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Florida Asset Protection : LLC issues: Olmstead v. Federal Trade Commission

By David M. Goldman

The Supreme Court of Florida recently had a chance to consider the single member LLC and the charging order protections under Florida Law. As expected by many, the single member LLC is not afforded the protection that a multi member LLC can be under certain circumstances. If you are wanting to structure your business entities and assets to protect against future and unknown liabilities, you should discuss these with a Florida Asset Protection Attorney.
Here is what happened in this recent case. This is not our typical blog posting, but its very fact specific so we have decided to post a short summary of the case for those who want to look at the facts, issues, and holding of the court. If you want a copy of the full case, let me know and I can send it to you.

Facts
Olmstead, through certain corporate entities, operated an advance-fee credit card scam. In response to this scam the FTC sued Olmstead and the corporate entities for unfair or deceptive trade practices. FTC obtained judgment and satisfy it they obtained an order compelling appellants to endorse and surrender to the receiver all of their right, title and interest in their LLCs.

Issue
Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender ?all right, title, and interest? in the debtor?s single-member LLC to satisfy an outstanding judgment.

Holding
Yes. The court may order a judgment debtor to surrender all right, title and interest in the debtor?s single member LLC to satisfy an outstanding judgment.

Argument/Analysis
Appellants argued the only remedy available was a charging order because it is the sole remedy discussed in the statute and that § 608.433(4) cannot be read in conjunction with § 56.061. A charging order is affords a judgment creditor access to a judgment debtor?s rights to profits and distributions from the business entity. FTC argues it is not the sole remedy against a debtor who is the owner of a single member LLC.

This conclusion rests on the uncontested right of the owner of the a single member LLC to transfer the owner?s full interest in the LLC and the absence of any basis in the LLC act for abrogating in this context the creditors remedy of levy and sale pursuant to Fla. Stat. § 56.061. The ownership interest is fully alienable because there are no other members to fulfill the requirement of ?approval of all members? for participation in management. It follows that the only approval an assignee of a single member LLC needs is the member transferring the interest. The charging order is a remedy for creditors when the debt is not freely transferable but is subject to the right of other LLC members to object to the assignee becoming a member.

Although transfer of management rights is generally restricted by statute, this characteristic underlies the charging order remedy, derived from the charging order remedy in partnerships. But in the Partnership Act the Legislature wrote into the statute that a charging order is the exclusive remedy for a judgment creditor. In the LLC Act the Legislature left this language out.

Appellants? argument is rejected because it is predicated on an unwarranted interpretive inference that transforms a remedy that is nonexclusive on its face into an exclusive remedy. There is no reasonable basis for inferring that the provision authorizing the use of charging orders under § 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor?s interest in a single member LLC. The court says they are not creating an exception for single member LLCs, but it seems issuing this as a remedy was also due to the would be on a case by case basis.

Dissent
This is judicial rewriting of the LLC Act. This will have a far-reaching impact because the principles used to ignore the LLC language apply with equal force to multi-member LLC. A judgment creditor seeking satisfaction must follow the statutory remedies specifically afforded under chapter 608, which include but are not limited to, a charging order, regardless of the membership composition of the LLC.

The ability of a member to voluntarily assign his interest does not subject the property of an LLC to execution on the judgment. Pursuant to §608.432(2)(c), the pledge or granting of a security interest, lien, or other encumbrance in or against, any or all of the membership interests of a member shall not cause the member to cease to be a member or to have the power to exercise any rights of a member. So a judgment, or a charging order, does not divest the member of a membership interest in the LLC as the member retains governance rights.

Exceptions not found in the statute cannot simply be read into the statute as the majority does by holding that single-member LLCs are an implicit exception to the charging order provision.

Full post as published by Florida Estate Planning Lawyer Blog on July 22, 2010 (boomark / email).