Owners of LLCs Beware: Your Ass(ets) May No Longer be Protected!

By Drew LaGrande & Jeffrey M. Gad
Akerman Senterfitt, Tampa, Florida

Corporate, estate planning, asset protection and bankruptcy attorneys in the Tampa Bay and throughout Florida took notice on June 24, 2010 when the Florida Supreme issued its long awaited decision in Olmstead v. Federal Trade Comm., SC08-1009 (Fla. 6-24-2010). The case examined whether a charging order protection would apply to single-member limited liability company or LLC. The Florida Supreme Court eliminated any doubt on this issue of first impression making it abundantly clear that charging-order protections do NOT apply to single-member LLCs. Consequently, the ruling in this case permits a Court to order a judgment debtor to surrender all rights, title and interest in the debtor’s single member LLC, removing some of the luster and attractiveness of having an LLC.

The case involved a $10 million judgment obtained by the Federal Trade Commission (“FTC”) against Shaun Olmstead individually, together with his corporate entities, for operating a credit card scam. Assets of these debtors were frozen and placed in receivership, including several single-member LLCs owned by Mr. Olmstead. The FTC obtained a judgment for injunctive relief and more than $10 Million in restitution. Mr. Olmstead was ordered to surrender his single-member LLC interests in order to satisfy the restitution judgment.

To better understand this ruling, requires a general understanding of the benefits afforded to owners of partnerships and LLCs in the form of "charging orders." Prior to the Olmstead case, members of LLCs in Florida were generally afforded "charging order" protections - meaning that creditors of an individual member in an LLC were typically limited to a “charging order” against the company's interest of the debtor member. A creditor was not, however, able to reach the assets of the LLC, or to become a member in the LLC in satisfaction of the claims. Therefore, to the extent so charged, a creditor could not take possession of the assets owned by the LLC or become an owner of the units. Instead, the creditor only has rights to collect distributions if any, made by the LLC. A charging order does not, however, require the LLC to actually make any distributions.

In light of these protections, LLCs have become a popular choice of entity when it comes to owning land. Over the past few years, however, there has been some debate as to whether the charging order protection applies to single member LLCs. Historically, the policy behind the charging order was to protect one partner from the actions of the other partners in the partnership. This protection was later extended to LLCs, but LLCs can and often do have only one member, unlike partnerships which must have two or more members. Accordingly, that has opened the door for a creditor, such as the one in Olmstead, to argue there is no policy reason to extend those protections to single member LLCs, since is no need to protect one member from the creditors of the other member.

In reviewing Florida's partnership and LLC statutes, the Court found that unlike partnerships, there is no express provision under Florida's LLC Statutes that allow a charging order to be the sole remedy that can be utilized with respect to a debtor’s membership interest in an LLC. Pursuant to Section 608.433 (4), Florida Statutes, “the Court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest.” Conversely, Chapter 620 of the Florida Uniform Partnership Act was revised to provide the express written language in the statutory provisions, making it clear that charging orders are the sole exclusive remedy for partnerships.

Accordingly, the Supreme Court in Olmstead concluded that the LLC Act 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 Florida Supreme Court therefore distinguished LLCs from partnerships in finding that the charging order provision in the LLC was not the exclusive remedy single member LLCs. Accordingly, it held that a court may order a judgment debtor to surrender all rights, title and interest in the debtor single member LLC to satisfy an outstanding judgment, thus eroding one of the key benefits in owning an LLC from the standpoint of asset protection.

The well publicized dissent offered strong opinions concerning the majority’s decision and questions whether the Court has tried to “right a wrong” in a case which clearly presented bad facts. As a result of the deceptive practices of Mr. Olmstead and some of his entities, restitution was owed in the amount of $10 Million. The Court, recognizing that Mr. Olmstead was deceptive, tried to provide the FTC as much access to obtain control over his assets in order to prevent him from “getting away with deceptive acts and not making restitution to the injured parties.”

Although the holding in Olmstead applied to single member LLCs (i.e. LLCs with only one owner), many Tampa practitioners fear that Florida Supreme Court’s ruling was sufficiently broad whereby it could be read to limit "charging order" protections for multiple member LLCs. It appears there are efforts underway, however, to introduce legislation to the LLC Act which would provide for charging order protections as the exclusive remedy for multiple-member LLCs. Until then, however, these uncertainties will remain and care should be given in preparing operating agreements to protect against a member’s interest from the possibility of being surrendered to a judgment creditor.

At the end of the day, Olmstead makes clear is that no charging order protection will be afforded to single member LLCs and that is never expected to change. To that end, corporate and estate planning attorneys including those in Tampa and St. Petersburg, Florida should notify their clients about the perils of a single member LLC, bearing in mind that a single member LLC is an entity that may provide convenience, but not asset protection. Whether similar limitations will apply to multi-member LLCs remains to be seen!