A limited liability company (“LLC”) can often be an effective asset protection tool as the assets of the LLC are often protected from individual member’s creditors and the individual member’s assets are often protected from a creditor of the LLC. However, due to the Supreme Court of Florida ruling in Olmstead v. FTC, Fla. Sup. Ct. No. SC08-1009 (2010) (“Olmstead”), the creditor protection of a single-member LLC is now in question.
Before Olmstead, creditors of a member of a limited liability company could not take title to the member’s interest in the LLC to satisfy its debt, but rather, after receiving a judgment against the member, the creditors were limited to obtaining a charging order as its sole remedy. A charging order provides that any distributions from the LLC to the debtor member must be paid directly to the creditor instead of the member (the member retains their controlling interest and the creditor only receives the member’s distribution, if any).
In Olmstead, the Federal Trade Commission (FTC) received a $10 million judgment against Shaun Olmstead and Julie Connell, and sought to collect on the judgment by seizing two Florida single-member LLCs owned by Olmstead. In making its ruling, the Court first analyzed Florida Statute section 56.061 which is generally used to award creditors the right to take assets of the debtor. The statute covered awarding stock of corporations to satisfy the debt but did not specifically refer to debtor’s interests in LLCs.
The court inferred that an LLC is a type of corporate entity and therefore “an interest in an LLC is personal property that is reasonably understood to fall within the scope of ‘corporate stock.’” Accordingly, absent any other statutory limitations, the court stated the FTC would be entitled to transfer Olmstead’s interest in the LLC to the FTC under Florida’s general execution statute. The court then proceeded to analyze the Florida LLC Act. It concluded that the Florida LLC Act did not “displace the creditor’s remedy available under section 56.061 with respect to a debtor’s ownership interest in a single-member LLC.”
The Court decided that since the owner of a single-member LLC has the uncontested right to transfer the owner’s full interest in the LLC, absent any language in the Florida LLC Act stating the contrary, creditors are not limited to charging orders as the sole remedy to satisfy a judgment. Therefore, the creditors of a single-member LLC may take the LLC to satisfy a creditor’s judgment.
The Olmstead ruling was a 5-2 decision. Justice Lewis began his dissent opinion by stating “Make no mistake, the majority today steps across the line of statutory interpretation and reaches far into the realm of rewriting this legislative act. The academic community has clearly recognized that to reach the result of today‘s majority requires a judicial rewriting of this legislative act.” In 2011, the Florida Legislature responded by drafting the “Olmstead Patch” which clarified that a charging order is the only remedy to satisfy a judgment against a member of a multi-member LLC.
However, the Legislature left open the possibility of foreclosure and sale of a single-member LLC interest when a judgment creditor can show that the distributions under a charging order will not satisfy the judgment in a reasonable amount of time.
In 2013, Florida’s new “Revised Limited Liability Company Act” went into effect. The new Act is a complete re-write of the previous Act and modernized Florida’s LLC law, however, the “Olmstead Patch” from 2011 remains unchanged in the new Act. With regards to charging order Florida Statue section 605.0503 states that a charging order is the sole and exclusive remedy by which a judgment creditor of a member may satisfy a judgment except in the case of a single-member LLC where the creditor can show that the charging order will not satisfy the judgment in a reasonable amount of time.
Put simply, the creditor(s) of a member of a single-member LLC may be able foreclose entire member’s interest (force the sale of the company) just as mortgage company would foreclose on a homeowner for an unpaid home loan.
When possible, having a multi-member LLC is a better option than a single-member LLC, but sometimes having a multi-member LLC is not an option. For asset protection purposes a single-member LLC still offers better asset protection than owning property in one’s individual name.
Remember, a creditor must first obtain a judgment against the member, then they must convince the court that distributions under a charging order will not satisfy the judgment within a reasonable time; the key being “reasonable time” which is different in every situation. Sometimes, just the number of hurtles a creditor has overcome will be enough to deter a creditor from pursuing the debtors interest in a LLC.
At the O’Connor Law Firm we assist our clients with starting and running both single and multi-member LLCs. Call or email our office today to discuss your specific situation.