After Olmstead: Will a Multiple-member LLC Continue to Have Charging Order Protection?
On June 24, 2010, the Florida Supreme Court issued its long-awaited opinion in the case of Shaun Olmstead, et al., v. The Federal Trade Commission, Supreme Court of Florida, Case No. SC08 1009, 2010 WL 2518106 (Fla.) and raised the question as to whether multiple-member Florida limited liability companies (LLCs) will continue to have charging order protection. A charging order is a remedy that a creditor of a member in an LLC (or of a partner in a limited partnership) can receive from a court that instructs the entity to give the creditor any distributions that would otherwise be paid to the partner or member from the entity.1 Generally, a creditor who receives a charging order with respect to a member’s (or partner’s) interest in the entity does not have any authority to mandate distributions from the entity or to participate in the management and affairs of the entity. Charging orders are governed by state law, and in many states, a charging order is the exclusive remedy for a creditor with respect to a debtor’s LLC membership interest (or limited partnership interest).
As a result of this decision, many practitioners will recommend converting Florida LLCs into limited partnerships and other entities or the use of voting and nonvoting interests (or other mechanisms) to take “control” away from members who might have their interests pursued by a creditor. This opinion, and the lack of coordination between it and the implied meaning of the statute, will reflect poorly on the state of Florida with reference to its reputation as an attractive business entity jurisdiction. Florida will be at a disadvantage because other jurisdictions, like Delaware and New York, are known for having sound legislative and court systems that provide commercial and trust clientele with a predictable business law environment.
The decision was written in response to the following certified question from the 11th Circuit Court of Appeals: “Whether, pursuant to Florida Statute Section 608.433(4), a court may order a judgment-debtor to surrender ‘right, title, and interest’ in the debtor’s single-member limited liability company to satisfy an outstanding judgment.”2 The Florida Supreme Court concluded that the statutory charging order law does not preclude a creditor from foreclosing on the debtor’s interest in a Florida single-member limited liability company organized under Florida law (also an SMLLC or a single-member LLC). In its analysis, the Florida Supreme Court answered the certified question in the affirmative, notwithstanding a spirited dissent written by Judge Fred Lewis and concurred by Judge Ricky Polston.
Many commentators and practitioners expected that the Florida Supreme Court would conclude that a charging order is not the sole and exclusive remedy for a creditor with respect to a debtor’s membership interest in a Florida single-member LLC, in light of cases in other jurisdictions that have addressed similar issues.3 However, it is surprising that the Supreme Court’s analysis and dicta in its majority opinion was, in great part, based upon the conclusion that the charging order is not the exclusive remedy for a creditor in the context of a multiple-member Florida limited liability company. The court suggests, the authors believe erroneously, that LLC member interests are subject to levy, which is a remedy that most creditors would clearly prefer over charging order status.4
This shot across the bow of multiple-member Florida LLCs is especially confusing in light of the fact that three longstanding Florida district courts of appeal decisions5 have construed a charging order statute with identical language to provide that a charging order is the exclusive remedy. Florida Bar publications (which are indicative of the practitioner’s viewpoint of this issue) have confirmed that the language of the present LLC statute provides for the charging order to be the exclusive remedy of a judgment creditor against a debtor’s LLC membership interest.6 Further, the court inexplicably held that the legislative intent of the LLC charging order statute that was originally passed in 1993 is somehow revealed by the more specific general and limited partnership statutes passed in 1995 and 2005, respectively, when the legislative history is clear that the drafting committees of the two subsequent partnership statutes simply did not address the LLC statute because it was not within their scope of review. How could legislative enactments regarding general partnerships in 1995 and limited partnerships in 2005 reveal the legislative intent of the statute that was enacted in 1993? The authors believe that the Supreme Court was simply confused or was not aware of the order of drafting and implementation of these statutes.7
As stated in the dissenting opinion:
This Court does not possess the authority to judicially rewrite those operative statutes through a speculative inference not reflected in the legislation. The Legislature has the authority to amend chapter 608 to provide any additional remedies or exceptions for judgment creditors, such as an exception to the application of the charging order provision to single-member LLCs, if that is the desired result. However, by basing its premise on principles of law with regard to voluntary transfers, the majority suggests a result that can only be achieved by rewriting the clear statutory provisions. In effect, the majority accomplishes its result by judicially legislating section 608.433(4) out of Florida law.8
As a result of the dissenting opinion, many practitioners are concerned that a multiple-member Florida LLC arrangement may not provide charging order protection, although that is not what the majority held. As discussed below, there is a good chance that there will be legislative clarification of this court-created “uncertainty by implication.” In the interim, advisors should alert their clients to the exposure and consider bifurcating Florida LLC membership interests into voting and nonvoting interests, converting Florida LLCs to limited partnerships or limited liability limited partnerships, moving Florida LLCs to jurisdictions that have a more stable charging order protection law, or implementing other divestment of management control strategies.
