Why FLPs Are Not Creditor-Proof

Family limited partnerships (“FLPs”) are often used in estate planning and asset protection. When properly structured, an FLP can centralize family asset management, restrict transfers, separate management rights from economic rights, and make it harder for a creditor of one partner to reach specific partnership property.

But FLPs are not perfect asset protection structures. Courts may respect the partnership form and still allow a creditor to reach the debtor-partner’s economic interest.

In some cases, a charging order can lead to foreclosure or sale of the partnership interest itself.

The key distinction is between partnership property and the partner’s interest in the partnership. A creditor may be blocked from directly seizing partnership assets, but the debtor-partner’s economic rights may still be vulnerable.

A Creditor Usually Cannot Seize Partnership Assets Directly

The starting point is that a judgment against an individual partner is not the same as a judgment against the partnership.

In Crocker National Bank v. Perroton, 208 Cal. App. 3d 1, 255 Cal. Rptr. 794 (Cal. Ct. App. 1989), the California Court of Appeal explained:

“A creditor with a judgment against a partner but not against the partnership ordinarily cannot execute directly on partnership assets or on the partner’s interest in the partnership.”

That rule is important for FLP planning. It means that a personal creditor of one partner generally cannot simply levy on partnership real estate, investment accounts, or other assets merely because that partner owes a personal debt.

The court also explained why the charging order remedy exists. It was designed to prevent disruption of the partnership business and protect the interests of the other partners:

“It was to prevent such ‘hold up’ of the partnership business and the consequent injustice done the other partners resulting from execution against partnership property that the quoted code sections and their counterparts in the Uniform Partnership Act and the English Partnership Act of 1890 were adopted.”

This is one reason FLPs can provide meaningful protection: the charging-order remedy is designed to prevent a personal creditor of one partner from disrupting the partnership business or executing directly against partnership property.

However, that protection is not absolute; the creditor may still reach the debtor-partner’s economic interest through a charging order and, in some circumstances, seek sale or foreclosure of that interest.

The Creditor’s Remedy Is Usually a Charging Order

Because the law generally protects partnership property from direct execution for the personal debt of one partner, a creditor usually must proceed in a more limited way. Instead of seizing partnership assets, the creditor typically seeks a charging order against the debtor-partner’s partnership interest.

In Crocker Nat’l Bank v. Perroton, 208 Cal. App. 3d 1, 6, 255 Cal. Rptr. 794 (Cal. Ct. App. 1989), the court explained:

“Therefore, a judgment creditor must seek a charging order to reach the debtor partner’s interest in the partnership.”

A charging order does not usually give the creditor control over the partnership or direct ownership of partnership property. Instead, it allows the court to charge the debtor-partner’s economic interest with payment of the unsatisfied judgment.

The court then described what a charging order can do:

“Through a charging order, the court may charge the debtor’s interest in the partnership with payment of the unsatisfied judgment, plus interest. The court may also appoint a receiver of subsequent profits or other money due to the debtor partner.”

In practical terms, the charging order does not necessarily give the creditor control over the FLP. But it may redirect distributions that would otherwise go to the debtor-partner.

In Madison Hills Ltd. Partnership II v. Madison Hills, Inc., 35 Conn. App. 81, 84–85, 644 A.2d 363 (Conn. App. Ct. 1994), the Connecticut Appellate Court made the same point:

“The charging order leaves the partnership intact but diverts to the judgment creditor the debtor partner’s share of the profits.”

The court also emphasized the limits of a charging creditor’s rights:

“It is important to note that a charging creditor does not become a full partner, is not entitled to manage the partnership, and has no right to attach specific partnership property.”

This distinction is critical. A charging creditor may not step into the shoes of a full partner. The creditor may not automatically receive management rights. But the creditor may still reach economic rights attached to the debtor-partner’s interest.

A Charging Order Can Lead to Sale of the Partnership Interest

The major risk is that a charging order may not be the end of the enforcement process.

In Crocker, the creditor obtained a judgment against Jon Perroton and then obtained a charging order against his limited partnership interest. When the charging order did not result in payment, the creditor moved for sale of Perroton’s interest in the partnership.

The court noted:

“As of November 1985, Crocker had received no monies as a result of the charging order against Turn-Key Storage. Therefore, on November 26, 1985, Crocker moved for an order of sale of Perroton’s interest in Turn-Key Storage.”

The court ultimately allowed the sale of the debtor-partner’s interest, while distinguishing that interest from the partnership’s own property:

“We conclude that the authorities support the order for sale of a judgment debtor partner’s partnership interest as distinct from the property of the limited partnership, where the creditor has shown that it was unable to obtain satisfaction of the debt under the charging order, and where the remaining partner, here the general partner Bette Perroton, has consented to the sale.”

This is a key lesson for FLP planning. The partnership assets may be protected from direct execution, but the debtor-partner’s interest may still be charged and sold if the facts and governing law support that remedy.

The Purchaser Does Not Necessarily Receive Full Partner Rights

The sale of a partnership interest does not necessarily mean that the purchaser becomes a full partner or gains control over the partnership. In Crocker, the court explained:

“Just as a charging order cannot grant the creditor a greater interest in the partnership than that of the debtor partner at the time of the order . . . a supplementary order for sale, does not allow the purchaser to acquire more rights in the partnership than the debtor partner possessed.”

The court also noted:

“Further, both the limited partnership agreement and the consent to the sale by Bette Perroton make clear that a purchaser of Perroton’s limited partnership interest would have rights to profits and losses, but would not become a substituted limited partner in the partnership, absent consent by the general partner.”

This is where careful drafting matters. A well-drafted FLP agreement may limit what a creditor or purchaser receives, but it may not prevent the creditor from reaching the debtor-partner’s transferable economic interest.

Foreclosure of the Partnership Interest

Madison Hills shows another important risk: foreclosure. There, the creditor sought a charging order and strict foreclosure of the debtor’s partnership interest. The trial court ordered that “the partnership interest be foreclosed unless redeemed by the defendant prior to April 15, 1993.”

On appeal, the Connecticut Appellate Court confirmed that foreclosure was available:

“Foreclosure is one of the orders available to charging creditors.”

The court further concluded:

“We conclude, therefore, that the UPA does permit a charging creditor to enforce its charging order through strict foreclosure.”

For FLP planning, this is significant. A charging order may begin as a remedy limited to distributions, but in some jurisdictions and under some circumstances, it may lead to foreclosure of the debtor-partner’s interest.

Conclusion

Family limited partnerships can be useful estate planning and asset protection tools, but they are not creditor-proof.

Courts may protect partnership assets from direct seizure while still allowing a creditor to reach the debtor-partner’s economic interest through a charging order, sale, or foreclosure.

The key is careful planning. FLPs should be properly structured, funded, and documented before creditor issues arise. A well-drafted partnership agreement can limit what a creditor or purchaser receives, but it cannot eliminate all enforcement risk.

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At Dilendorf Law Firm, we provide tailored legal solutions for high-net-worth individuals and families seeking to preserve wealth, maintain control, and plan for future generations.

We help U.S. and non-U.S. clients with estate planning, asset protection, family limited partnerships, domestic and international trust structures, and creditor-risk analysis.

If you’re considering a Family Limited Partnership as part of your estate or asset protection strategy, our team is here to help. Contact us at (212) 457-9797 or email us at info@dilendorf.com.