When a creditor seeks a charging order against a debtor’s interest in an LLC or partnership, who can object and what can they object to? And what if the debtor owns LLC interests through a series of trusts, but those trusts have already in another case years before been determined to be the alter egos of the debtor?
Over a decade ago, I penned the article Fraudulent Transfers In Hypnotic Taxi (Jan. 30, 2016) This article talked about fraudulent transfers that debtor Evgeny Freidman made to avoid the collection by Citibank of a $31.5 million liability against Freidman’s personal guarantee. We now rejoin Freidman’s deadbeat legacy already in progress.
GF Judgments LLC (“GFJ”) took assignment of a New York judgment from yet another creditor of Freidman, being Sterling Bank, for a little more than $3.6 million against the Estate of Evgeny Freidman, which is to say that this litigation so long that the debtor himself passed. GFJ domesticated the judgment into Cook County, Illinois, and then began post-judgment discovery efforts to the administrator of the Estate.
Discovery revealed three companies: Azurite LLC, 4514 Elston LLC, and 4532 N. Elston LLC. There were also three trusts: The Evelyn Funding Trust (formed in Belize), the Lindy Funding Trust (formed in Nevis) and the Bridge Funding Trust. The ownership of these companies by these trusts is somewhat complicated, so please bear with me.
Azurite LLC was owned 50% by the Lindy Trust and 50% by the Bridge Trust.
4514 Elston LLC was owned 50% by the Evelyn Trust and 50% by the Bridge Trust.
4532 N. Elston LLC was owned 50% by the Lindy Trust and 50% by the Bridge Trust.
Which is to say that the Lindy Trust owned 50% of Azurite LLC and 50% 4532 N. Elston LLC.
The Evelyn Trust only owned a 50% interest in 4514 Elson LLC.
The Bridge Trust owned a 50% interest in all three LLCs.
It is here that we must engage in another flashback. In yet another case involving Freidman, In re Hypnotic Taxi, LLC, No. 15-43300, 2017 WL 4464876 (Bk.EDNY, Oct. 4, 2017), the U.S. Bankruptcy Court had determined the Evelyn Trust and the Lindy Trust were Freidman’s alter ego and allowed the piercing of those trust’s liability shields.
Because the Evelyn Trust and the Lindy Trust had already been declared to be the alter egos of Freidman ― albeit in another case ― GFJ now took the position that it too could look through those trusts as Freidman’s alter egos. This would allow GFJ to place charging orders on the 50% interests owned by the Evelyn Trust and the Lindy Trust in each of the three LLCs. Thus, GFJ filed a motion for a charging order against those 50% interests arguing all that.
The three LLCs resisted the motion. They first argued that the alter ego findings in the 2017 bankruptcy case did not inure to GFJ’s benefit. Second, the LLCs argued that the “supplementary proceedings” under Illinois law does not permit such veil piercing.
The circuit court (trial court) found that the bankruptcy court’s 2017 ruling on alter ego had been fully contested by the Evelyn Trust and the Lindy Trust, as well as by Freidman himself. Thus, the circuit court would recognize that alter ego finding and allow GFJ to look through the trusts to place charging orders against the trusts’ 50% interests in the LLCs.
The three LLCs appealed and this resulted in the opinion of the Illinois Appellate Court in GF Judgments LLC v. Estate of Friedman, 2026 IL App (1st) 250546 (Ill.App.Distr. 1, June 26, 2026), that we shall now examine.
The first question the court decided is very interesting: Does an LLC (or the three LLCs here) have standing to contest proceedings which determine whether some of its owners are the alter egos of a debtor?
Standing means that a party has a legally-recognizable interest in the conflict before the court. For example, neighbors A & B have sued each other over a driveway easement. Neighbor C supports Neighbor A and jumps into the lawsuit to support Neighbor A. However, since Neighbor C doesn’t have a legal interest in the driveway dispute, then Neighbor C doesn’t have standing. But to change this hypothetical only slightly, let’s say that Neighbor C also uses the driveway. In that case, Neighbor C would have standing to join the court case.
While GFJ challenged the LLCs’ standing before the appeals court, it had not done so before the circuit court and thus had waived its argument. The appeals court then stated that it would not consider the issue of standing, and then went right on to consider the issue of standing.
The appeals court mused that the LLCs had some standing because it was the LLCs who had to respond to GFJ’s discovery, i.e., “[t]he LLCs thus occupy the role of third-party citation respondents here.” Further, since a charging order compels an LLC to re-direct distribution payments to the creditor, the appeals court further mused that such was enough to create standing since the LLCs needed to know who to pay.