In this case, the debtors, according to the court, “operated an advanced-fee credit card scam” and were sued by the Federal Trade Commission (FTC) for unfair or deceptive trade practices. The debtors’ assets, which included several single-member Florida LLCs, were frozen and placed in receivership. The FTC ultimately obtained a judgment against the debtors and then obtained an order compelling them to endorse and surrender to the receiver all of their “right, title, and interest in their LLCs.” The authors find it noteworthy that the FTC was apparently not considered a “super creditor” for purposes of being able to ignore state law creditor protection provisions, as the SEC was considered in SEC v. Solow, 2010 WL303959 (S.D. Fla. 2010).9
In response to the Florida Supreme Court’s answer to the certified question, the 11th Circuit upheld the order of the U.S. District Court for the Middle District of Florida, compelling the defendants to surrender all “right, title and interest” in their single-member LLCs.10 The 11th Circuit relied upon the reasoning espoused in the Florida Supreme Court’s opinion to hold that a judgment-creditor of an LLC member is not barred from pursuing the judicial levy of a debtor’s single-member LLC membership interest as a remedy to satisfy its judgment against the debtor.
The Majority Opinion
The majority opinion, written by Justice Charles Canady, held that a court may order a judgment debtor to surrender all right, title, and interest in a debtor’s single-member Florida LLC to satisfy an outstanding judgment. The majority based its conclusion primarily on “the uncontested right of the owner of a single-member LLC to transfer the owner’s full interest in the LLC and the absence of any provisions in the Florida Limited Liability Company Act for abrogating in this context the long-standing creditor’s remedy of levy and sale under execution.”
The Supreme Court explored the question of whether a charging order is the exclusive remedy for a judgment creditor against a debtor-member of a Florida LLC. As noted by the court, the statutory language of §608.433 does not expressly provide that a charging order is the exclusive remedy of a creditor, which is in contrast to the charging order provisions under the Florida Revised Uniform Partnership Act and the Florida Revised Uniform Limited Partnership Act. Both partnership statutes expressly provide that a charging order is the exclusive remedy by which a judgment creditor of a partner or partner’s transferee can satisfy a judgment of the judgment debtor’s membership interest in the partnership. Practitioners should understand, however, that the Florida charging order rules that apply to general partnerships and limited liability partnerships actually allow a foreclosure on the partnership interest that is subject to the charging order, unlike the charging order provisions that apply to limited partnerships and limited liability limited partnerships. The court did not mention this in its opinion.11
This distinction between the Florida LLC charging order statute and the Florida partnership and limited partnership charging order statutes was of great significance to the court. It used the distinction to conclude that the legislature did not intend for a charging order to be the exclusive remedy of a judgment creditor with respect to a debtor’s membership interest in a limited liability company. In concluding that the charging order is not the exclusive remedy for judgment creditors as to a Florida LLC member interest, the court stated:
In this regard, the charging order provision in the LLC Act stands in stark contrast to the charging order provisions in both the Florida Revised Uniform Partnership Act, §620.81001-.9902, Fla. Stat. (2008), and the Florida Revised Uniform Limited Partnership Act, §620.1101-.2205, Fla. Stat. (2008). Although the core language of the charging order provisions in each of the three statutes is strikingly similar, the absence of an exclusive remedy provision sets the LLC Act apart from the other two statutes…. The Legislature has shown — in both the partnership statute and the limited partnership statute — that it knows how to make clear that a charging order remedy is an exclusive remedy. The existence of the express exclusive-remedy provisions in the partnership and limited partnership statutes therefore decisively undermines the appellants’ argument that the charging order provision of the LLC Act — which does not contain such an exclusive remedy provision — should be read to displace the remedy available under section 56.061.12
Section 56.061 provides that various categories of real and personal property of a debtor are subject to levy and sale under execution. The court acknowledged that Florida law has long provided that corporate stock of a debtor is property that is subject to levy or sale under execution by a judgment creditor to satisfy the creditor’s judgment. The court further analogizes a membership interest in an LLC to stock in a corporation, stating that “an LLC is a type of corporate entity, and an ownership interest in an LLC is personal property that is reasonably understood to fall within the scope of ‘corporate stock.’”13
The court, therefore, concluded that the remedy of levy and sale under execution pursuant to F.S. §56.061 is available to a judgment creditor with respect to a debtor’s membership interest in a single-member Florida LLC, and such remedy is not displaced by the charging order remedy that is available to a judgment creditor under F.S. §608.433(4).
