LLC and Partnership Interests: Aid to Asset Protection, Obstacle to Judgment Creditors - Business Lawyers

New Jersey LLC's and Partnerships Can Protect Assets and Impede Judgment Collection

Viewed from the perspective of asset protection or judgment collection, New Jersey’s Revised Uniform Limited Liability Company Act (“RULLCA”) is an important statute. For an attorney tasked with protecting a client’s assets, the statute provides a useful safeguard to a client’s wealth to the extent that wealth is held within limited liability companies (“LLC”). To an attorney seeking to collect on a judgment for a creditor, the statute creates problematic limitations on the creditor’s ability to collect. The same is true of New Jersey’s Uniform Limited Partnership Law and Uniform Partnership Act.

How LLC's Limit Judgment Collection in New Jersey

The pivotal provision in RULLCA regarding the rights, or the lack thereof, of judgment creditors, provides:

On application by a judgment creditor of a member, a court may charge the transferable interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. An action by a court pursuant to this section does not deprive any member of the benefit of any exemption laws applicable to his transferable interest. A court order charging the transferable interest of a member pursuant to this section shall be the sole remedy of a judgment creditor, who shall have no right under 42:2C-1 et seq. or any other State law to interfere with the management or force dissolution of a limited liability company or to seek an order of the court requiring a foreclosure sale of the transferable interest. Nothing in this section shall be construed to affect in any way the rights of a judgment creditor of a member under federal bankruptcy or reorganization laws.

N.J.S.A. 42:2C-43.

Based upon this provision, a judgment creditor’s right to collect with respect to a judgment debtor’s interest in a LLC is limited to those of an assignee. The provision makes clear that the judgment creditor has no ability to participate with the management of the LLC or force its dissolution. The judgment creditor cannot force the sale of the judgment debtor’s interest in the LLC or assert a right to the proceeds of such a sale in order to satisfy a judgment. At best, the judgment creditor may collect on up to ten percent of any distributions of profits that the debtor is entitled to receive from the LLC. Zavodnick v. Leven, 340 N.J. Super. 94 (App. Div. 2001); see N.J.S.A. 2A:17-56.

How General Partnerships Limit Judgment Collection in New Jersey

The rights of judgment creditors are similarly limited in the context of general partnerships in New Jersey. With respect to a judgment debtor’s interest in a general partnership, a judgment creditor’s “sole remedy” in New Jersey is to seek judgment satisfaction by charging the “transferable interest” of the debtor in a general partnership. N.J.S.A. 42:1A-30. The creditor cannot interfere with management, force dissolution or force the sale of the debtor’s interest in the general partnership.

How Limited Partnerships Limit Judgment Collection in New Jersey

With respect to a judgment debtor’s interest in a limited partnership, as in the case of a LLC, a judgment creditor may pursue collection from distributions to which the judgment debtor is entitled. N.J.S.A. 42:2A-48. However, the limited partnership statute does not explicitly prohibit a judgment creditor from attempting to involve itself in management, force dissolution or force the sale of the judgment debtor’s interest in the limited partnership. While other concerns may weigh against seeking these types of relief, they are at least theoretically available based upon a strict reading of the statute.

LLC and Partnership Interests: Friend of Asset Protection Lawyers, Foe of Collection Lawyers

In short, whether or not the protection from judgment creditors afforded by New Jersey’s Uniform Limited Partnership Law, Uniform Partnership Act and Revised Uniform Limited Liability Company Act is a good thing depends on whether you are a judgment creditor or a judgment debtor. When we are working on behalf of creditors as collections lawyers, and we obtain a judgment on behalf of the client, learning that the judgment debtor’s assets are tied up in LLC’s or partnerships is an unwelcome development. Collection may well be a problem, and the debtor may be what is sometimes referred to as “judgment proof.” If we have this information in advance of suit, or of obtaining a judgment, our advice to the client as to how to proceed will undoubtedly be affected.

This analysis is reversed when we are proactively seeking to protect the assets of an individual or defending an individual in litigation. New Jersey’s Uniform Limited Partnership Law, Uniform Partnership Act and Revised Uniform Limited Liability Company Act are legitimate mechanisms that can limit the exposure of our clients’ assets in the event a creditor obtains a judgment against them.

The New Jersey business lawyers at the Law Office of Bart J. Klein advise clients on issues relating to New Jersey business formation and in a broad range of commercial disputes, including collections. We represent both creditors and debtors and are well versed in the law governing judgment collection. We welcome you to call us at (973) 763-6060, email info@bartjkleinlaw.com, or complete our online contact form for more information.

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