Limits Value of Single-Member LLCs for Asset ProtectionOlmstead v. FTC
On June 24, 2010, the Florida Supreme Court in Olmstead v. FTC,[1] held that Florida law permits a court to order a judgment debtor to surrender its entire right, title and interest in a limited liability company (“LLC”) owned solely by the debtor to satisfy an outstanding judgment against the debtor.
Shaun Olmstead (“Olmstead”) or Julie Connell (“Connell”) owned membership interests in separate single-member Florida LLCs. Olmstead and Connell were sued by the FTC for unfair and deceptive trade practices related to an advance-fee credit card scam. Olmstead’s and Connell’s assets, including their membership interests in several single-member Florida LLCs, were frozen and placed in receivership. The FTC obtained a judgment against Olmstead and Connell and an order compelling them to endorse and surrender to the receiver all of their right, title and interest in their single-member Florida LLCs. Olmstead and Connell appealed the order to the United States Court of Appeals for the Eleventh Circuit which certified to the Florida Supreme Court the question of whether the judgment creditor could levy and execute on the membership interest of a single-member LLC under Florida law. The Florida Supreme Court 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” and answered the question in the affirmative.
The Court began its analysis by reviewing the general nature of, and statutory framework for, Florida LLCs, as well as the nature of the “charging order” remedy, the typical remedy available to judgment creditors against a debtor-member of an LLC. The Court acknowledged similarities between LLCs and partnerships, including restrictions on the transfer of ownership and management rights that customarily exist in both partnerships and LLCs. In particular, the Court recognized that the restrictions on the transfer of management rights were the underlying basis for the “charging order” remedy.
Under Florida law, a judgment creditor which is awarded a ”charging order” is essentially treated as an assignee of the membership interest of the debtor-member. Under the Florida Limited Liability Company Act (the “Act”), a mere assignee of a membership interest in an LLC is entitled only to share in the profits and losses of the LLC and to receive distributions from the LLC to which the assignor was entitled. An assignee is not entitled to participate in the management of the LLC or to become a member of the LLC unless all of the other members consent. Florida Statutes, §608.432 and §608.433.
If the only remedy available to a judgment creditor of a member of an LLC is a charging order, then the result would be some degree of asset protection for members of an LLC because absent the consent of all of the other members, the judgment creditor would only be entitled to receive the distributions to the debtor-member, but would not be entitled to levy and execute on the membership interest itself or acquire the rights of a member, including rights to participate in the management of the LLC. The question considered by the Court, however, was whether the charging order remedy is the sole remedy available to a judgment creditor of the debtor-member of a single-member LLC or whether the judgment creditor could also avail itself of the remedy of levy and sale under execution available to creditors generally.
In determining that the judgment creditor was entitled to the remedy of levy and sale under execution against a debtor’s membership interest in a single-member LLC, the Court reasoned that the owner of a single-member LLC did not need anyone’s consent to assign its entire interest in the LLC, including all rights attributable to such interest as would be required in a multiple-member LLC. The Court also found no basis in the Act for denying the long-standing creditor’s remedy of levy and sale under execution to a LLC membership interest generally. The Court noted that the Florida Revised Uniform Partnership Act and the Florida Revised Uniform Limited Partnership Act both provide that a charging order against a partner’s transferable interest in a partnership is the exclusive remedy available to creditors of the partner, but that the Act did not include a similar exclusive remedy provision. Accordingly, the Court concluded that under §608.433(4) of the Act a creditor could avail itself of the remedy of levy and execution under sale against a debtor’s full interest in a single-member LLC, including, indirectly, the assets of the LLC, and was not limited to the charging order and profits of and distributions from the LLC as an exclusive remedy.
Prior to the Olmstead decision, the charging order remedy was commonly considered the sole remedy available to judgment creditors of a member of an LLC and limited the creditor to the right to receive distributions, share in the profits and losses and receive allocations of income, gains, losses, deductions or credits from the LLC. However, the Court’s holding recognizes that judgment creditors may control and own the debtor-member’s interest in a single-member LLC through the levy and sale under execution process. Effectively, this means that the assets of a single-member LLC are subject to the claims of the LLC owner’s creditors. Therefore, the single-member LLC is not a viable option for asset protection and planning.
LLCs have become the entity of choice for many individuals. However, the Court’s decision negates one of the primary reasons many individuals elect to form a Florida LLC. Additionally, although the Court’s ruling related to single-member LLCs, it is unknown how case law based upon this decision will evolve with respect to multiple-member LLCs. It would appear that some of the Court’s reasoning for not limiting a creditor to a charging order in the case of a single-member LLC could also apply under certain circumstances to multiple-member LLCs (e.g., where a member has the right to assign its interest in the LLC without the consent of the other members).
As a result of the Olmstead decision, all owners of single-member Florida LLCs should consider and consult with their advisors to determine whether the Florida LLC is the appropriate form of entity given the entity’s purposes and the owner’s particular goals. Even members of multiple-member Florida LLCs may wish to consult with their advisors to determine whether they and the LLC and its assets are adequately protected against the claims of the members’ creditors and whether changes to the LLC governing documents are necessary to ensure that appropriate protective provisions are in effect.
Should you wish to discuss these matters in more detail, or to receive more information about how the Court’s holding may effect your protection against creditor claims, please contact at 407.649.4017, at 407.649.4036, at 407.649.4026 or your regular Baker Hostetler contact.
[1] Olmstead v. FTC, No. SC08-1009 (Fla. June 24, 2010).
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