A strong dissent was written by Judge Lewis attacking a number of points in the majority’s opinion. The dissent criticizes the fact that the majority did not answer the exact question as certified by the 11th Circuit14 and the fact that the majority rephrased the certified question to “frame the result.” The dissent further states:
Nevertheless, the certified question before us is not the discretionary nature of this remedy but whether a court should even apply the charging order remedy to single-member LLCs. The majority rephrases the question certified to this Court as not considering whether an exception to the charging order provision should be implied for single-member LLCs. In doing so, the majority unjustifiably alters and recasts the question posited by the federal appellate court to fit the majority’s result. The convoluted alternative presented by the majority is premised on a limited application of a charging order without express language in the statutory scheme to support this assertion.15
Judge Lewis also attacked the majority’s failure to address the critical issue of whether the LLC charging order provision applies uniformly to all LLCs, regardless of the number of members of the company. Because the Florida LLC Act (and more specifically, the charging order statute) does not contain an exception for single-member LLCs or refer to the number of members of the LLC as having any bearing on the applicability of the statutory provisions, the dissent argued that the provisions of the Florida LLC Act apply uniformly to all Florida LLCs, regardless of whether the LLC is a single-member LLC or a multiple-member LLC. Judge Lewis supported this conclusion by citing the doctrine of legislative reenactment to determine that it was the intent of the Florida Legislature to have all provisions of the Florida LLC Act apply uniformly to all Florida LLCs. Specifically, Judge Lewis wrote:
Further, when the Legislature amended the LLC requirements for formation to allow a single-member LLC, it did not enact other changes to the provisions in the LLC Act relating to an involuntary assignment or transfer of a membership interest to a judgment creditor of a member or to the remedies afforded to a judgment creditor. Moreover, no other amendments were made to the statute to demonstrate any different application of the provisions of the LLC Act to single-member and multimember LLCs. For example, the LLC Act generally does not refer to the number of members in an LLC within the separate statutory provisions. The Legislature is presumed to have known of the charging order statute and other remedies when it introduced the single-member LLC statute. Accordingly, by choosing not to make any further changes to the statute in response to this addition, the Legislature indicated its intent for the charging order provision and other statutory remedies to apply uniformly to all LLCs. This Court should not disregard the clear and plain language of the statute.16
Because there is no statutory provision that creates an exception to the applicability of any part of the Florida LLC Act for single-member LLCs, the dissent concluded that the majority’s result is not attainable under the plain language of the LLC Act “without judicially writing an exception into the statute.” This provides for the frightening realization that the majority opinion may have opened the door for a judgment creditor to argue successfully that the charging order remedy is not the creditor’s exclusive remedy in the context of multiple-member Florida LLCs.
The dissent also had a problem with the majority ignoring the “separation between the particular separate assets of an LLC and a member’s separate membership interest in the LLC”17 by allowing the trial court to order the judgment debtors to involuntarily surrender their membership interests in the LLCs and to authorize a receiver to liquidate the specific assets of the LLC to satisfy the judgment. In the view of the dissent, “in stripping the statutory protections designed to protect an LLC as an entity distinct from its owners, the majority obliterates the distinction between economic and governance rights by allowing a judgment creditor to seize both from the member and to liquidate the separate assets of the entity.”18 Accordingly, Judge Lewis wrote that he would answer the certified question in the negative because, under Florida law, a court does not have the authority to order an LLC member to surrender and transfer all right, title, and interest in an LLC without first going through the statutory requirements that were created by the Florida Legislature.
