The New Olmstead Patch Legislation: A Case Study in the Art of Compromise for Florida LLC Law
On April 29, 2011, the last business day of the 2011 legislative session, the Florida Legislature passed an amendment to F.S. §608.433 to clarify the law and to “patch” the gap in varying interpretations of the charging order provisions in the Florida LLC Act, which were the result of the controversial Florida Supreme Court opinion in Shaun Olmstead et al. v. Federal Trade Commission, 44 So. 3d 76 (June 24, 2010).1 The new legislation passed the House with 112 yeas and one nay and was unanimously approved in the Senate 39-0. The new legislation was signed into law by the governor on May 31, 2011, “with retroactive application.”
The history of this not so simple legislation begins with the somewhat hysterical reaction of Florida (and many other) lawyers to the Olmstead decision, which the Florida Supreme Court issued on June 24, 2010. The split opinion caused grave concern and lamentation among the LLC cognoscenti of The Florida Bar and the ABA. As one article describing the Olmstead decision put it, “Sadly, rather than mapping the issues to help future travelers, Olmstead charted a unique and difficult course for others to follow.”2
The Olmstead Decision, Briefly
On June 24, 2010, the Florida Supreme Court issued its long-awaited and sharply divided 5-2 opinion in Olmstead, with the majority concluding that the LLC act charging order provisions were not the “exclusive” remedy for judgment creditors of judgment debtors who owned the sole membership interests in an LLC.3 This was surprising and contrary to the general body of common law, which had treated charging orders as the exclusive remedy for judgment creditors of owners of interests in unincorporated business entities.
The facts were straightforward, but, as some commentators have opined, they were not good facts when it came to an interpretation of the existing LLC act charging order provision, and they resulted in problematic interpretation.4
Briefly, the facts are that Shaun Olmstead and Julie Connell (the defendants) were running a prepaid “platinum” credit card scam which defrauded approximately 200,000 members of the public who bought into the scam. The FTC sued the defendants in the U.S. District Court for the Middle District of Florida under the Federal Trade Commission Act and obtained injunctive relief and a summary judgment requiring restitution for more than $10 million against the defendants. As part of the district court proceedings, the assets (including several Florida single-member LLCs) of the defendants were frozen and placed in receivership. The district court also granted the FTC motion to compel surrender of the membership interests in the Florida single-member LLCs owned by the defendants.5
The defendants appealed to the U.S. Court of Appeals for the 11th Circuit, but failed to seek a stay of execution, so the receiver took possession of the two LLC business premises. In a per curiam opinion, by summary judgment, the 11th Circuit affirmed the district court as to a permanent injunction and the $10 million judgment in damages.6
The FTC then filed a motion to compel the individuals (Olmstead and Connell) and the single-member LLCs (SMLLCs) to surrender their assets in partial satisfaction of the judgment. The district court granted the motion and the defendants appealed once again to the 11th Circuit. On this appeal, the defendants argued that the only remedy available against their ownership interests in the SMLLCs was a charging order under the language of F.S. §608.433(4) of the Florida LLC act, and as such, the FTC was limited to the rights of an assignee under Florida law.
F.S. §608.433(4) provided:
On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member’s interest.
In certifying the question to the Florida Supreme Court, the 11th Circuit noted that it could find no controlling Florida precedent and said it was unable to determine whether Florida law allows a court to order a judgment debtor to surrender “all right, title, and interest” in the debtors’ single-member LLCs.7
The certified question from the 11th Circuit to the Florida Supreme Court was as follows: “Whether, pursuant to Fla. Stat. section 608.433(4), a court may order a judgment-debtor to surrender all “right, title, and interest” in the debtor’s single-member limited liability company to satisfy an outstanding judgment.”
Noteworthy is the fact that the 11th Circuit indicated that its phrasing of the certified question was not controlling.
The Florida Supreme Court accepted the certified question, but rephrased the certified question as follows: “Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member limited liability company to satisfy an outstanding judgment.”
This change in the format of the certified question was significant, because, as the dissent observed, it allowed the majority to look beyond the language of F.S. §608.433(4), which is precisely what the majority then did.
