Charging Order Information Rights And Discovery

Topic Information_Rights TopicsInformationRightsDiscovery

♦ CHARGING ORDER CREDITORS INFORMATION RIGHTS

A charging order is the exclusive remedy generally available to a judgment creditor to satisfy a judgment out of a debtor's interest in partnerships, limited partnerships, LLCs, or general partnerships, providing the creditor a lien on the debtor's transferable interest. This interest typically covers the right to receive distributions but excludes management rights and control over the entity's operations. The charging order does not enable the creditor to compel distributions or participate in management; the debtor partner or member retains all rights aside from the distributions subject to the order. Courts emphasize protecting the entity's management from creditor interference, preserving the limited liability and investment protections for other partners or members. Remedies such as foreclosure of the charging order, appointment of receivers, or ancillary orders may be available but are strictly circumscribed, with variation among jurisdictions, such as in California and Texas, and are often limited by statute or case law to avoid undermining the entity's integrity. Access to financial or other information about the entity is generally considered part of management rights and is not granted to the charging order holder unless explicitly authorized and necessary, as limited by courts enforcing RUPA § 504 principles. Redemption of the charged interest may occur before foreclosure by partners or the entity upon consent. The creditor's rights typically extend only to distributions already made or to be made, not to the entity's assets or management.

Statutes and case law affirm that the charging order creates a lien on the debtor's economic interest but prevents disruption to the entity's management or operations. Courts have refused to extend information rights or management participation to charging order holders, equating such rights to management controlled by partners or members without encumbrance. Courts recognize the necessity of preserving the entity's structure and limited liability protections for other owners. The charging order may be enforced by redirecting distributions, and appointment of receivers or other orders may be used minimally to effect this goal. Foreclosure and transfer of the interest to creditors permitting broader rights have become rare or statutorily limited. The creditor’s right to information is limited; financial records or future financial statements are not routinely accessible. These principles apply broadly under national partnership and LLC uniform acts and have been specifically addressed in California and Texas jurisdictions, as well as Minnesota and federal bankruptcy contexts.

Creditors holding charging orders against debtor interests in limited liability companies, limited partnerships, and general partnerships generally have very limited information rights. Under both federal and state law, charging order creditors typically receive only the economic rights of assignees, which means they are entitled to distributions that would have been paid to the judgment debtor but cannot access the entity's books, records, or other confidential business information. However, courts possess broad discretionary authority to issue ancillary orders necessary to effectuate charging orders, which in limited circumstances may include ordering disclosure of specific financial information directly related to monitoring distributions. The scope of these information rights varies significantly by jurisdiction, with some states like Delaware strictly limiting creditors to distribution rights only, while others like Oregon grant courts broader authority to make orders that the judgment debtor "might have made" or that circumstances require.

Statutory Framework for Charging Orders

The foundational legal framework for charging orders derives from uniform acts adopted across jurisdictions with state-specific variations. State statutes based on the Uniform Limited Liability Company Act, Revised Uniform Limited Partnership Act, and Uniform Partnership Act provide that charging order creditors receive only the rights of assignees rather than full membership or partnership rights. This fundamental limitation means creditors cannot participate in management, vote on entity matters, or exercise the inspection and information rights typically available to members or partners.

The Pennsylvania Uniform Limited Liability Company Act exemplifies the standard approach, providing that "a charging order constitutes a lien on a judgment debtor's transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor". PA ST 15 Pa.C.S.A. § 8853. Similarly, the statute grants courts authority to "make all other orders necessary to give effect to the charging order". PA ST 15 Pa.C.S.A. § 8853, establishing the foundation for potential ancillary relief including limited information disclosure.

Delaware's Restrictive Approach

Delaware takes the most restrictive approach to charging order creditor rights, strictly limiting creditors to economic distributions without any information access. Under Delaware Code § 18-703, "the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled". DE ST TI 6 § 18-703. The statute explicitly prohibits creditors from obtaining "possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company". DE ST TI 6 § 18-703.

This restrictive framework is reinforced by Delaware's member inspection rights statute, which grants comprehensive information access exclusively to "each member of a limited liability company," including access to financial information, tax returns, membership lists, and formation documents DE ST TI 6 § 18-305. Since charging order creditors do not become members, they cannot access these extensive information rights, creating a significant gap between member privileges and creditor entitlements.

