Your Single-Member LLC: Not A Mighty Fortress

The tar balls are hitting Florida’s beaches, but the state’s courts aren’t yet clogged with oil spill litigation.  With some time on its hands, the Florida Supreme Court is still able to issue advisory opinions, including its June 24 decision in Olmstead v. Federal Trade Commission, 2010 WL 2518106 (Fla. 2010).  Olmstead may not be as important as, say, Gore v. Harris, but it’s still significant, and has attracted the attention of other commentators, including Juan Antunez.

Olmstead suggests that single-member LLCs are not shielded from “reverse piercing” for debts of their sole member.  The facts in Olmstead were pretty extreme: two persons, each a member of their own single-member LLCs, were sued by the FTC for running a credit card scam.  The defendants’ assets were frozen and placed in receivership. The FTC ultimately received injunctive relief and more than $10 million in restitution.

The case ended up before the Eleventh Circuit, which certified the question to the Florida Supreme Court: “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.”  The majority opinion in Olmstead answered this question in the affirmative.

In Olmstead, the Florida Supreme Court had to reconcile two statutes.  First, F.S. 608.433(4) provides a charging order remedy for creditors of LLC members:

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. [emphasis added]

F.S. 608.433(1), in turn, provides that:

Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.

On the other hand, F.S. 56.061 provides that various categories of real and personal property, including “stock in corporations,” shall be subject to levy and sale under execution.”  The Olmstead court found that an “LLC is a type of corporate entity, and an ownership interest in an LLC is personal property that is reasonably understood to fall within the scope of ‘corporate stock’.”

The debtors/defendants claimed that the charging order remedy in F.S. 608.433(4) was an exclusive remedy that displaced the levy and sale under execution remedy under F.S. 56.061.

An important starting point for the court’s analysis was that the sole member in a single-member LLC may freely transfer the owner’s entire interest in the LLC.  The general rule under F.S. 56.061 is that the debtor’s legal or equitable interest in any property the debtor may alienate or assign is subject to payment of the debtor’s debts.  Accordingly, the court found that F.S. 56.061 “authorizes a judgment creditor with a judgment for an amount equaling or exceeding the value of the membership interest to levy on that interest and to obtain full title to it, including all the rights of membership — that is, unless the operation of F.S. 56.061 has been limited by F.S. 608.433(4).”

Based on its interpretation of F.S. 608.433 as a whole, the court found that the charging order remedy did not override the levy and sale under execution remedy, because the limitation on assignee rights in F.S. 608.433(1) “had no application to the transfer of rights in a single-member LLC,” because in a single-member LLC, “the set of ‘all members other than the member assigning the interest’ is empty.”  The court’s interpretation was that an “assignee of the membership interest of the sole member in a single-member LLC becomes a member — and takes the full right, title, and interest of the transferor — without the consent of anyone other than the transferor.”

In the court’s view, the charging order remedy in F.S. 608.433(4)  meant that a “judgment creditor cannot defeat the rights of nondebtor members of an LLC to withhold consent to the transfer of management rights” but did not “support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor.”

The court contrasted the similar charging order provisions in Florida’s partnership and limited partnership statutes, which are expressly exclusive, with the LLC charging order provision, which is not expressly exclusive.  Due to this lack of exclusivity, the court declined to read the LLC charging order statute as displacing the general judgment levy and sale statute and remedy.

Judge Lewis authored a rather impassioned dissent, which focused on concerns that the majority’s opinion was not only incorrect with regard to single member LLCs, but could be read more broadly to undercut protection for multi-member LLCs against judgment levy and sale.

KYEstates generally supports the debtor, and would like to say the dissent had the better argument, but it’s hard for us to get there.  The majority opinion seems logical.  LLCs are good “liability insulation” for their single member.  What they’re not, necessarily, is liability insulation against their single member.  By itself, this proposition just doesn’t seem that threatening.  Olmstead does indicate, however, that maximum asset protection may result from having multiple members in LLCs where possible.

Olmstead is an interesting installment in the ongoing cat-and-mouse game of asset protection.  KYEstates will continue to keep readers posted.

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