To be fair, the majority opinion did examine F.S. §608.433(4) quite closely, but it distinguished the charging order provision in the LLC Act from the Florida partnership and limited partnership charging order provisions by concluding that since the LLC act did not use the word “exclusive” before the word “remedy” — whereas the Florida partnership and limited partnership acts did specifically provide for the charging order to be the “exclusive remedy” — that other remedies should be available to judgment creditors of debtors who hold LLC membership interests.
Specifically, the majority said that the Florida LLC act charging order provision stood “ in stark contrast to the charging order provisions in both the Florida Revised Uniform Partnership Act and the Florida Revised Uniform Limited Partnership Act.” Under both Florida partnership statutes, the relevant statutes expressly provide that the charging order is the “exclusive remedy” by which a judgment creditor of a partner or transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership or limited partnership. The majority concluded that “ the legislature must have intended that charging orders for LLCs are different than charging orders for partnerships ” (emphasis added). That, in the author’s opinion, was an erroneous conclusion and one without any support in the legislative history of the implicated partnership or LLC acts. The Florida Legislature corrected that erroneous presumption in the new patch legislation, discussed below.
Having dispatched the “exclusivity” argument by misplaced reliance on the absence of the word “exclusive” in §608.433, the majority tried, repeatedly, to analogize the membership interests in an LLC to stock in a corporation. The majority even said an LLC is “a type of corporate entity,” and that an LLC ownership interest is personal property “reasonably understood to fall within the scope of corporate stock.” Naturally, this language was not welcomed by students of unincorporated business entities. As knowledgeable practitioners understand, an LLC is a hybrid entity which derives principally from limited partnership law and concepts, but which has certain corporate characteristics (most notably limited liability), and which has built up its own distinct entity status, and which should never be characterized as “a type of corporate entity.”
Continuing its misguided focus on corporations, the majority noted that under F.S. §56.061, the general execution statute, “stock in corporations” was subject to execution to satisfy a judgment. The simple — and some would argue obvious — fact that LLC membership interests are different than stock in a corporation was not persuasive to the majority.
Sadly, the Florida Supreme Court is not alone in its misguided view of LLCs. Many courts continue to fail to comprehend the distinct status of the LLC as its own entity. There are numerous cases in lower courts, and even the U.S. Supreme Court, which have mentioned an entirely new (and mythical) entity known as the limited liability corporation.8
Needless to say, the Olmstead majority concluded that the charging order was not the exclusive remedy available to a judgment creditor holding a judgment against the sole member of a Florida SMLLC and ordered the debtor “to surrender all right, title and interest to and in the LLCs” to satisfy the outstanding judgment.
The animated dissent pointed out that such a tortured interpretation of the charging order provision in the LLC act was not only wrong as to SMLLCs, but that it opened the door to allowing judgment creditors of members in a MMLLC to having all of their right, title, and interest in the membership interest executed upon by judgment creditors.
Aftermath of Olmstead
Promptly following the release of the Olmstead decision, members of the three sections of The Florida Bar most closely concerned with business entities laws in Florida, to wit, the Business Law Section, the Tax Section, and the Real Property Probate and Trust Law (RPPTL) Section, formed committees to consider the Olmstead opinion and to draft proposed legislation in response to it.
The Tax and RPPTL sections were the first to propose a form of legislation, which they circulated for comment.9 That proposal created a new subsection within §608.433, which made it clear that for LLCs “having more than one member,” the charging order would be the sole and exclusive remedy. The proposal was silent as to SMLLCs. The Business Law section, which at the time was in the middle of its three-year plus consideration of revising the entire Florida LLC act, was concerned that since the Tax/RPPTL proposed legislation failed to adequately address SMLLCs, it effectively left the Olmstead decision controlling the fate of SMLLCs in Florida.
