We’ve previously talked about the problems with New York’s limited liability law in relation to opinions entered in 79 Madison and 245 Park Avenue. These opinions allowed creditors to circumvent the limitations of charging orders and force debtor’s to turn over their interests in LLC directly to creditors ― including all rights attendant to those interests. This results in a permanent forfeiture of the debtor’s interest that is subject to the turnover order. Now we see that the situation is getting progressively worse.
A company called Saadia Square LLC owned a minority interest in another company called SM Logistics Holdco LLC, which we will refer to as simply SM Holdco. At some point, the firm of Shumener, Odson & Oh LLP obtained a judgment of just under $800,000 against Saadia Square. To collect the judgment, the Shumener firm sought an order from the U.S. District Court for the Southern District of New York requiring Saadia Square to simply turn over its interest in SM Holdco to the Shumener firm to satisfy the judgment.
The laws of New York authorize such a turnover order generally as a post-judgment enforcement remedy. Moreover, unlike nearly all other states, the New York limited liability company law does not restrict a creditor to the remedy of a charging order against a debtor/member’s interest in an LLC. Anyway, all this resulted in the Opinion & Order entered in Shumener, Odson Oh LLP v. Saadia Square, LLC, 2026 WL 1266002 (S.D.N.Y., May 8, 2026), that we will now discuss.
The court began by noting that Federal Rule of Civil Procedure 69(a) allows a party to file a motion to enforce a money judgment in federal court, but the procedure adopted by the federal court under Rule 69(a) must align with local state procedure. Here, that local state procedure is New York’s § 5225(a) which provides for a turnover order that requires the debtor to hand over certain property to a creditor to satisfy the judgment. Under § 5225(a), the creditor only needs to show that the debtor owns the property sought. This property includes interests in limited liability companies.
It is here that New York law diverges from the laws of all but a handful of states. In the overwhelming majority of states, a judgment creditor is limited to the remedy of a charging order against a debtor/member’s interest in an LLC or partnership. The LLC and partnership laws of most states provide that the charging is the exclusive remedy available to judgment creditors in these situations.
What is the difference? A charging order has at least two components: (1) It places a lien upon the debtor/member’s right to distributions from LLC or partnership, and (2) it requires the entity to pay distributions to the creditors until the judgment is satisfied. The laws of many states, however, allow the charging order lien to be foreclosed upon and the debtor’s right to distributions sold at auction if the distributions will not pay the judgment within a reasonable time (the laws of a significant number of states, but still a minority, prohibit such foreclosure).
By contrast, a turnover order takes the debtor’s interest and either gives it to the creditor or the interest is auctioned off and the creditor gets the proceeds from the sale. What exactly the creditor, or the purchaser at the auction, actually gets is a different subject altogether that I will discuss below.
It is here that we come to a significant plot twist. Turns out that Saadia Square won a $40.5 million jury verdict against SM Holdco’s managing member. Although that jury verdict was being appealed, Saadia Square argued that if Shumener firm would just wait until that verdict was affirmed on appeal, Saadia Square would be able to pay the Shumener firm in full. Thus, Saadia Square argued, the Shumener firm should be restricted to a charging order against Saadia Square’s interest in SM Holdco.
Saadia Square also argued that SM Holdco itself was a borrow on a third-party loan to SM Holdco, and under the loan agreement if Saadia Square lost its interest then SM Holdco would be deemed to have defaulted on the loan and SM Holdco would suffer millions of dollars of damages.
But the court was having none of this. Either the Shumener firm was entitled to a turnover order for the SM Holdco interest, or it was not. If the Shumener firm was entitled to a turnover order, then it was mandatory for the court to grant that turnover order. The New York turnover statute did not create any discretion in the court to consider the consequences of the turnover order if it were granted. Further, “[t]he Court is also not bound by the provisions of SM Holdco’s operating agreement in ordering that turnover.” In other words, the New York turnover statute would trump the “pick your partner” provisions of the SM Holdco operating agreement and New York’s limited liability company law.
As to Saadia Square’s argument that the sale of SM Holdco would create a windfall to the Shumener firm, the court noted that Saadia Square could itself have sold its interest in SM Holdco and used a portion of those funds to pay off the Shumener firm.
The court also rejected the argument that SM Holdco was a borrower on a loan that would go into default should Saadia Square cease to be a member. Reviewing the loan agreement, the court found that SM Holdco was not a party to that agreement and Saadia Square had overstated its concern about the default.
Having determined that the Shumener firm was entitled to the turnover order for the SM Holdco interest, the court next examined the mechanics of the turnover order. Basically, There were three ways that this could go down: (1) the SM Holdco interest could be turned over to the sheriff for auction, (2) the interest could be turned over directly to the Shumener firm, or (3) a received could be appointed to take possession of the interest and sell it privately. Since the Shumener firm had not requested a receiver, and the court could thus not order a receiver, this last option was out.
