New York debt collection laws allow judgment creditors many ways to collect from debtors. One option available is to take over or “charge” a judgment debtor’s interest in an LLC or limited liability company.
An LLC is a separate entity that offers personal liability to each of the shareholders or stockholders. An individual and/or corporation may have an interest in an LLC, and that interest is fair game when it comes to judgment enforcement in New York.
NY Civil Practice Law and Rules Article 52 is the go-to statute for judgment enforcement in New York. The law empowers judgment creditors to satisfy their judgments by “attaching” a debtor’s interests in real and personal property with some exemptions.
So how does this turn your judgment into money or an interest in an LLC?
How to Translate a Judgment Into Interest in an LLC
Although not limited to real estate, many buildings in NYC are owned by an LLC. The building could be the only asset owned by the LLC. If for purposes of this illustration, the building is a rental, the rental income and expenses to operate the building are by the LLC.
The person or company that is a shareholder or stockholder in the LLC is entitled to a distribution from the LLC. The profit distribution is based on the percentage of ownership (membership interest).
A judgment debtor, individual or corporate, with an interest in an LLC, has an asset that falls under the enforcement provisions of NY’s CPLR. The judgment creditor can look to attach and/or charge the debtor’s interest in the LLC. Depending on the size of the judgment, you may be able to acquire some or all of the judgment debtors’ interest in the LLC and become the owner of the shares.
In other cases, the court may exercise its discretion and offer the judgment creditor a charge against the debtor’s interest. The decision as to whether the interest would be sold or transferred to the judgment creditor would be at the discretion of the court. If the judgment debtor’s interest is “charged” rather than transferred, the judgment creditor would be entitled to the monies deemed income from the distribution of the LLC.
Some issues could interfere with or preclude a judgment creditor from acquiring or charging an interest in an LLC, including a lien for federal and state tax for individual debtors or security interest.
After a levy is served and before the sale of the interest in the LLC, a search for tax liens and security interests is conducted. If otherwise pledged or lined by the state or federal authorities, you would not be successful with a sale of the debtor’s interest in the LLC.
Do you have a judgment you are looking to collect on? Contact Frank, Frank, Goldstein and Nager to learn more about your debt collection options.