The Business Law Section Executive Council, after months of strenuous and heated internal debate, on October 12, 2010, adopted proposed legislation to modify F.S. §608.433.10 The BLS proposal was very similar to the Tax/RPPTL proposed legislation in providing that a charging order would be the sole and exclusive remedy available to judgment creditors who held judgments against a member of a multi-member LLC (MMLLC), but it also tried to protect SMLLC members by including SMLLCs in the general “exclusive remedy” rule, while carving out an exception which allowed for judgment creditors to seek more assertive judicial orders in connection with SMLLCs.
The Business Law Section legislative proposal was itself a compromise that tried to address the concerns of creditors’ rights lawyers, bankruptcy lawyers, and bankers who saw SMLLCs as fundamentally different from MMLLCs. Obviously, many knowledgeable members within the Business Law Section argued that it would be wrong to treat LLCs differently, and pointed, among other reasons, to the statutes of other states which afforded the exact same treatment of SMLLCs and MMLLCs in regard to charging orders. The policy arguments advanced by the creditors’ rights proponents cited the Olmstead decision majority analysis, and the premise that while a MMLLC had the imprimatur of partnership law that consistently validated the fundamental “one should always be able to pick their partners” principle, they argued that principle should not apply to SMLLCs because the sole member of an SMLLC, by definition, had no “partners” whose interests should be protected.
The new legislation was first introduced in the House on January 18, 2011, by Lakeland Congresswoman Stargel as H.B. 253, and substantially followed the proposed legislation of the Business Law section, but with a few modifications.
After H.B. 253 was introduced, representatives of all three sections of The Florida Bar came together at the Tax Section directors’ committee meeting in Boca Raton on January 22, 2011, in an effort to achieve a unified legislative front. Thanks to the efforts of the leaders of all three sections, the sections were successful in adopting a modified, uniform, legislative proposal.
On February 16, 2011, Orlando Sen. David Simmons filed S.B. 1152 to amend §608.433. The Senate bill generally aligned with the substance of recommendations proposed by the new unified Florida Bar drafting committee.
While the Bar was now unified in its efforts to pass the proposed legislation, there was yet another effort, the details of which were unknown to the Bar, to propose legislation in response to Olmstead coming from the Florida Bankers Association.11 Representatives of The Florida Bankers Association naturally liked the Olmstead decision, and they took a much more aggressive stance in proposing, among other things, that the Olmstead decision should be expanded, by legislation, beyond SMLLCs, to apply to MMLLCs if the judgment debtor was a member who “controlled” the MMLLC, a result which would have made Florida stand so far apart from the previous body of law on the rights of judgment creditors as to appear, perhaps once again, as being out of touch with the precedent applicable to charging orders in the context of unincorporated entities.
The bankers’ proposal was never introduced in the legislature. Throughout the legislative process, members of the Bar and members of the bankers association continued to try to reach compromise language which might satisfy all concerned. That Bar/bankers compromise occurred very late in the process, but it did happen, and the result was further movement away from the simple rule, which would have provided that a charging order is and should be the exclusive remedy of judgment creditors of a debtor who is a member of an LLC.
The New Olmstead Patch Legislation
The patch legislation is a direct result of the analysis in the majority opinion of Olmstead, which has caused many Florida practitioners to urge caution in utilizing Florida LLCs. Prior to the patch legislation, some knowledgeable practitioners have opined that it would be fool-hardy to use a Florida LLC after Olmstead, when so many other states provided clarity when it comes to charging orders as the sole and exclusive right of judgment creditors of a judgment debtor who holds LLC membership interests.12
The patch legislation is comprised of amendments to §608.433.13
First and foremost, a new subsection (5) has been added to §608.433, which provides: “Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company” (emphasis added).
The intended purpose of subsection (5) is to eliminate any question about the scope of the remedies available to judgment creditors in the context of Florida limited liability company membership interests held by judgment debtors. The exclusive remedy language of the revised charging order provision applies to all Florida LLCs, not just MMLLCs.
However, in a nod to those who view SMLLCs as fundamentally different than MMLLCs (for purposes of this article, the author is avoiding discussion of the public policy arguments espoused by the various competing interests in this analysis), the new legislation carved out exceptions to the general rule of charging order exclusivity, and, thus, the new exceptions found in §608.433 subsections (6) and (7) discussed below, which apply only to SMLLCs.