Judicial Authority for Ancillary Relief

Despite the generally restrictive statutory framework, courts possess substantial discretionary authority to issue ancillary orders necessary to effectuate charging orders. In Madison Hills Ltd. Partnership II v. Madison Hills, Inc., the Connecticut Appellate Court held that "once a judgment creditor obtains a charging order, the trial court is authorized to make any orders and inquiries in support of the charging order". Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994). This broad authority enables courts to fashion relief beyond the basic charging order when necessary for enforcement.

The scope of this ancillary authority varies by jurisdiction. Oregon's limited partnership statute (ORS 70.295) incorporates language from the partnership statute (ORS 67.205) authorizing courts to "make all other orders, directions and inquiries which the circumstances of the case may require" and to order what "the judgment debtor might have made". Law v. Zemp, 362 Or. 302 (2018). In L. on behalf of Robert M. L. Profit Sharing Plan v. Zemp, the Oregon Supreme Court held that while courts have authority to include ancillary provisions in charging orders (such as financial disclosure requirements) when necessary to effectuate the charging order without unduly interfering with management, the trial court erred in imposing such provisions without sufficient evidence that they met this standard. The court reversed the lower court's order and remanded for further proceedings Law v. Zemp, 362 Or. 302 (2018).

Limited Information Rights in Practice

When courts do grant information-related relief, it typically focuses narrowly on distribution monitoring rather than broader business information access. In SFG Commercial Aircraft Leasing Inc. v. Montgomery Equipment Co., a federal district court applying West Virginia law held that creditors were entitled to "an accounting of all future distributions made to or for the benefit of debtor" but explicitly rejected broader requests for "an accounting of all future distributions that could have been made to debtor". SFG Commerical Aircraft Leasing Inc. v. Montgomery Equipment Company, Inc., 661 F.Supp.3d 561 (2023). The court found the latter request "overly vague. As discussed above, a distribution comes into existence only once an LLC decides to make a distribution to its members. Given that SFG will already receive an accounting of distributions made to Dr. Falbo, it is unclear what kind(s) of additional financial information is sought." and noted that the creditor had not shown "how accessing the LLCs' records would ensure that the Charging Order is honored". SFG Commerical Aircraft Leasing Inc. v. Montgomery Equipment Company, Inc., 661 F.Supp.3d 561 (2023).

Connecticut courts have similarly allowed limited information access tied directly to effectuating charging orders. In Mack Film Development, LLC v. Benevolent Partners, L.P., the court held that it could order production of information the debtor as a limited partner could access, and additionally could order further disclosure beyond those rights as necessary to effectuate the charging order. Mack Film Development, LLC v. Benevolent Partners, L.P., Not Reported in A.3d (2014). However, the court emphasized that such orders must be "related to the plaintiff creditors' specific efforts to obtain payment from the defendant debtors' interest" rather than general information gathering. Mack Film Development, LLC v. Benevolent Partners, L.P., Not Reported in A.3d (2014).

Privacy Protections for Non-Debtor Members

Courts consistently protect the interests and privacy of non-debtor entity members when considering creditor information requests. In NAMA Holdings, LLC v. World Market Center Venture, LLC, the Delaware Chancery Court upheld limitations on an indirect member's inspection rights, finding that managing members could reasonably "limit the scope of NAMA's inspection to only non-sensitive information, while simultaneously prohibiting photocopying of Venture's books and records" when the requesting party made threats that "Alliance threatened to copy these records and leak them to High Point, a threat made all the more menacing to Venture by NAMA's staunch refusal to negotiate over the proper scope of a confidentiality agreement". NAMA Holdings, LLC v. World Market Center Venture, LLC, 948 A.2d 411 (2007). The court recognized that entities have legitimate interests in protecting trade secrets and competitive information from disclosure.

This protection extends to membership information and other sensitive data. In Sanders v. Ohmite Holdings, LLC, the Delaware Chancery Court held that where an LLC agreement does not limit member inspection rights, those rights are co-extensive with the statutory rights under Section 18-305 of the Delaware LLC Act. Sanders v. Ohmite Holdings, LLC, 17 A.3d 1186 (2011). However, these rights typically apply only to actual members, not charging order creditors who lack membership status.

