Wednesday, July 14, 2010

Florida Supreme Court Decision Strips Asset Protection for Single Member LLCs

In a 5-2 decision entered on June 24, 2010, the Florida Supreme Court reviewed the issue of “[w]hether 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.” The Court concluded that the statutory charging order provision does not preclude application of the creditor’s remedy of execution on an interest in a single-member LLC. The Court primarily justifies its conclusion by the uncontested right of the owner of a single-member LLC to transfer the owner’s full interest. Also supporting the decision is the fact that Florida’s Limited Liability Company Act does not have a provision prohibiting a creditor’s remedy of levy and sale under execution.

In Olmstead v. FTC, the appellants, owner-members of the LLCs at issue, were several single-member LLCs that effectively operated an advance-fee credit card scam. The FTC brought suit against the LLCs for violations of §5(a) of the Federal Trade Commission Act, 15 U.S.C. §45(a). The appellants argue that the sole statutory remedy available against their ownership interests in single-member LLCs is a charging order. A charging order is a statutory remedy that allows judgment creditors to access a judgment debtor’s rights to profits and distributions from the business entity, in this case single-member LLCs, where a judgment debtor has full ownership interest. However, under a charging order, a judgment creditor is not authorized to obtain full rights, title, and interest of the membership interest.

An LLC is a type of corporate entity that allows for a taxation structure similar to a partnership, but affords limited liability similar to that of a corporation. According to the Court, an ownership interest in an LLC is equivalent to ownership of corporate stock, and therefore, it qualifies as personal property. Because an LLC ownership interest is classified as “corporate stock,” it falls within the scope of the levy and sale under execution remedy. See Florida Statutes § 56.061 (2008) (providing a list of personal and real property within the purview of the remedy of levy and sale under execution). Under this Section, a judgment creditor is authorized to levy a membership interest and obtain full title and rights to that interest.

Additionally, interests in LLCs are assignable if all non-assigning members consent to the assignment. See Florida Statutes § 608.433 (2008). Because this interest is assignable, it can be used to pay for an owner’s debts. See Bradshaw v. Am. Advent Christian Home & Orphanage, 199 So. 329, 332 (Fla. 1940). The Olmstead Court rendered § 608.433 inapplicable to the case of one-member LLCs because single owner-members can assign full rights, title, and interest to any assignee without any consent, but their own. The Court reasoned then that because single-owner-members can fully assign their interest, this full interest can be reached by judgment creditors if the judgment equals or exceeds the value of the full ownership interest.

Finally, the Court determined whether levy and sale under execution remedy should apply to LLCs and whether the charging order provision in the LLC Act limits the scope of the levy and sale under execution remedy. The Court looked to statutory construction and legislative intent. It concluded that the charging order provision is not an exclusive remedy under the LLC Act because, unlike the Florida Uniform Partnership Act and Limited Partnership Act (ACTs), the LLC Act does not include exclusive language similar to those Acts, so the remedy of levy an sale under execution serves an additional remedy to judgment creditors with respect to LLCs. Further, the charging order does not limit a levy and sale under execution in the context of single-member LLCs because like the inapplicability of §608.443 of the LLC Act, the legislature did not intend for all provisions in the LLC Act to apply to single-member LLCs. Because single-member LLCs are the only LLC entity that can fully assign all LLC rights, the limits on a charging order were not meant to apply to single-member LLCs. Accordingly, the Court held that a judgment debtor can be ordered to “surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment.”

This begs the question, what should single-member LLCs do to protect their assets? Unfortunately, the answer to that question is: only time will tell. It is uncertain whether Florida courts will interpret and apply this decision broadly or if they will apply it strictly. Further, this decision was made in the context of single-member LLCs engaged in deceptive business practices, perhaps courts will decide to limit its application to these types of cases and render it inapplicable to cases where the judgment debtor is a legitimate single-member LLC. In the mean time, single-member LLCs should tread lightly.

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