These new subsections (6) and (7) are aimed at providing the courts with the power — subject to stated conditions, upon motion of judgment creditors — to address circumstances where a judgment creditor is being frustrated in its attempts to collect on a judgment against a judgment debtor who is the sole member in a SMLLC, and where it would be appropriate for a court, upon a proper showing, to expand the remedies beyond the mere right to receive distributions otherwise payable by the LLC to the member. It is important to note, however, that these exceptions are occasioned only under limited circumstances and should not become the standard remedy for the judgment creditor of a SMLLC member. They are “carve-outs” from the general rule of exclusivity, and hopefully courts will carefully consider the facts and circumstances of any case presented by a judgment creditor which seeks to avail itself of the exceptions to the general rule of exclusivity.
New subsection (6) provides:
In the case of a limited liability company having only one member, if a judgment creditor of a member or member’s assignee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the assignee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. A judgment creditor may make a showing to the court that distributions under a charging order will not satisfy the judgment within a reasonable time at any time after the entry of the judgment and may do so at the same time that the judgment creditor applies for the entry of a charging order.
The exception created by new subsection (6) provides for a facts and circumstances test that should be applied in each case on its unique circumstances, not in all cases. For example, the exception might arise in the context of the following circumstances: 1) the sole member of a SMLLC who had previously been receiving regular distributions of profits from the LLC intentionally precludes the LLC from continuing to make distributions after a judgment is obtained against the sole member, as a means of frustrating the judgment creditor; or 2) where the asset(s) owned by the LLC could only produce distributable cash if the assets were liquidated, and the sole member refuses to liquidate the assets without any reasonable basis for the liquidation, other than to frustrate the judgment creditor.
The trigger for subsection (6), “if a judgment creditor of a member…establishes to the satisfaction of a court of competent jurisdiction that distributions …will not satisfy the judgment within a reasonable time…,” comes from existing Florida law. Although this is not a new concept under Florida law, some will argue that it is too vague. For example, what constitutes “a reasonable time” will differ depending upon whether the party examining that question is a creditor or debtor. However, it does allow the courts to consider the circumstances and apply their own judicial judgment, after hearing both sides and carefully considering the facts and evidence before them.
The intended and necessary conclusion from subsection (6) is that it permits a court to order some action, and the anticipated action, if it is satisfied that the judgment creditor should obtain relief under the circumstances, is for the court to order foreclosure, rather than direct execution, on the SMLLC interest of the judgment debtor. Hence, new subsection (7) is added to F.S. §608.433.
New subsection (7) provides:
In the case of a limited liability company having only one member, if the court orders foreclosure sale of a judgment debtor’s interest in the limited liability company or of a charging order lien against the sole member of the limited liability company pursuant to subsection (6):
(a) The purchaser at the court-ordered foreclosure sale obtains the member’s entire limited liability company interest, not merely the member’s transferable interest;
(b) The purchaser at the sale becomes the member of the limited liability company; and
(c) The person whose limited liability company interest is sold pursuant to the foreclosure sale or is the subject of the foreclosed charging order ceases to be a member of the limited liability company.
This subsection was added to satisfy the concerns of the bankers so they could point to a specific remedy allowing them to obtain a membership interest. It provides a judicially mandated construct and oversight to the process of foreclosure, in the limited circumstances where a judgment creditor convinces a court that foreclosure on a debtor’s SMLLC interest is warranted as an exception to the general rule of charging order exclusivity, under all of the facts and circumstances.
Although this will cause some practitioners to not use Florida SMLLCs, it is certainly preferable to the confusing direct execution on the entire LLC interest, which was apparently authorized by the majority in the Olmstead decision. The legislation provides a court-ordered foreclosure sale, which allows for the judgment debtor to try to keep or realize the excess value that may be inherent in the assets of the LLC, to the extent that value exceeds the amount of the judgment.