The Ramifications of the Decision
Although commentators19 have anticipated that the Supreme Court would permit a judgment creditor to reach the assets of a debtor’s single-member LLC,20 The legal community could not have predicted this questionable court analysis or the present environment of uncertainty as to charging order protection for multiple-member LLCs that will hopefully be clarified (or overruled, depending on your view of the Supreme Court’s holding) by the Florida Legislature in 2011.
The Business Law, Tax, and Real Property, Probate and Trust Law sections of The Florida Bar have been collaborating for almost two years on a rewrite of 608 (the Florida Limited Liability Company Act). The charging order section of the rewrite is controversial and far from being fully developed, particularly given that the drafting committees have been waiting for the Supreme Court to rule on Olmstead. It is noteworthy, however, that the pre- Olmstead and very preliminary draft of the LLC charging order statute does specify that the charging order is the exclusive remedy. “Other remedies, including foreclosure on the judgment debtor’s transferable interest and a court order for direction, accounts, and inquiries that the judgment debtor might have made, are not available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s transferable interest and may not be ordered by a court.”21
Given the issues raised by the Supreme Court decision, the Florida Legislature may be forced to explicitly address single-member LLCs in its rewrite. Note that Wyoming has, effective July 1, 2010, become the first state to give protection to single-member LLCs organized under Wyoming law, with a law that provides that the charging order “is the exclusive remedy by which a person seeking to enforce a judgment against a debtor, including any judgment debtor who may be the sole member, disassociated member, or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest or from the assets of the limited liability company.”22 The Florida Legislature, it would seem, will be compelled to address the treatment not just of multiple-member LLCs, but single-member LLCs as well (like the Wyoming Legislature); otherwise, its clarification will be somewhat illusory because there may still be some confusion as to the applicability of the charging order statute to single-member LLCs.
Well-respected bankruptcy and debtor-creditor lawyers have commented that the Supreme Court will be severely criticized for this “nonbusiness law savvy” decision given its potential implications to current and prospective choice of entity discussions. The vast majority of experts in this area have concluded that Florida multiple-member LLCs offer charging order protection. Specifically, the 2008 Florida Bar-published “Asset Protection in Florida” treatise provides at §4.3023 that “[a] creditor’s right against a member’s interest in an LLC is limited to a charging order. See F.S. §608.433(4).. . . An interest in an LLC is not assignable in whole or in part unless all of the non-assigning members approve the assignment. See F.S. §608.432(1)(a).”
A 2003 bankruptcy court decision, In re Albright, 291 B.R. 538, 540 (D. Colo. 2003), allowed the bankruptcy trustee to become a “substituted member” of a Colorado single-member LLC. The Albright court, applying Colorado law, reasoned that the restriction of a creditor to only a charging order remedy is designed to protect the nondebtor members of the LLC. The court also reasoned that because there were no nondebtor members to protect in the context of single-member LLCs, restricting a creditor to a charging order remedy serves no purpose. Thus, the bankruptcy trustee could receive all of the debtor’s rights in the single-member LLC. However, the Albright court specifically provided that the result would be different if there were other legitimate nondebtor members in the LLC, and in which event the bankruptcy trustee would only be entitled to the distributions, profits, and tax attributes to which a majority member would otherwise have been entitled.
The Olmstead majority opinion’s analysis that a charging order is not the exclusive remedy for judgment creditors with respect to a judgment debtor’s membership interest in a Florida LLC may be flawed in light of several Florida district courts of appeal cases24 that have found that a charging order is the appropriate remedy for a creditor of a partner in a limited partnership, notwithstanding that the limited partnership charging order statute at the time of each opinion did not expressly provide that a charging order is the exclusive remedy of a judgment creditor.
