Creditor’s Receivership Of Family Partnership

A creditors rights to collect money from a partnership interest or LLC interest are limited by statute to a charging lien against distributions to the partner/member.

A client explained that one of his creditors has asked a court to appoint a receiver over his family limited partnership for the purposes of collecting partnership assets and enforcing a charging lien against the client’s partnership interest. The family partnership was formed outside of Florida and the motion for receivership is being litigated in the foreign state where the partnership is formed. The foreign state in question has charging lien remedies similar to Florida laws.

I am not aware of any Florida case which has considered a creditor’s rights to have a receiver appointed over an LLC or partnership owned by a debtor. To the extent the purpose of the receivership is to assist the creditor’s collection efforts the receivership may constitute a collection remedy beyond the permitted charging lien remedy. On the other hand, the creditor might get a receiver appointed if he could show that the partnership is distributing all its assets in the face of an immanent charging lien or that the partnership has disparate assets which the general partner is unwilling to either disclose or assemble.

Another important issue is the receiver’s compensation. Normally, receivers are compensated from assets of property under their receivership. A receiver over a partnership or LLC could eat up the partnership/LLC assets by paying himself fees. The expenses of the receivership would pressure the debtor to settle the debts. A debtor would want a court to impose the expenses of receivership in the creditor who is asking for the receiver arguing that receivership fees at the behest of the creditor amounts to an attack on partnership assets in excess of the limited charging lien remedies provided by statutes.

In this particular instance the Florida resident had chosen to establish asset protection entities in foreign jurisdictions because he thought the foreign states offered better legal protections. Now, the Florida debtor must defend the receivership action outside of Florida, and he must hire a separate law firm in the foreign state to handle legal matters in that state. In fact, Florida’s protection of partnership interest and LLC interest is second to none. Florida’s protections were enhanced by a recently revised partnership statute.

Last updated on July 2, 2020