For example, in a public foreclosure sale, where the LLC owns a commercial or residential property worth, say, $2 million, the judgment debtor is likely to obtain something close to the market value of the underlying asset when the ownership interest in that LLC is sold, whereas the debtor would get nothing if the judgment creditor could simply execute and take over the entire SMLLC interest without any payment to the judgment debtor. So, under this example, assume the bidder at a foreclosure sale agrees to pay $1 million for the LLC interest of the judgment debtor and assume that the amount of the judgment is only $500,000. The judgment creditor would be paid in full, and the balance of $500,000 would be paid to the judgment debtor. Absent a foreclosure sale, in a direct execution on the debtor’s entire right, title, and interest in the LLC membership interest, the debtor could lose his or her entire interest in the LLC, even if the value of the underlying assets substantially exceeded the amount of the judgment, simply because there would not have been the public auction of the membership interest.
New subsection (7) also makes it clear that the judgment debtor ceases to be a member upon the sale, and that the successful bidder acquires the entire membership interest. It does not trigger dissolution of the LLC, so any contracts or other third-party considerations that may be applicable to the LLC remain intact.
A new §2 was added to §608.433 to state the legislative intent of the amendments to §608.433, which are to clarify existing law rather than make new law, to be remedial, and to make the amendments have retroactive application. Some would argue that it did make new law in allowing for the foreclosure on the SMLLC interests, and in treating them differently than MMLLC interests, but remember that Olmstead was the law of Florida once the Supreme Court issued its ruling. The “retroactive application” was not intended to overturn Olmstead, nor any other case that was decided after Olmstead, but the amendments would have to be taken into consideration by any court considering a case affected by §608.433 after the amendments were signed into law on May 31, 2011.
The new §2 is as follows: “Section 2. The amendment to s. 608.433, Florida Statutes, made by this act is intended by the Legislature to be clarifying and remedial in nature and shall apply retroactively.”
Last Minute Amendments
As the 2011 Florida legislative session was coming to a close, representatives of the unified Bar sections and their lobbyists met with representatives of the Florida Bankers Association and their lobbyists to try, yet again, to reach compromise on the proposed legislation which might address continuing concerns of the bankers while the Senate bill was still in the Banking and Insurance Committee. To that end, there were several additional compromise provisions created which were believed to be helpful in clarifying certain aspects of §608.433, and which, in an acknowledgement that “something is better than nothing,” became acceptable to both sides. The Senate sponsor adopted the proposed additions to §608.433 and amended the legislation on April 25, 2011, as a Banking and Insurance Committee substitute bill, four days before it went to floor of the Senate for full Senate vote.
These last minute amendments to the previously passed H.B. 253, which were adopted by the Senate, are as follows:
Subsection (8) was added to §608.433 to preclude any further arguments by judgment creditors that the remedy of foreclosure — which is discussed in subsection (7) as applicable to SMLLCs in certain circumstances — could, under any circumstances, apply to a member’s interest in a multi-member LLC.
Subsection (8) provides: “In the case of a limited liability company having more than one member, the remedy of foreclosure on a judgment debtor’s interest in such limited liability company or against rights to distribution from such limited liability company is not available to a judgment creditor attempting to satisfy the judgment and may not be ordered by a court.”
Subsection (9) was the “quid pro quo” for subsection 8, and was added to provide comfort to creditors’ rights advocates that the clarifying amendments to §608.433 were limited to judgment creditors of debtors’ interests in an LLC, but were not intended to override or “trump” the general law in Florida, which applied to creditors’ rights remedies in certain circumstances, like fraud, or where the creditor had obtained a consensual security interest in the membership interest, or where equitable principles not inconsistent with the section would be applicable. This subsection also states the obvious in providing that a court has the continuing power to enforce its own issued orders.
Subsection (9) provides:
Nothing contained in Section 608.433 shall limit:
(a) the rights of a creditor that has been granted a consensual security interest in a limited liability company interest to pursue the remedies available to such secured creditor under law applicable to secured creditors;
(b) The principles of law and equity which affect fraudulent transfers;
(c) The availability of the equitable principles of alter ego, equitable lien, or constructive trust, or other equitable principles not inconsistent with this section; or
(d) The continuing jurisdiction of the court to enforce its charging order in a manner consistent with this section.