The Olmstead dissenting opinion points out that the plain language of the Florida LLC Act does not provide for the judicial foreclosure of a debtor’s membership interest in a Florida LLC. The dissent also notes that the Florida LLC Act does not provide that a charging order is the exclusive remedy of a judgment creditor, but that “the plain language of the charging order provision only provides one remedy that a judgment creditor may choose to request from a court and that the court may, in its discretion, choose to impose.” Based on this analysis, the lack of an express mention of a charging order as the exclusive remedy in the context of LLCs appears to be irrelevant, because the language of the LLC Act only provides for one remedy for a judgment creditor with respect to a debtor’s LLC membership interest.
As further indicated by the dissent, there is nothing in the Florida LLC Act or in Florida case law that creates an exception to the applicability of the Florida LLC Act in relation to single-member LLCs, and, therefore, the charging order statute should apply with equal force to both single-member and multiple-member LLCs. Significant uncertainty is created because the majority does not make a distinction between the applicability of its opinion to single-member LLCs versus multiple-member LLCs. The majority opinion further complicates matters by not addressing the effect that articles of organization or operating agreement provisions will have on the remedies available to a judgment creditor, if such provisions restrict the voluntary and/or involuntary assignment of an LLC membership interest, the admission of additional members, and the voting of membership interests in a multiple-member Florida LLC.
The authors believe that such restrictions in the articles of organization or operating agreement of an LLC organized in Florida will be applicable to an LLC membership interest that has been charged or attached by a judgment creditor. Section 608.432 specifically provides that the assignee of a membership interest in a Florida LLC shall have no right to participate in the management of the business and affairs of a limited liability company unless the LLC’s articles of organization or operating agreement provide otherwise, and all LLC members other than the assigning member approve of the assignee participating in the management of the LLC. Further, F.S. §608.433 explicitly states that an assignee “may become a member only if all members other than the member assigning the interest consent,” and “an assignee who has become a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of the assigning member under the articles of organization, the operating agreement, and this chapter.”
Therefore, assuming that a court allows a judgment creditor to “step into the shoes” of a debtor with respect to the debtor’s LLC membership interest, the creditor’s interest in the Florida LLC should be subject to the provisions of the LLC’s articles of organization and operating agreement. In the absence of contrary provisions in such governing documents, the statutory prohibitions on the assignability of an LLC interest, the admission of new members, and the management of LLC business and affairs should also apply. Nevertheless, practitioners now have a good degree of uncertainty as to what trial court and bankruptcy court judges will do in multiple-member Florida LLC situations before the expected legislative clarification takes place.
Because of the uncertainty created by this decision, clients with multiple-member LLCs may consider converting the LLCs into limited partnerships or limited liability limited partnerships.25 In the case of law firms, however, Rule 4-8.6 of the Rules Regulating The Florida Bar only allows lawyers to practice law in the form of professional service corporations, professional limited liability companies, sole proprietorships, general partnerships, or limited liability partnerships. None of these “authorized business entities” offer optimal charging order protection. The authors have not found any authority that would allow a law firm to practice law in the form of a limited partnership or a limited liability limited partnership. Based on the above-referenced Rule 4-8.6, the practice of law under a limited partnership or a limited liability limited partnership appears to be a violation of the Rules Regulating The Florida Bar, and such a violation may result in disciplinary action against the partners of the law firm. Therefore, it is not recommended for law firms to convert their law practices into limited partnerships or limited liability limited partnerships, but they should instead consider the alternative measures described below to address the uncertainty created by Olmstead.
As an alternative, clients may want to change the management structure so as to make their LLCs manager-managed (instead of member-managed) and grant control to the manager. Careful consideration should be given to the choice of manager and to the removal powers granted to the members. In the former vein, the ideal choice from a tax and nontax perspective would be someone who is not related or subordinate to the members. In the latter vein, it would be prudent not to grant the members the power to remove the manager; otherwise, the transfer of control to the manager would be deemed illusory. Some clients — depending on their comfort level with completely divesting control — may instead prefer to change the management structure so that there are two managers, one who controls daily management duties and a new third party manager who controls distribution and liquidation decisions.
