Olmstead--a lever from member's creditor to full multi-member LLC membership?

• Author: McGinty, A. Edward
• Position: Business Law

Defendant Shaun Olmstead, through defendants Peoples Credit First, LLC, and Consumer Preferred, LLC, and with the help of defendant Julie Connell, devised and marketed an advance-fee credit card scam. Defendants mailed consumers over 10 million solicitations which created the impression that, in exchange for a payment of $45 or $49, a consumer would receive a "platinum" credit card like a VISA or MasterCard with a $5,000 credit line. But there was a catch. The cards were not general purpose credit cards and could only be used to make purchases from the defendants' catalog and website. The cards were not accepted by any other vendor. More than 200,000 consumers purchased the cards. The evidence suggested that the advance fees for the cards generated far greater revenues than merchandise sold on credit through the cards. A sufficient number complained to local better business bureaus and state agencies to attract the attention of the Federal Trade Commission. (1)

The FTC sued the defendants in the U.S. District Court for the Middle District of Florida for unfair and deceptive trade practices in violation of [section]5(a) of the Federal Trade Commission Act. The court entered a judgment against the defendants, jointly and severally, for injunctive relief and more than $10 million in restitution, and ordered assets of the members frozen and placed in receivership. The assets placed in receivership included several nonparty, single-member Florida LLCs owned by either Olmstead or Connell. The order required Olmstead and Connell to surrender all the assets in their nonparty, single-member LLCs. (2) That order went well beyond the scope of the charging order remedy provided by F.S. [section]608.433(4), which states:

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.

Olmstead and his accomplice defendants appealed the order to the U.S. Court of Appeals for the 11th Circuit, arguing that a) the plain language of the statute does not distinguish between single-member and multimember LLCs, and b) a charging order is the exclusive remedy that a judgment creditor may obtain against the membership interest of a member of a Florida LLC, including a single member LLC. The FTC argued that the charging order remedy originated in common law to protect nondebtor partners from being forced unwillingly into partnership with a creditor of a debtor-partner and that this rationale does not apply to single-member LLCs because there are no nondebtor members whose interests need protection, and, therefore, a charging order should not be the sole remedy. (3) The 11th Circuit concluded that Florida law was not sufficiently clear for the court to determine whether the district court's surrender order was permissible under the Florida LLC charging order statute, F.S. [section]608.433(4), and certified the following question to the Florida Supreme Court: "[W]hether 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 a judgment." (4)

The Florida Supreme Court Opinion

On June 24, 2010, the Florida Supreme Court issued its opinion in Shaun Olmstead, et al., v. Federal Trade Commission, 44 So. 3d 76 (2010). In a five/two decision, the majority first rephrased the 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." (5) By pulling back the judicial lens of the controlling law from the narrow focus of the LLC charging order statute to the wide angle vista of the entire body of Florida law, the majority prefigured its ultimate holding. The majority answered the question in the affirmative, holding that 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. The holding was based on the following premises:

1) F.S. [section]608.432(2)(b) only entitles the assignee of a membership interest a right "to share in such profits and losses, to receive such distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned," (6) unless all members other than the assigning member consent to admit the assignee as a member with a member's rights to vote and participate in management. The assignee does not have any right to vote, participate in management, or obtain information.

2) But the sole member of a single-member LLC, unlike a member of a multi-member LLC, has the unfettered power and right to voluntarily transfer the entire interest in the LLC, including control of the management of the LLC, because there are no other members whose consent is required. Therefore, the limits on the rights that a member can assign under F.S. [section]608.432(2)(b) do not apply to the voluntary transfer of rights in single-member LLCs.

3) F.S. [section]608.433(4) provides a charging order remedy for a judgment creditor of a debtor-member of an LLC and limits the rights of a judgment creditor under a charging order to the rights of an assignee.

4) F.S. [section]608.433(4) should not be interpreted to give a judgment creditor of the sole member of an LLC less extensive rights than the rights that are voluntarily assignable by the judgment debtor (the court cited In re Albright, 291 B.R. 538, 540 (D. Colo. 2003), which rejected the argument that the bankruptcy trustee was only entitled to a charging order with respect to the debtor's ownership interest in a single-member LLC, and holding that "'[b]ecause there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate'"). (7)

5) The charging order provisions in both the Florida Revised Uniform Partnership Act, F.S. [section][section]620.81001-.9902 (2008), and the Florida Revised Uniform Limited Partnership Act, F.S. [section][section]620.1101-.2205 (2008), expressly provide that the charging order is the exclusive remedy that a judgment creditor may have against...