The discussions involving the additions in subsection (9) focused most heavily on whether they were needed at all, as many members of the drafting committee believed these principles were ingrained in Florida law already, and did not need the imprimatur of statutory expression. For example, everyone should know that if a debtor gives a creditor a security interest in the debtor’s LLC membership interest, the debtor would not be allowed to argue that F.S. §608.433 overrides that consensual security interest. Nonetheless, it was agreed that stating the obvious is better than having a bad decision because the statute failed to state the obvious — something some have argued happened in Olmstead.
Conclusion
Like almost all legislation, the amendments to F.S. §608.433 are the result of compromise and are not perfect. However, a few things are clear to this author as a result of this legislative exercise and the new legislation.
First, Florida lawyers and business owners should recognize that although the new legislation is far better for the state of Florida LLC law than leaving Olmstead as the law of the land when it comes to charging orders, Florida may still suffer in the formation of SMLLCs, since so many states provide for charging order as the exclusive remedy, without any possibility of foreclosure, for all LLCs, both MMLLCs and SMLLCs.
Second, the new legislation provides stability and certainty for Florida MMLLCs, which assures practitioners and businesses they can safely utilize Florida MMLLCs for conducting business without forum shopping to find a jurisdiction that provides traditional charging order “exclusivity protection” from a member’s judgment creditors, which is an essential and critical aspect of going into business with others.
Third, membership interests in SMLLCs, although governed by the same general rule of the charging order as the “exclusive remedy,” are subject to a court’s examination and discretion in determining whether a foreclosure sale of the membership interest is appropriate under the facts and circumstances. This is a judicially ordered foreclosure sale, with traditional foreclosure sale protections, which is certainly better than a direct levy by a judgment creditor. In that regard, although it will certainly be criticized, it offers some degree of judicial oversight and a formal foreclosure sale process, which is better than the result reached in Olmstead.
Fourth, this author believes that Florida will be the only state in the country to use this bifurcated statutory construction in dealing with charging orders and LLC membership interests, where SMLLCs are treated differently than MMLLCs, which may create unintended consequences elsewhere. There will be some level of controversy and, I suspect, a good amount of criticism leveled against the new Florida statutory structure. Some will complain that SMLLCs were “thrown under the bus” to placate creditors, while others will say not enough was done to protect creditors from unscrupulous debtors who will flaunt the law by adding “peppercorn” members to their SMLLCs, thereby turning them into MMLLCs to avoid the Olmstead result. Others will say SMLLC formations will be lost to other states because Florida did not do what Delaware, Michigan, Wyoming, Nevada, and other states have done to provide even more certainty and protection of the entity status of SMLLCs.
Finally, the author’s last comment in response to the anticipated criticisms of the “patch” is to remind everyone that the legislature meets every year, and courts hear cases every day, so this is not likely to be the final time we examine this issue.
1 Rehearing denied (August 31, 2010) .
2 Thomas Geu, Thomas E. Rutledge & John R. DeBruyn II, To Be or Not to Be Exclusive: Statutory Construction of the Charging Order in the Single Member LLC, 9 DePaul Bus. & Com. L. J. 84 (Fall 2010).
3 A “charging order” is a well-entrenched legal doctrine, derived from English law and first introduced in U.S. statutory law in the 1914 Partnership Act, which afforded a lien remedy to judgment creditors against a judgment debtor who holds an ownership interest in an unincorporated entity. It essentially serves like a garnishment order to require the LLC to pay over to the judgment creditor all amounts (up to the amount of the judgment) which would have been distributed from the LLC to the judgment debtor/member of the LLC. To the extent so charged, the judgment creditor has only the rights of an assignee of the membership interest, and does not become a member. For an in-depth discussion of charging orders in the context of LLCs, the author suggests the following: Carter G. Bishop, Desiderata: The Single Member Limited Liability Company Charging Order Statutory Lacuna, Stan. J. L. Bus. & Fin. ( Oct. 25, 2010); and Carter G. Bishop, LLC Charging Orders: A Jurisdictional and Governing Law Quagmire, 12 J. Bus. Entities 14 (May/June 2010).