Similarly, clients might also want to consider recapitalizing the LLC so that the membership interests are bifurcated into voting and nonvoting membership interests. Clients may want to further refine this approach by making the membership interests full voting and limited voting, such that the latter, for example, may only vote on selling the assets or borrowing funds, but would not be allowed to vote on distributions or liquidations. The client could then issue a majority of the voting (or the full voting) membership interests to persons and/or entities other than the client, or issue a majority of the voting membership interests to an irrevocable trust that is a “grantor trust,” which is treated as a disregarded entity under federal income tax law but is respected as a separate entity under state law.26 The LLC operating agreement could provide that the LLC cannot make a distribution, be dissolved, or carry out other specified tasks without a vote of a majority of the voting interests. This would ensure that if a creditor of the client receives all “right, title, and interest” to the client’s LLC membership interest, the creditor would not be able to force a distribution from the LLC or the liquidation of the LLC.
Clients and their advisors may additionally explore alternative asset protection strategies with respect to business entity planning, including forming LLCs in offshore jurisdictions, such as Nevis, or in other domestic jurisdictions that have well-settled charging order law with respect to multiple-member LLCs, such as Delaware, Wyoming, or Nevada. With respect to existing Florida LLCs, clients and their advisors may also consider converting a Florida LLC to a Delaware, Texas, or Wyoming LLC that has an LLC act that provides that a charging order is the exclusive remedy of a creditor. Moreover, clients and their advisors may be more inclined to consider alternative asset protection vehicles, such as offshore trusts and offshore insurance and annuity products. Nevertheless, Florida law may well apply where the “conflict of law” analysis shows that the LLC is owned by Floridians, managed by Floridians, and primarily holds Florida-based assets.27
The above referenced alternative asset protection strategies to Florida LLCs are not bulletproof and may face other issues and/or limitations. For example, if a Florida LLC is converted to a foreign entity, it cannot be taxed as an S corporation. The converted foreign LLC may provide additional asset protection features in that it may be impossible for the creditor to force the manager or account sponsor of the LLC to present assets to the creditor unless or until the law of the foreign jurisdiction where the assets are held is satisfied. If, for example, a Nevis LLC holds a Swiss brokerage account, then the Swiss institution holding the account would be expected not to make the account available to the creditor until both Swiss and Nevis law are satisfied that an asset turnover is appropriate. However, a U.S. court might determine it appropriate to put a U.S. debtor in jail on contempt if it finds that the debtor has established and/or funded the foreign LLC arrangement in order to make it “impossible” for imminently expected creditors to have access to the assets being held.28
Furthermore, if a Florida LLC that is taxed as an S corporation is converted to a limited partnership, the entity could lose its S corporation status if the general partner and limited partner interests are considered to be “separate classes of stock” under the applicable S corporation tax law. The authors know of no well-respected authority that advocates the use of a state law limited partnership structure to house an S corporation. The change in federal tax classification of an S corporation to classification as a partnership or disregarded entity for income tax purposes is equivalent to a constructive liquidation for income tax purposes, which can trigger income tax if the entity has assets (including any goodwill) that are worth more than its tax basis in those assets.
The bottom line is that the Florida Supreme Court created uncertainty for the estate and business planning community that will probably be resolved by the Florida Legislature before court cases make their way back to the appellate courts, and many existing Florida LLCs that do not now provide for separate voting and nonvoting rights may be converted into voting and nonvoting structures, limited partnerships or limited liability limited partnerships, and/or be moved to other jurisdictions by reason of this decision. Such judicial and legislative unpredictability helps to explain why U.S. citizens so often choose to place assets and legal structures outside of the jurisdiction of their own state and national government legal systems. We are all reminded that no one creditor protection strategy should ever be relied upon to protect a client’s assets when multiple strategies are available, and that the law can shift unexpectedly, giving clients good reason to wonder whether they are best served by subjecting all of their assets to any one jurisdiction or asset class.
Nevertheless, the authors believe that courts will be reluctant to allow a judgment creditor to reach the assets of a multiple-member LLC in which a debtor is a member. In any event, Florida LLCs are not as safe as they once were for use as asset protection vehicles, and clients and their advisors should strongly consider alternatives to simple Florida multiple-member LLCs for business and investment entity planning.
