Charging Order Challenge Successful
If a creditor’s remedy is restricted to a charging order, that means that the creditor cannot get at the assets of a partnership or LLC, right?
Wrong.
Most business owners seek to protect their personal assets from problems arising from their business activities. They do this by creating business entities like a partnership or LLC. Unfortunately, sometimes these personal and business worlds collide, and that can be an asset protection nightmare.
Usually, when these two worlds collide, there is an attempt to attack personal assets by piercing the corporate veil. However, as a recent case illustrates, an attack can come through the personal world to attack the business assets … even when that business interest is in a partnership or LLC.
Forbes recently reported on just such a case in an article titled “Webb & Carey: When Control Is Bad — Receiver Uses Debtors' Controlling Interests In Partnerships To Get At Partnership Assets.”
There’s a new trick in which a creditor can access assets within a partnership by pairing the often created “charging order” with the powers of a “receiver” who, in return, takes up the powers of a debtor with controlling interests in the partnership. Whew!
Teaching point: if you have a controlling interest in a partnership or LLC, be aware. A creditor may seek to take control over your interest and thereby for distributions or even the sale of the business.
As a result, if you are working to protect your assets and the assets of your company, it is worth handing off control and closing that back door before the creditors come.
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Reference: Forbes (June 3, 2012) “Webb & Carey: When Control Is Bad — Receiver Uses Debtors' Controlling Interests In Partnerships To Get At Partnership Assets