No Superior Creditor Protection for Single Member LLCs
The new case rules that the charging order protection usually afforded to owners ("members") of a Florida limited liability company, is not available for a single member limited liability company.
The Florida Supreme Court, in a decision rendered last Thursday, made Florida law clear, that a charging order is not the exclusive remedy available for a creditor with a judgment against the owner of a single member limited liability company (LLC). The Supreme Court, in answering a certified question from the federal 11th Circuit Court of Appeals, ruled: "the statutory charging order provision does not preclude application of the creditor‘s remedy of execution on an interest in a single-member LLC." The case is Shaun Olmstead vs. Federal Trade Commission, Case No. 08-1009, decision rendered June 24, 2010.
How does this case affect asset protection planning in the State of Florida?
Prior to this ruling, Florida was one of only seven states that seemed to provide, by statute, that a charging order was the exclusive remedy for a judgment creditor to use against the owner of a limited liability company. Florida Statutes, Section 608.433(4). The Olmstead case tells us, if we didn't already know, that the charging order remedy does not provide asset protection for the sole owner of a single member LLC, and may not be the exclusive remedy afforded to creditors of an owner of an LLC interest. Exactly what does all of this mean for asset protection planning purposes?
When a creditor obtains a judgment against a debtor, the creditor typically has the right to seize the non-exempt assets owned by the debtor to satisfy the judgment. The ownership interest of an LLC is not an asset exempt from creditor claims. However, Florida Statutes, Section 608.433(4), provides that the judgment creditor can not seize the ownership interest of a limited liability company from the judgment debtor if there are non-debtor members of the LLC. Instead, the creditor's remedy against the debtor's ownership interest of the LLC is a "charging order."
A charging order does not allow the creditor to seize the ownership interest of the LLC, but only allows the creditor the "rights of an assignee." The rights of an assignee consist of two rights: (1) the right to receive any distributions from the LLC to the owner; and (2) the owner's allocable share of the profits from the operations of the LLC.
LLCs are treated by law as partnerships. (Under the "check the box" regulations from the Internal Revenue Service, the owners of an LLC can elect to be taxed as a corporation - S or C -, a partnership, or a sole proprietorship, which is unrelated to the treatment of the legal entity as a partnership). Under the common law of Florida, and most other states, partners have a fiduciary duty to each other that is the highest duty owed under the law. The common law, which has been codified in the Florida Statutes, will not "force" someone into a fiduciary relationship with someone else because of the high level of trust and confidence that a fiduciary relationship involves. Florida Statutes, Section 608.432(1).
The charging order allows the creditor, presumably, to acquire the benefits of the LLC ownership interest from the debtor, while respecting the rights of the non-debtor members of the LLC not to be "forced" into a fiduciary relationship with the creditor. The charging order denies to the creditor actual ownership of the LLC interest.
The analysis by the Supreme Court, and the actual ruling, is potentially significant. The Court specifically determined that the charging order is not the "exclusive" remedy that a judgment creditor might have against the ownership interest of an LLC - potentially even where there are multiple members of the LLC. It contrasted the LLC statute, which merely provides that the creditor has the right to a charging order, with the Florida Uniform Partnership Act (Fla. Stat., §§ 620.81001-.9902) and Florida Uniform Limited Partnership Act (§§ 620.1101-.2205) provisions which specifically provide that the charging order is the "exclusive" remedy for creditors of partnership interests.
The Court's ruling was very narrowly focused on the analysis that Florida Statutes, Section 56.061, allows a judgment creditor to seize any non-exempt assets of the debtor to satisfy the judgment, while the charging order statute limits the ability of a creditor to seize the ownership interest when there are non-debtor members of the LLC. Essentially, the Court said the owner of a single member LLC has no non-debtor members to cause the application of the charging order statute, because the owner of a single member LLC has the ability to transfer all of his ownership interest without the approval of any non-debtor members of the LLC.
The bottom line effect of the ruling is this: single member LLCs have no greater asset protection value than corporations; but, a properly formed multi-member LLC, with a carefully drafted operating agreement and legitimate non-debtor owners, has significant asset protection value compared to a corporation.
The narrow scope of the ruling makes it more clear than ever, that the provisions of the operating agreement for the LLC must be specifically tailored to accomplish the asset protection objectives for which LLCs are often used. The improvident use of boiler-plate operating agreements may have the effect of providing a creditor with a remedy other than the charging order, since it is clear from this case that in Florida, for LLCs, the charging order is not the "exclusive" remedy available to creditors.
You can read the case here .