Florida’s reputation as a trust and business law jurisdiction has been brought into question by the decision, which will hopefully be resolved without delay by the legislature. Our state’s judicial system was ridiculed during the 2000 presidential election for its interpretation of “hanging chads” and for its role in determining the winner of the 2000 presidential election.29 The reputation of the Florida Supreme Court is not looking any better after Olmstead, and the decisionmaking espoused by the court in this decision will not be long-forgotten by business and trust lawyers and their sophisticated clientele.
1 For a detailed discussion regarding charging orders , see Alan S. Gassman & Sabrina M. Moravecky , Charging Orders: The Remedy for Creditors or Debtor Partners, 3 6 Estate Planning Magazine 12, 21
2 Shaun Olmstead, et al., v. Federal Trade Commission, No. SC08-1009 at 1, 2010 WL 2518106 (Fla. 2010), 2010-1 Trade Cases P77, 079.
3 In re Albright, 291 B.R. 538, 540 (D. Colo. 2003) ; In re Modanlo, 412 B.R. 715, 727-31 (D. Md. 2006) ; In re A-Z Electronics, LLC, 350 B.R. 886 (D. Idaho 2006).
4 Although a creditor may prefer a levy (which could create a cash payment with the sale of the debtor’s membership interest or a reverse pierce of the LLC in which the creditor levies and executes against the LLC’s assets) rather than a charging order, which may not create any cash payment, such ownership of a debtor’s membership interest by the creditor will cause the creditor to be allocated income attributable to such interest pursuant t o Rev. Rul. 77-137, 1977-1 C.B. 178.
5 Myrick v. Second Nat’l Bank of Clearwater, 335 So. 2d 343 (Fla. 2d D.C.A. 1976) ; Atlantic Mobile Homes, Inc. v. LeFever, 481 So. 2d 1002 (Fla. 2d D.C.A. 1986) ; Givens v. Nat’l Loan Investors L.P., 724 So. 2d 610 (Fla 5th D.C.A. 1998).
6 Thomas O. Wells , Asset Protection Provided with Florida Business Entities, Asset Protection in Florida §4.30 (Florida Bar Real Property, Probate, and Trust Law Section ed. 2008).
7 Initially a charging order was mentioned as a creditor’s remedy with respect to a debtor’s partnership interest in a partnership under Fla. Stat. §620.695 in 1973 (“On application to a court having jurisdiction by any judgment creditor of a partner, the court may charge the interest of the debtor partner with payment of the unsatisfied amount of the judgment with interest…. ”). After Florida district courts of appeal opinions found that the charging order was the exclusive remedy under the 1973 partnership statute, the legislature adopted the exact above-referenced charging order language in its drafting of the 1986 limited partnership charging order statute
(Fla. Stat. §620.153) and the 1993 LLC charging order statute
(Fla. Stat. §608.433), thus, clearly intending that LLC charging order protection would be equivalent to partnership charging order protection. When the general partnership and limited partnership statutes were updated in 1995 and 2005, respectively, the language was made even clearer as to charging orders being the exclusive remedy of a judgment creditor, but this should not be viewed to have altered the historical language that is still found in the LLC statute.
8 Olmstead, 2010 WL 2518106 at 8.
9 For excellent perspective on this case, see LISI Asset Protection Planning Newsletters #151, #152, and #153 (April 28, 2010) , available at http://www.leimbergservices.com.
10 Federal Trade Commission v. Peoples Credit First, LLC, et al. , No. 06-13254, DC Docket No. 03-02353-CV-T-17-TBM (September 29, 2010).
11 Fla. Stat. §620.8504
; Fla. Stat. §620.1703 . See Fla. Stat. §620.8504(2) (“A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.”). Fla. Stat. §620.8601(4) further provides that a charging order causes a partner to disassociate from a general partnership or limited liability partnership, which triggers a dissociation distribution from the GP or LLP to redeem the partner’s interest . See Thomas O. Wells , Asset Protection Provided with Florida Business Entities, Asset Protection in Florida §4.32 (Florida Bar Real Property, Probate, and Trust Law Section ed. 2008).