But this did not end the issue, though the appeals court. The LLCs had only limited standing to the extent they were require to respond to GFJ’s discovery or make the 50% distribution payments to GFJ instead of those distributions going to the trusts.
Under Illinois law, judgments are generally enforced by a supplemental proceeding. Such a proceeding allows a creditor to enforce the judgment against the debtor’s assets, but it does not permit the court to determine that assets held by a third party are really those of the debtor. Nor does it permit litigation of issues not directly related to the discovery of the debtor’s assets or enforcement of the judgment against those assets.
As applied here, the limitations of the supplemental proceeding did not allow the three LLCs to object to the alter ego determination as to the Evelyn Trust and the Lindy Trust. The only things against which the LLCs could assert objections were whether they held distribution proceeds or as to the scope of the charging order. Thus, the LLCs asserting objections to the alter ego findings as to the trusts were improper.
The LLCs were allowed, however, to argue that Freidman’s interests in the LLCs (through the trusts) terminated with his death in October, 2021. This is because the issue of Freidman’s death went to the current interest owners of the LLC and the charging orders sought could only apply to current interest owners. This determination required a new proceeding, called a plenary proceeding, to determine whether the distributional interest belonged to Freidman’s estate and thus was available to Freidman’s creditors. In essence, the three LLCs would have to file a new lawsuit requesting declaratory relief that Freidman’s interest somehow disappeared with his death.
The appeals court next considered whether collateral estoppel should be applied to 2017 holding in the Hypnotic Taxi case that the Evgeny Trust and the Lindy Trust were Freidman’s alter ego. In other words, whether that prior alter ego finding should be applied to this case.
The court discussion here about collateral estoppel was long and related to the technical aspects of that doctrine which are beyond the scope of this article. The bottom line is the New York court’s finding that the Evgeny and Lindy Trusts were Freidman’s alter ego would be respected in this case as well.
Thus, the appeal court affirmed the circuit court’s placing charging orders on the 50% interests in the LLCs owned by the Evgeny Trust and Lindy Trust.
ANALYSIS
Standing in the context of charging orders is a very interesting topic for those of us who practice in this area. Consider that a charging order typically involves three parties: The creditor, the debtor, and the entity whose interest is being charged. The creditor has complete standing as the party seeking the charging order remedy.
But what about the debtor’s standing? One might assume that the debtor has standing because the debtor is the one being most affected by the charging order ― and this is true ― but what objection does the debtor have? The debtor either owes the judgment or not. The debtor either owns an interest in the entity or does not. The debtor might quibble over the language of the charging order, but that’s about it. The debtor does not have standing, however, to assert objections that the entity or some other party might assert.
That brings us to the entity. The entity is affected by the charging order because it has to redirect distributions from the debtor to the creditor. But that’s about it, and even that is no more of a burden than changing the payee on the distribution check. The entity cannot assert any objections of the debtor, even assuming that the debtor would have any objections. Otherwise, the entity shouldn’t care because the entity itself is largely unaffected by the charging order. The entity thus has limited standing to object to the charging order. Where the entity usually objects is where the charging order is too broadly crafted and would, for example, compel the entity to produce information to the creditor that it ordinarily should not have to produce.
There are also third-parties who might have objections to a charging order, being other creditors who might be asserting their own claims to the debtor’s interests in the LLC. But even these objections will not go to whether the creditor can get the charging order, but rather is limited to the priority of the charging order lien and order of priority in payment of the distributions.
The upshot is that only a creditor has full standing and the rest of these parties, the debtor, the entity and other creditors, only have limited standing to argue against the charging order. This is why most charging order applications are granted, which is generally because there are few good objections to the charging order being sought. There is an argument to be made that the court should be removed from the process of issuing the charging order altogether. Instead, the court clerk should be allowed to administratively issue the charging order with the court holding a hearing only if somebody objects.
Finally, this opinion is also interesting because it demonstrates that alter ego findings are capable of being imported from another case involving the same debtor if the elements for collateral estoppel have been met. In other words, if one creditor obtains a finding that the debtor is an alter ego of something, whether a trust or an LLC or whatever, then all the creditors who come along later have a pretty good chance of using that finding for their own benefit without having to prove it up.
That is as powerful for creditors as it is devastating for debtors.
Read the full article here