4 See, for example, Dominic R. Lioce, Chinks in the Armor: Current Trends in Limited Liability Company Structure after Olmstead, 85 Fla. B. J. 36 ( Jan. 2011); Thomas Geu, Thomas E. Rutledge & John R. DeBruyn II, To Be or Not to Be Exclusive: Statutory Construction of the Charging Order in the Single Member LLC, 9 DePaul Bus. & Com. L. J. 84 (Fall 2010); Edward A. McGinty, Olmstead — A lever from Member’s Creditors to Full Multi-member LLC Membership?, 85 Fla. B. J. 39 (March 2011).
5 FTC v. Peoples Credit First, LLC, 2005 WL3468588, 1 (M.D. Fla. December 18, 2005).
6 FTC v. Peoples Credit First, LLC, 2007 WL 2071712 (11th Cir. July 19, 2007).
7 FTC v. Peoples Credit First, LLC, 528 F.3d 1310, 1314 (11th Cir. 2008).
8 See, for example, the 2009 opinion of Justice Scalia in Arthur Andersen LLP v. Carlisle, 129 S.Ct.1896, 173 L.Ed.2d 832 (2009).
9 The Tax Section efforts were led by then current chair Guy Whitesman, chair-elect Nick Lioce, past chairs Lauren Detzel and Richie Comiter, Joel Masur, and the author’s partner Bill Lane, among others. A draft legislative patch was created and subsequently adopted by the RPPTL Section. The initial Tax/RPPTL patch addressed multi-member LLCs, but left SMLLCs to be governed by the results of Olmstead.
10 The Business Law Section’s proposed legislation essentially treated MMLLCs in the same fashion as the Tax/RPPTL proposal (providing that the charging order was the exclusive remedy for judgment creditors), but it also addressed SMLLCs and included them in the general rule, while allowing judgment creditors to reach them in certain limited circumstances.
11 The Florida Bankers Association’s legislative proposal was titled “Rights of Creditors to Assets of Controlled Business Entities,” dated Nov. 1, 2010.
12 See, e.g., DE section 18-703, NV Revised Statutes 86.401, and MI 450.4507, which amended its LLC statute in December of 2010, after Olmstead, as follows: “MICHIGAN LIMITED LIABILITY COMPANY ACT (EXCERPT). 450.4507 Charging membership interest with payment of judgment; rights of judgment creditor; rights and powers of member; charging order as lien on membership interest; section as exclusive remedy.
Sec. 507. (1) If a court of competent jurisdiction receives an application from any judgment creditor of a member of a limited liability company, the court may charge the membership interest of the member with payment of the unsatisfied amount of judgment with interest.
(2) If a limited liability company is served with a charging order and notified of the terms of that order, then to the extent described in the order, the member’s judgment creditor described in the order is entitled to receive only any distribution or distributions to which the judgment creditor is entitled with respect to the member’s membership interest.
(3) This act does not deprive any member of the benefit of any exemption laws applicable to the member’s membership interest.
(4) Unless otherwise provided in an operating agreement or admitted as a member under section 501, a judgment creditor of a member that obtains a charging order does not become a member of the limited liability company, and the member that is the subject of the charging order remains a member of the limited liability company and retains all rights and powers of membership except the right to receive distributions to the extent charged.
(5) A charging order is a lien on the membership interest of the member that is the subject of the charging order. However, a person may not foreclose on that lien or on the membership interest under this act or any other law, and the charging order is not an assignment of the member’s membership interest for purposes of section 505(4).
(6) This section provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the member’s membership interest in a limited liability company. A court order to which a member may have been entitled that requires a limited liability company to take an action, provide an accounting, or answer an inquiry is not available to a judgment creditor of that member attempting to satisfy a judgment out of the member’s membership interest, and a court may not issue an order to a judgment creditor.” History: 1993, Act 23, Eff. June 1, 1993; — Am. 2010, Act 290, Imd. Eff. Dec. 16, 2010.
