- Landmark Florida Supreme Court Ruling Significantly Affects Singular Member LLCs
- June 22, 2011 | Author: David W. Woodburn
- Law Firm: Buckingham, Doolittle & Burroughs, LLP - Akron Office
For years, the limited liability company (LLC) has been a popular business vehicle for small businesses and individuals hoping to better insulate their assets from creditors. The LLC was first introduced in the United States in 1977. By 1996, all 50 states had statutes authorizing the use of LLCs as a business vehicle. Given the ease with which an LLC could be formed, the lack of requirements for annual minutes and meetings, and other asset protection benefits associated with the LLC, it was often a preferred vehicle for use by business persons.
More specifically, assets owned by an LLC have historically enjoyed protection from creditors by the individual owners (members) of the LLC. Under both Ohio and Florida law, it was believed that the best a creditor of an LLC member could do would be to obtain a “charging order” against the LLC member’s interest. The charging order gave the creditors the right to receive distributions otherwise attributable to the debtor’s charged interest, but only when such distributions were made. This forced creditors to wait for significant periods of time before they could collect, if at all, on distributions to a member. When the LLC was owned by a single individual, it was unlikely that the member would authorize any such distribution and therefore the creditors would not be able to collect on their owed debt.
The Florida Supreme Court recently ruled that a charging order was not the exclusive means for creditors to reach the membership interest of a debtor who was a sole owner of an LLC. In Olmstead vs. FTC, the court was faced with a situation where the FTC sued the defendant and various corporate entities for unfair and deceptive trade practices arising out of an advanced fee credit card scam. The FTC obtained judgment and sought to satisfy it by obtaining an order compelling the defendants to endorse and surrender to the receiver all of their interests in the single-member LLCs. To the surprise of many, the court ordered that the judgment debtor surrender all of its interests in the LLCs to satisfy the judgment. This approach called into question the prevalent theory in the United States that creditors could merely obtain a charging order against such interests.
Not surprisingly, creditors throughout the country are now seizing upon the opportunity to collect against a member’s interests in single-member LLCs (and possibly multimember LLCs). Accordingly, individuals who have existing Florida LLCs should discuss their situation with counsel immediately. Even those who own Ohio LLCs should consider meeting with their attorney to determine whether or not creditors have a legitimate argument that they can bypass charging orders in seeking to collect judgments involving LLCs.
Editor and Author’s Note: Immediately before the scheduled printing of this edition of the Trusts and Estates Bulletin, the Florida legislature passed and Florida Governor Rick Scott approved House Bill 253, which revises Fl. Stat. 608.433, and states that a charging order is the sole and absolute remedy available to a judgment creditor against a member of a multi-member LLC. However, with respect to the sole member of a single member LLC, it states that a charging order is not the sole remedy available to a judgment creditor. The revisions apply retroactively. The Ohio legislature has not reacted as of this writing. Now more than ever it is critical to consult with your attorney to gauge their level of risk which they may have with respect to their particular business entity.