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 6)

McBride Law Blog

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After Olmstead v. FTC, a Florida Case with Potential National Implications.

The Florida Supreme Court’s opinion in Olmstead v. FTC created much uncertainty concerning charging order protection for multi-member LLCs in Florida[1] and seems to have been the catalyst for legislative action in Florida and Delaware, among others.

In 2011, the Florida legislature amended the Florida Revised Limited Liability Company Act to provide that a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s transferee may satisfy a judgment from the judgment debtor’s interest in an LLC or rights to distributions from the LLC.[2] In the case of a single-member LLC, however, if a judgment creditor of a member or member’s transferee proves successfully that distributions under a charging order will not satisfy the judgment within a reasonable time, the court may order the sale of that interest in the LLC pursuant to a foreclosure sale.[3] The amended statute goes on to provide that the purchaser at the court-ordered foreclosure sale obtains the member’s entire LLC interest, not merely the rights of a transferee, becoming a member of the LLC, while the person whose LLC interest is sold ceases to be a member.[4] In other words, the amendment affirms the autonomy of the original members in multi-member LLCs and their ability to manage their own enterprise, while creating an exception for single-member LLCs in light of the special circumstances concerning the same.

Delaware, on the other hand, decided to take a different approach when it amended its LLC charging order statute in 2013. The statute now expressly provides that “[t]he entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.”[5] The Delaware amendment seems to be designed precisely to avoid the results in Albright, Modanlo, A-Z Electronics, and Olmstead, making the state even more attractive for forming an LLC. Still, it might be misguided to think that single-member LLC interests are now exempt from foreclosure in Delaware, as there is no guarantee that courts would not apply a different rule for single-member LLCs, especially in bankruptcy where LLC law intersects with federal bankruptcy law, including fraudulent transfer and avoidance provisions, designed to provide creditors with recourse. Likewise, adding additional member(s) to a single-member LLC, while precautionary, might not be a foolproof solution in bankruptcy, if the court finds that a debtor intended to hinder, delay, or defraud creditors through a multi-member LLC with “peppercorn” co-members.[6] Additionally, there is an open question of what would happen if someone attempted to execute on a charging order against a single-member Delaware LLC in a state like Florida, as the two state statutes clash and the internal affairs of the LLC would be at odds with the rights of a possible claimant.

This post was a part of a multi-post blog series on single-member LLCs and creditors’ rights.  You can find the other posts by searching our blogs at www.mcbrideattorneys.com.  If you have any questions about the content of this blog series or other issues not discussed here, please contact us.

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, 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).

[2] Fla. Stat. § 650.0503(3) (emphasis added).

[3] Id. § 650.0503(4).

[4] Id. § 650.0503(5).

[5] Del. Code  tit. 6, § 18.703(d) (emphasis added).

[6] In re Albright, 01-11367 ABC (Bankr. D. Col. 2003), at 4 n.9.

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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