13 Fla. Stat. §608.433. “Right of assignee to become member. — (1) Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.
(2) 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. An assignee who becomes a member also is liable for the obligations of the assignee’s assignor to make and return contributions as provided in s. 608.4211 and wrongful distributions as provided in s. 608.428. However, the assignee is not obligated for liabilities which are unknown to the assignee at the time the assignee became a member and which could not be ascertained from the articles of organization or the operating agreement.
(3) If an assignee of a limited liability company interest becomes a member, the assignor is not released from liability to the limited liability company under s. 608.4211, s. 608.4228, or s. 608.426.
(4)(a) On application to a court of competent jurisdiction by any judgment creditor of a member or a member’s assignee, the court may enter a charging order against the limited liability company interest of the judgment debtor or assignee rights for the unsatisfied amount of the judgment plus interest.
(b) A charging order constitutes a lien on the judgment debtor’s limited liability company interest or assignee rights. Under a charging order, the judgment creditor has only the rights of an assignee of a limited liability company interest to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled from the limited liability company, to the extent of the judgment, including interest.
(c) This chapter does not deprive any member or member’s assignee of the benefit of any exemption law applicable to the member’s limited liability company interest or the assignee’s rights to distributions from the limited liability company.
(5) Except as provided in subsections (6) and (7), a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.
(6) In the case of a limited liability company having only one member, if a judgment creditor of a member or member’s assignee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the assignee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. A judgment creditor may make a showing to the court that distributions under a charging order will not satisfy the judgment within a reasonable time at any time after the entry of the judgment and may do so at the same time that the judgment creditor applies for the entry of a charging order.
(7) In the case of a limited liability company having only one member, if the court orders foreclosure sale of a judgment debtor’s interest in the limited liability company or of a charging order lien against the sole member of the limited liability company pursuant to subsection (6):
(a) The purchaser at the court-ordered foreclosure sale obtains the member’s entire limited liability company interest, not merely the rights of an assignee;
(b) The purchaser at the sale becomes the member of the limited liability company; and
(c) The person whose limited liability company interest is sold pursuant to the foreclosure sale or is the subject of the foreclosed charging order ceases to be a member of the limited liability company.
(8) In the case of a limited liability company having more than one member, the remedy of foreclosure on a judgment debtor’s interest in such limited liability company or against rights to distribution from such limited liability company is not available to a judgment creditor attempting to satisfy the judgment and may not be ordered by a court.
(9) Nothing in this section shall limit:
(a) The rights of a creditor that has been granted a consensual security interest in a limited liability company interest to pursue the remedies available to such secured creditor under other law applicable to secured creditors;
(b) The principles of law and equity which affect fraudulent transfers;
(c) The availability of the equitable principles of alter ego, equitable lien, or constructive trust, or other equitable principles not inconsistent with this section; or
(d) The continuing jurisdiction of the court to enforce its charging order in a manner consistent with this section. History. — s. 34, ch. 93-284; s. 56, ch. 97-102; s. 1, ch. 99-315; s. 1, ch. 2011-77. Note. — Section 2, ch. 2011-77, provides that ‘[t]he amendment to s. 608.433, Florida Statutes, made by this act is intended by the Legislature to be clarifying and remedial in nature and shall apply retroactively.’”
Louis T. M. Conti chaired the Business Law Section committee on the Olmstead patch and recognizes the extraordinary efforts of several members of the Business Law Section, most notably section lobbyists Bill Wiley and Aimee Diaz-Lyon; Legislation Committee Chair Gary Teblum; the reporter for the LLC drafting task force, Greg Marks; bankruptcy judges Catherine McEwen and Michael Williamson; and former section chairs Mark Wolfson, Phil Schwartz, and Rick Gross. He is a partner in Holland & Knight, LLP, and the views expressed in this article are his own and do not reflect the views of Holland & Knight, LLP.
This column is submitted on behalf of the Business Law Section, Mindy Mora, chair, and Melanie E. Damian and Peter F. Valori, editors.
