure on a debtor member’s interest, and a court may not order it. A charging order is the creditor’s sole and exclusive remedy against that interest, with the exceptions the statute preserves.

A single-member LLC works differently. There, a court may order a foreclosure sale if the creditor shows that distributions will not satisfy the judgment within a reasonable time. The buyer then takes the entire interest and becomes the member.

Even in a multi-member LLC, the statute does not limit four things:

• A creditor’s rights under a consensual security interest in the interest
• Fraudulent transfer law
• Alter ego, equitable lien, and constructive trust theories
• The court’s continuing jurisdiction to enforce its charging order in a manner consistent with the statute

Those carve-outs are why the way your company handles money after a creditor appears matters. For how creditors work toward this remedy, see our guide to collecting a judgment in Florida.

Does the Same Rule Apply to Partnerships and Corporations?

No. Florida’s LLC statute bars foreclosure in multi-member companies, its limited partnership statute bars it outright, and its general partnership statute allows it. A corporation is different again, because a creditor can levy on its shares. Confirm your entity type first.

• General partnership. A court may order foreclosure of the charged interest at any time, and the purchaser takes the rights of a transferee. Before foreclosure, the debtor, or the other partners, can redeem the interest. The other partners can use non-partnership property, or partnership property with the consent of every partner whose interest is not charged.
• Limited partnership. The charging order is the exclusive remedy, and foreclosure on the interest is not available.
• Corporation. Stock in corporations is subject to levy and sale under execution, so a creditor with a judgment can levy on your partner’s shares.

What Should Our Company Do First?

Confirm what the creditor actually holds, then protect your records and your distribution practices. Before any order is entered, do not rearrange your partner’s pay, loans, or distributions in response to the creditor. Once an order exists, have an attorney review how it applies to your distributions.

1. Get the judgment and any court order. Only a judgment creditor can obtain a charging order, so ask for both before the company pays anyone. An attorney such as Ty Robare, whose practice includes judgment collection and ownership disputes, can read them alongside your agreement. If the creditor names the company in a court filing, that is a lawsuit defense matter for the company itself.
2. Pull your governing documents. Your operating agreement or partnership agreement defines the distribution right the creditor reaches. Check the distribution terms, transfer limits, and buyout provisions. If the language is unclear, see how courts interpret an ambiguous LLC operating agreement.
3. Leave your partner’s pay alone until counsel weighs in. Because the statute keeps fraudulent transfer law in play, and preserves the court’s jurisdiction to enforce its order, changing how or when your partner is paid after a creditor appears can draw scrutiny. Our guide to protecting your business during a civil lawsuit covers the charging order rule alongside the transfer rules, and the firm’s page on avoiding fraudulent transfers explains actual and constructive fraud.
4. Price a buyout. In a general partnership, the other partners can redeem a charged interest before foreclosure. Section 605.0503 gives LLC members no comparable right, so buying out your partner or paying off the creditor would be a negotiated deal. A buyout agreement can set the terms, and business divorce is the route when co-owners are separating. See business divorce versus dissolution and how to remove a business partner or member.
5. Keep the company separate from your partner’s debt. The judgment is against your partner, not the company, and the statute does not limit alter ego, equitable lien, or constructive trust theories. Keep company accounts, records, and decisions apart from his personal finances. Our overview of alter ego liability explains how those claims work.

What Facts Will Decide How This Affects Our Company?

Five facts change the answer for your company:

• Entity type and member count. A single-member LLC, a multi-member LLC, a general partnership, a limited partnership, and a corporation each follow different rules.
• Whether a judgment exists. Only a judgment creditor can seek a charging order, and a creditor with a pending lawsuit has not reached that point.
• What your agreement says. Distribution terms, transfer restrictions, and buyout provisions define the right the creditor reaches.
• How the company distributes. A charging order reaches distributions, so how often the company pays them, and whether it retains profits instead, matters.
• What changed after the creditor appeared. Any change to your partner’s pay, loans, or distributions can matter under fraudulent transfer law.

These facts decide the outcome, and an attorney needs to review them. No general guide can tell you how a charging order will play out for your company.

Not sure which of these facts applies to your company? Request a free consultation with Jimerson Birr and bring your agreement and the judgment.

How Can Jimerson Birr Help When My Partner’s Creditor Wants a Share of Our Company?

If your partner’s creditor wants his share of your company, Jimerson Birr represents LLC members, partners, and the companies themselves across Florida, and we review the governing documents these disputes turn on. Call (904) 389-0050 or request a free consultation. Once a court enters a charging order, the company must pay the creditor any distribution that would otherwise go to your partner, so the time to review your agreement and your options is before that happens.