McBride Law Blog

LLC Owners, If You Owe Someone Money, Your Ownership of an LLC Might Not Be Protected: When It Comes to Single-Member LLCs, Charging Order May Not Be the Exclusive Remedy (Part 5)

McBride Law Blog

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Real Life Stories (Cases) on the Issue: Olmstead v. FTC (Florida).

Olmstead v. FTC, a non-bankruptcy case, dealt with the question as to whether a court may order judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment (not unlike the question of whether a debtor-member in bankruptcy transfers all of his or her interests in the LLC to the bankruptcy trustee).[1] In that case, the Federal Trade Commission (“FTC”) sued the defendants for unfair or deceptive trade practices involving an advance-fee credit card scam and obtained judgment for more than $10 million in restitution.[2] To partially satisfy that judgment, the FTC obtained an order compelling the defendants to endorse and surrender to the receiver all of their right, title, and interest in their LLCs, which was the subject of the appeal.[3]

Florida’s LLC charging order statute provides that a judgment creditor has only the rights of an assignee of the debtor’s membership interest.[4] And Florida’s LLC statute, as many other states’, states the basic rule that, absent a contrary provision in the articles or operating agreement, an assignee of an LLC interest does not become a member without the consent of all the other members.[5] At the same time, the court noted, the general rule under Florida law is that where one has any interest in property which he may alien or assign, that interest is liable for the payment of his debts.[6] Thus, in the context of this general rule, the court concluded that the limitation on assignee rights has no application to the transfer of rights in a single-member LLC and an assignee of the membership interest of the sole member in a single-member LLC becomes a member and takes the full right, title, and interest of the transferor.[7] Curiously, though, the court went on to say that the relevant question is not whether the purpose of the charging order provision provides a basis for implying an exception for single-member LLCs, but whether it is justified to infer that the LLC charging order mechanism is an exclusive remedy.[8] And based on the language of the LLC charging order provision (“the court may charge the [LLC] membership interest of the member with payment of the unsatisfied amount of the judgment with interest”), which the court said stood in stark contrast to the charging order provisions in Florida’s partnership and limited partnership acts (“[charging order] provides the exclusive remedy which a judgment creditor of a partner or transferee may use to satisfy a judgment”), the court concluded that the Florida legislature did not intend to make the charging order an exclusive remedy in the LLC context and, thus, the remedy of execution on the debtor’s membership interest in an LLC is available.[9]

Although many commentators anticipated that the Florida Supreme Court would permit a judgment creditor to reach the assets of a debtor’s single-member LLC, in light of Albright, Modanlo, and A-Z Electronics, the opinion nevertheless caused an outcry for the questionable legislative analysis and for failing to draw a distinction between single-member and multiple-member LLCs, thereby creating much uncertainty as to whether the charging order protection would still apply to multi-member LLCs in Florida.[10] Not surprisingly, Olmstead prompted the Florida legislature and those of several other states, notably Delaware, to amend their respective LLC statute to clarify the applicability of charging order protection, which we will discuss in our next post.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

[1] See generally Olmstead v. FTC, No. SC08-1009 (Fla. June 24, 2010).

[2] Id. at 2–3.

[3] The question was certified by the U.S. Court of Appeals for the Eleventh Circuit to the Florida Supreme Court.

[4] Id. at 7 (internal citations omitted).

[5] Id. at 9 (internal citations omitted).

[6] Id. at 7 (internal citations omitted).

[7] Id. at 9.

[8] Id. at 10–11 (emphasis in original).

[9] Id. at 10–15 (internal citations omitted).

[10] See, e.g., Alan S. Gassman et al., After Olmstead: Will a Multiple-Member LLC Continue To Have Charging Order Protection?, The Fla. Bar J., Vol. 84, No. 10 (Dec. 2010).  The consensus seems to be that the legislative history is clear that such difference in the Florida LLC and partnership statutes is unintentional.

Posted In: Bankruptcy, LLC, Personal Liability, Uncategorized

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