The Florida Supreme Court, in a decision rendered last Thursday, made Florida law clear, that a charging order is not the exclusive remedy available for a creditor with a judgment against the owner of a single member limited liability company (LLC). The Supreme Court, in answering a certified question from the federal 11th Circuit Court of Appeals, ruled: "the statutory charging order provision does not preclude application of the creditor‘s remedy of execution on an interest in a single-member LLC." The case is Shaun Olmstead vs. Federal Trade Commission, Case No. 08-1009, decision rendered June 24, 2010.
How does this case affect asset protection planning in the State of Florida?
Prior to this ruling, Florida was one of only seven states that seemed to provide, by statute, that a charging order was the exclusive remedy for a judgment creditor to use against the owner of a limited liability company. Florida Statutes, Section 608.433(4). The Olmstead case tells us, if we didn't already know, that the charging order remedy does not provide asset protection for the sole owner of a single member LLC, and may not be the exclusive remedy afforded to creditors of an owner of an LLC interest. Exactly what does all of this mean for asset protection planning purposes?
When a creditor obtains a judgment against a debtor, the creditor typically has the right to seize the non-exempt assets owned by the debtor to satisfy the judgment. The ownership interest of an LLC is not an asset exempt from creditor claims. However, Florida Statutes, Section 608.433(4), provides that the judgment creditor can not seize the ownership interest of a limited liability company from the judgment debtor if there are non-debtor members of the LLC. Instead, the creditor's remedy against the debtor's ownership interest of the LLC is a "charging order."
A charging order does not allow the creditor to seize the ownership interest of the LLC, but only allows the creditor the "rights of an assignee." The rights of an assignee consist of two rights: (1) the right to receive any distributions from the LLC to the owner; and (2) the owner's allocable share of the profits from the operations of the LLC.
LLCs are treated by law as partnerships. (Under the "check the box" regulations from the Internal Revenue Service, the owners of an LLC can elect to be taxed as a corporation - S or C -, a partnership, or a sole proprietorship, which is unrelated to the treatment of the legal entity as a partnership). Under the common law of Florida, and most other states, partners have a fiduciary duty to each other that is the highest duty owed under the law. The common law, which has been codified in the Florida Statutes, will not "force" someone into a fiduciary relationship with someone else because of the high level of trust and confidence that a fiduciary relationship involves. Florida Statutes, Section 608.432(1).
The charging order allows the creditor, presumably, to acquire the benefits of the LLC ownership interest from the debtor, while respecting the rights of the non-debtor members of the LLC not to be "forced" into a fiduciary relationship with the creditor. The charging order denies to the creditor actual ownership of the LLC interest.
The analysis by the Supreme Court, and the actual ruling, is potentially significant. The Court specifically determined that the charging order is not the "exclusive" remedy that a judgment creditor might have against the ownership interest of an LLC - potentially even where there are multiple members of the LLC. It contrasted the LLC statute, which merely provides that the creditor has the right to a charging order, with the Florida Uniform Partnership Act (Fla. Stat., §§ 620.81001-.9902) and Florida Uniform Limited Partnership Act (§§ 620.1101-.2205) provisions which specifically provide that the charging order is the "exclusive" remedy for creditors of partnership interests.
The Court's ruling was very narrowly focused on the analysis that Florida Statutes, Section 56.061, allows a judgment creditor to seize any non-exempt assets of the debtor to satisfy the judgment, while the charging order statute limits the ability of a creditor to seize the ownership interest when there are non-debtor members of the LLC. Essentially, the Court said the owner of a single member LLC has no non-debtor members to cause the application of the charging order statute, because the owner of a single member LLC has the ability to transfer all of his ownership interest without the approval of any non-debtor members of the LLC.
The bottom line effect of the ruling is this: single member LLCs have no greater asset protection value than corporations; but, a properly formed multi-member LLC, with a carefully drafted operating agreement and legitimate non-debtor owners, has significant asset protection value compared to a corporation.
The narrow scope of the ruling makes it more clear than ever, that the provisions of the operating agreement for the LLC must be specifically tailored to accomplish the asset protection objectives for which LLCs are often used. The improvident use of boiler-plate operating agreements may have the effect of providing a creditor with a remedy other than the charging order, since it is clear from this case that in Florida, for LLCs, the charging order is not the "exclusive" remedy available to creditors.
You can read the case here .
Posted by Randy Coleman at 6/28/2010 7:37 AM 
Categories: Limited Liability Companies, Business Owners, Asset Protection, Charging Order Protection
Tags: business owners asset protection attorney Jacksonville asset protection attorney Florida asset protection attorney limited liability company
Categories: Limited Liability Companies, Business Owners, Asset Protection, Charging Order Protection
Tags: business owners asset protection attorney Jacksonville asset protection attorney Florida asset protection attorney limited liability company
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