Receiver Appointment and Enhanced Authority

In jurisdictions that permit receiver appointments, courts may grant receivers broader authority than charging order creditors possess directly. In Morgan Stanley Smith Barney LLC v. Johnson, the Eighth Circuit referenced Minnesota statutes authorizing courts to "appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made". Morgan Stanley Smith Barney LLC v. Johnson, 952 F.3d 978 (2020). This approach potentially expands information access by vesting inquiry powers in a court-appointed neutral party rather than the creditor directly.

In the charging order at issue in Drakes v. Glover Group Investments, LLC, the trial court "authorized to make all other orders, directions, accounts, and inquiries that [Ms.] Ejiniwe is or would have been entitled to make in regard to her interest in Burleson Estates One, LLC". Drakes v. Glover Group Investments, LLC, Not Reported in Atl. Rptr. (2021). However, these enhanced powers remain tied to the receiver's role in collecting distributions rather than general business oversight.

Arguments and Rebuttals

Arguments for Broader Creditor Information Rights

Necessary Ancillary Relief

Courts possess inherent authority to make orders necessary to effectuate charging orders, which may require access to financial information to monitor compliance and identify distributions.
Oregon's statute explicitly authorizes courts to make orders "which the circumstances of the case may require," providing broad discretion for information disclosure orders when needed for enforcement, though the Oregon Supreme Court has clarified that this authority is limited to orders necessary to effectuate the charging order without unduly interfering with partnership management.
Anticipated Rebuttals: Charging order statutes specifically limit creditors to assignee rights, which do not include management or inspection privileges, and courts should not circumvent these legislative limitations through broad ancillary relief.

Distribution Monitoring Requirements

Creditors need basic financial information to understand the timing and amount of distributions they are entitled to receive under charging orders.
Without access to distribution schedules and financial data, creditors cannot effectively monitor compliance with charging orders or identify when entities are improperly withholding distributions.
Anticipated Rebuttals: Creditors receive actual distributions when made, providing sufficient notice of compliance, and broader financial information access would inappropriately intrude on entity operations and non-debtor member privacy.

Judicial Efficiency and Fairness

Information access enables creditors to make informed decisions about foreclosure timing and settlement negotiations, promoting efficient resolution of collection proceedings.
Denying reasonable information access effectively nullifies charging order remedies by preventing creditors from meaningfully evaluating their collection prospects.
Anticipated Rebuttals: The legislative choice to limit charging orders to economic rights reflects a policy balance protecting entity operations and non-debtor members, and judicial expansion of these rights undermines legislative intent.

Arguments for Limited Creditor Information Rights

Statutory Assignee Rights Limitation

State statutes based on uniform acts consistently provide that charging order creditors receive "only the rights of an assignee," which traditionally exclude management and information access privileges.
Legislative intent clearly favors protecting entity operations and non-debtor members by limiting creditor intrusion to purely economic rights.
Anticipated Rebuttals: Courts retain authority to make necessary ancillary orders, and reasonable information access does not transform creditors into members but merely enables effective enforcement of distribution rights.

Entity Asset Protection Framework

The charging order system specifically aims to protect entities from creditor interference while providing meaningful collection remedies, and information access requirements would undermine this balance.
Non-debtor members have legitimate expectations that their business information and entity operations will not be subject to creditor oversight.
Anticipated Rebuttals: Limited information access for distribution monitoring does not constitute management interference and is necessary to prevent entities from concealing distributions or manipulating timing to defeat creditor rights.

Privacy and Competitive Concerns

Business entities have substantial interests in maintaining confidentiality of financial information, member data, and operational details that could be exploited by competitors.
Broad information access creates risks of trade secret disclosure and competitive harm to non-debtor entity participants.
Anticipated Rebuttals: Courts can impose appropriate confidentiality restrictions and limit information scope to distribution-related data, addressing privacy concerns while ensuring effective charging order enforcement.

Cases on Both Sides

Supporting Broader Creditor Information Rights

Law v. Zemp, 362 Or. 302 (2018) — The Oregon Supreme Court held that courts have authority to include ancillary provisions (such as financial disclosure requirements) in charging orders when necessary to ensure the charging order's effectiveness without unduly interfering with partnership management. However, the court reversed the trial court's imposition of such provisions because the record lacked evidence that they met this standard. The court emphasized that ancillary relief authority is limited to orders necessary to allow creditors to reach the debtor's distributional interest without unduly interfering with partnership management.
Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn.App. 81 (1994) — The Connecticut Appellate Court held that courts possess broad authority to make "any orders and inquiries in support of the charging order" once obtained. The court recognized that effective charging order enforcement may require ancillary relief beyond the basic distribution entitlement, including reasonable information gathering necessary for compliance monitoring.
Mack Film Development, LLC v. Benevolent Partners, L.P., Not Reported in A.3d (2014) — The Connecticut Superior Court held that it could order disclosure beyond the debtor's rights as a limited partner when necessary to effectuate charging orders. The court held that such additional disclosure must be related to the creditor's specific efforts to obtain payment from the debtor's interest and limited to giving effect to the charging order.

