After Olmstead: will a multiple-member LLC continue to have charging order protection?

• Author: Gassman, Alan S.
• Position: Cover story

[ILLUSTRATION OMITTED]

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 decisions (5) 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 [section] 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...