The New York opinions (79 Madison and 245 Park Member) set out two requirements for what is known as a direct turnover order, which means that the interest goes directly the creditor and not to auction. These two requirements are that the debtor’s interest in an LLC or partnership is uncertain, and the debtor has obstructed the creditor’s ability to collect on its judgment.
Here, for whatever reason, Saadia Square did not offer any evidence as to the value of SM Holdco and so its value was uncertain. That left whether Saadia Square had obstructed the judgment:
“Regarding obstruction, Shumener alleges the following: (1) Jack Saadia (Saadia Square’s ‘control person’) was convicted of fraudulent importation and transportation of goods in 2009, … Saadia Square is a ‘fraudulent enterprise’ that Jack Saadia holds out as having ‘substantial assets,’ even though in fact it has none, …; and (3) Jack Saadia made various misrepresentations about Saadia Square’s finances, and Shumener relied on those misrepresentations in providing legal services to Saadia Square, the nonpayment for which led to the Judgment …. Shumener provides no information regarding its efforts to collect on the Judgment itself, but it advises that the Judgment was registered in this District .on December 24, 2025,’ and that ‘[n]ot one dime has been paid towards’ it since then.”
The court cut through a lot of this, such as noting that Jack Saadia’s conviction or that Saadia Square had not paid its legal bills was not probative on whether Saadia Square was dodging the judgment. “In sum, the Court does not credit Shumener’s broad assertions of Saadia Square’s and Jack Saadia’s untrustworthiness as a proxy for Saadia Square’s obstruction of Shumener’s efforts to collect the Judgment.”
Yet, the court thought it relevant that Saadia Square had not attempted to pay the judgment for nearly six months. This alone, apparently, persuaded the court that Saadia Square was obstructing the collection of the judgment and thus a direct turnover order was issued for Saadia Square to transfer to the Shumener firm the Saadia Square interest within one week.
ANALYSIS
The court giving Saadia Square a week to turn over its interest in SM Holdco basically gave Saadia Square a week to come up with the $800,000 to pay the judgment. If SM Holdco really is as valuable as Saadia Square claimed, presumably Saadia Square came up with the $800,000 to pay off the Shumener firm — but we will not find out unless there is an appeal of this decision.
Otherwise, the court here glosses over one of the most important issues, which is what a creditor gets with a turnover order. With an LLC or partnership, the only thing that Saadia Square held that was assignable was an economic interest a/k/a distributional interest or assignable interest, in SM Holdco. Such an interest, by whichever name, is just the right to receive distributions from SM Holdco and does not include other rights attendant to membership, such as voting or management rights.
However, it seems from the tenor of the court’s discussion — and from the opinions of the other case to which the court cited — that the turnover order would give the Shumener firm the full banana, i.e., both the economic interest and the other rights attendant to the membership interest. If so, that is more cumulative proof that New York’s limited liability company law is a mess compared to other states which mandate that a charging order (which does not convey the membership rights but only the distributional rights to a creditor) is the “exclusive remedy”. If the turnover order gave a creditor no more than the debtor’s economic interest, then there really would be little difference between granting a turnover order and a charging order which is subject to foreclosure, but that doesn’t appear to be what is going on in New York.
Some might suggest that this problem could be easily fixed by merely using an LLC formed in a state which does restrict a creditor’s remedy to a charging order in such cases. They would be wrong. The problem is that in a case involving a New York judgment, the court will apply New York law to grant a turnover order and not the law of the state of the LLC’s formation.
It might be possible to improve the odds that a creditor with a turnover order would be limited to only the economic interest through better drafting of the LLC’s operating agreement. In this scenario, a member’s economic interest and other interests (voting rights and the like) would be carefully bifurcated, with the economic interest being transferrable and the other interests being non-transferrable. The problem with this approach, however, is that one would have to wait for a test case to find out if it works. And nobody like to be the test case.
Otherwise, the best way to protect an LLC interest in New York is the same as it is everywhere else and the same as it has always been: Have the LLC interest held in something that is not likely to suffer a judgment, such as a trust. Although somewhat complicated from a business planning perspective, this can be accomplished where the ultimate beneficial owner is an operating business too, like Saadia Square. The downside is that if the operating business will not be able to pledge the LLC interests as collateral for loans if needed. But there is no perfect solution.
Because of the direction in which New York’s court decisions are going on this subject, which is pro-turnover order, New York’s limited liability law is at risk of effectively losing one of the key reasons that LLCs are formed, which is for the so-called charging order protection. This creates a great deal of uncertainty in business planning. Frankly, the New York State Assembly should take up the issue and consider a fix — make the charging order remedy exclusive like it is in most states.
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