Supporting Limited Creditor Information Rights

Green v. Bellerive Condominiums Ltd. Partnership, 135 Md.App. 563 (2000) — The Maryland Court of Special Appeals held that charging order creditors are not entitled to become partners or exercise partner rights, strictly limiting creditor authority to economic distributions. The court emphasized that charging orders provide limited collection remedies that do not transform creditors into entity participants with management or oversight privileges.
Gaslowitz v. Stabilis Fund I, LP, 331 Ga.App. 152 (2015) — The Georgia Court of Appeals held that charging orders give creditors no direct remedy against company property and limit creditor rights to distribution entitlements.
Mahalo Investments III, LLC v. First Citizens Bank & Trust Co., Inc., 330 Ga.App. 737 (2015) — The Georgia Court of Appeals held that charging order creditors have "only the rights of an assignee" and cannot interfere with management or access entity property. The court emphasized the legislative policy of protecting entity operations while providing meaningful but limited collection remedies to creditors.

Practical Implications

Creditors seeking to collect judgments through charging orders face significant information limitations that affect collection strategy and timing decisions. The restricted access to entity financial information makes it difficult for creditors to assess whether distributions are likely, evaluate the true value of the debtor's interest, or determine optimal timing for foreclosure proceedings. This uncertainty often forces creditors to rely on incomplete information when making critical collection decisions.

The appointment of receivers represents one potential avenue for enhanced information access, as receivers may possess broader authority to make inquiries that the judgment debtor could have made. However, receiver appointment typically requires additional court approval and may involve substantial costs that smaller creditors cannot justify relative to the judgment amount.

Entity managers and non-debtor members benefit significantly from the limited information access rules, as they can continue operating without creditor oversight or interference. However, they must still comply with charging orders by forwarding distributions when made, and courts may impose disclosure requirements for distribution-related information in appropriate circumstances.

The confidentiality protections built into the charging order system provide meaningful asset protection benefits for entity structures, particularly in competitive business environments where financial information disclosure could create strategic disadvantages. These protections encourage the use of entity structures for legitimate business purposes while still providing creditors with meaningful but limited collection remedies.

Recent Developments

Recent cases demonstrate courts increasingly distinguishing between different types of information requests, approving narrow distribution-related disclosure while rejecting broader financial information access. In SFG Commercial Aircraft Leasing Inc. v. Montgomery Equipment Co. (2023), a federal court approved accounting requirements for actual distributions while rejecting requests for potential distribution information, establishing a clearer boundary between permissible and impermissible information requests. SFG Commerical Aircraft Leasing Inc. v. Montgomery Equipment Company, Inc., 661 F.Supp.3d 561 (2023).

Enhanced receiver powers have emerged as a significant development, with courts in Morgan Stanley Smith Barney LLC v. Johnson (2020) recognizing receivers' authority to "make all inquiries the judgment debtor might have made". Morgan Stanley Smith Barney LLC v. Johnson, 952 F.3d 978 (2020). This approach provides a potential middle ground between direct creditor access and complete information restriction, though it requires additional procedural steps and court oversight.

The bankruptcy context has seen expanding creditor collection tools, with In re Pettine (2023) addressing bankruptcy trustee authority to obtain and sell charging orders. In re Pettine, 655 B.R. 196 (2023). This development potentially expands creditor access to entity interests through the bankruptcy process, though it remains limited to the trustee's collection authority rather than direct information access.

Professional entity limitations have become more clearly defined, with Berns Custom Homes, Inc. v. Johnson (2021) clarifying that charging order statutes may not apply to certain professional associations and corporations. Berns Custom Homes, Inc. v. Johnson, 177 N.E.3d 636 (2021). This development narrows the scope of charging order remedies in some contexts while reinforcing their availability for traditional partnership and LLC structures. ♦