12 Olmstead, 2010 WL 2518106 at 6.
13 Id. at 3.
14 Id. at 8.
15 Id. at 16.
16 Id. at 9.
17 Id. at 10.
19 See endnote 6.
20 Subsumed in this statement is a significant point — to the extent practitioners have clients with single-member LLCs who are concerned about asset protection vis-à-vis an outside creditor should admit additional members as soon as possible. To mitigate fraudulent conveyance concerns and the potential for adverse tax consequences, consideration should be given to structuring the transaction as a sale to an irrevocable grantor trust. This is properly the topic of another article and could be implemented in conjunction with various sophisticated estate planning techniques.
21 Legislative Position Request Form Submitted by the Real Property, Probate & Trust Law Section of The Florida Bar, Jan. 5, 2006 , available at http://www.rpptl.org/Content/Committees/LegislativeReview/Creditor’s_remedies_against_LP_and_LLLP_Interests.pdf.
22 W yo. Stat. §17-15-503 (emphasis added). The Olmstead case addressed the rights of a single-member of a Florida LLC and reviewed Fla. Stat. §608.433. However, it is not clear that such holding would apply in Florida to a creditor of a single member of a Wyoming (and Delaware) LLC that provides a charging order as an exclusive remedy . See New Times Media, LLC v. Bay Guardian Co., In c ., Del. D.C. No. 10-72-GMS-LPS (June 28, 2010) (limiting the rights of a California judgment creditor to foreclose because Delaware law does not allow for such remedy).
23 See endnote 6.
24 Myrick, 335 So. 2d 343 ; Atlantic Mobile Homes, Inc., 481 So. 2d 1002 ; Givens, 724 So. 2d 610.
25 As noted at endnote 10, general partnerships and limited liability partnerships do not enjoy the same charging order protection as limited partnerships and limited liability limited partnerships.
26 The option of creating a voting trust to own the membership interests (which is an effective method of divesting control in the corporate arena) is a less certain option in the LLC context because voting trusts are not expressly contemplated under Florida law such that their use can be challenged. Specifically, while §607.0730 of the Florida Business Corporation Act provides rules governing the transfer of stock of a corporation to a voting trust, the Florida Limited Liability Company Act does not provide any similar provision.
27 B ecause the Florida Supreme Court based its holding on its interpretation of Fla. Stat. §608.433 and a lack of “exclusive remedy” language, such a holding may not apply to LLCs created pursuant to laws of another state. Nevertheless, it is unsettled as to whether Florida law will continue to apply with respect to LLCs that have been moved to other jurisdictions, if the LLC continues to have significant contacts in the state of Florida. For a detailed discussion regarding conflict of law analysis in the context of trusts , see Leimberg Information Services, Inc., LISI Estate Planning Newsletter #1391 (Jan. 6, 2009) , available at http://www.leimbergservices.com; Gideon Rothschild, Daniel S. Rubin, and Jonathan G. Blattmachr , A Few Bad Apples Should Not Spoil the Bunch, 3 2 Vand. L. Rev. 763 (1999).
28 In re Lawrence, 279 F.3d 1294, 1297 (11th Cir. 2002) ; F.T.C. v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999).
29 Gore v. Harris, 772 So. 2d 1243 (Fla. 2000), rev’d, Bush v. Gore, 531 U.S. 98 (2000).
Alan S. Gassman , J.D., LL.M., is a partner at the Clearwater law firm of Gassman, Bates & Associates, P.A. He is a frequent LISI commentator and practices tax and estate planning.
Christopher J. Denicolo , J.D., LL.M., is an associate at the Clearwater law firm of Gassman, Bates & Associates, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law.
David L. Koche is a partner at Barnett, Bolt, Kirkwood, Long & McBride. He received his J.D. from Georgetown University and his LL.M. in taxation from the University of Florida.
Thomas O. Wells is a principal at the Coral Gables law firm of Thomas O. Wells, P.A. He practices in the areas of tax, transactional, wealth, and estate planning.
The authors thank Kenneth J. Crotty, J.D., LL.M., a partner at the firm of Gassman, Bates & Associates, P.A., and Suzanne Palms, Will Hurter, and Andrew Bickford, law clerks at the firm of Gassman, Bates & Associates, P.A., for their help in drafting this article.