Prior to June 24, 2010 it was largely understood by practitioners in Florida that the only remedy which a creditor may employ against a debtor’s interest in an LLC was a charging order.  However, in June of this year the Florida Supreme Court issued its opinion in Olmstead v. F.T.C. 44 So.3d 76 (Fla. 2010), and turned that idea on its head.

Preliminarily, LLCs have traditionally been used in Florida as powerful business and estate planning vehicles because of their ability to be taxed as a partnership, while providing the security of limited liability.  They additionally limit the ability of members to assign management rights to new persons or entities.  A charging order is a remedy that had previously been viewed as the exclusive remedy by which to attack a debtor’s interest in an LLC.  It entitles a creditor to any distributions from the LLC to which the debtor would otherwise be entitled, but does not allow the creditor to exert any management authority over the LLC, and does not allow a creditor to liquidate assets of the LLC to satisfy the debt owed.  The weakness of a charging order is that a debtor (especially in a single-member LLC) can simply choose not to make any distributions, thereby limiting the effectiveness of the charging order.  

The background of the Olmstead case reflects the old adage that bad facts make bad law.  The F.T.C. sued individual defendants in federal court alleging that they had engaged in a deceptive advance-fee credit card scheme.  During the course of the action the assets of the individuals were frozen and were placed under the supervision of a receiver.  Among the assets were a number of LLCs owned by each defendant, each of which had only one member.  The F.T.C. eventually gained a $10M judgment, and instead of seeking a charging order on the defendants’ various LLCs, it requested that the court compel the defendants to “endorse and surrender to the Receiver, all of their right, title and interest” in the LLCs.  The district court granted the request, and after an appeal to the 11^th Circuit a certified question was returned to the Florida Supreme Court attempting to determine if Florida’s LLC statute allows a court to order a debtor to surrender all right, title and interest in an LLC to satisfy a judgment.

The Florida Supreme Court considered the question in a broader context, and examined whether Florida law in general (as opposed to only the LLC statute) allows a court to compel the surrender of a debtor’s interest in an LLC.  In analyzing the issue, the Court looked primarily at two statutes: F.S. 56.061, Florida’s levy and execution statute, and F.S. 608.433, an LLC statute dealing with the rights of assignees, and allowing the issuance of a charging order.  The Court noted that F.S. 56.061 allows various types of property to be “subject to levy and sale under execution,” including stock in a corporation (which was likened to an ownership interest in an LLC).  Looking to F.S. 608.433(4) the Court noted that it provides a judgment creditor the remedy of seeking a charging order against a debtor, stating that a “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 the rights of an assignee of such interest.”      

The Court keyed in on the fact that that the debtors did not argue that F.S. 56.061, by its own terms, did not extend to their ownership interests in the LLCs.  Rather, the debtors argued that the charging order remedy which was provided in F.S. 608.433(4) was an exclusive remedy which supplanted the levy and sale remedy which was provided by F.S. 56.061.  So, in coming to its decision, the Court essentially looked to whether any language in F.S. 608.433(4) caused the charging order remedy to attain exclusivity, or whether, on the other hand, the general remedy provided by F.S. 56.061 may apply in addition to the charging order remedy.  The Court found that F.S. 608.433(4) on its face did not grant the charging order remedy any exclusivity.  The Court further looked to similar provisions in the partnership act and the limited partnership act which specifically do provide for exclusivity, and found that fact to be evidence of the legislature’s intention for the remedy provided in F.S. 608.433(4) to be non-exclusive.  In the end, the Court held that the charging order remedy did not preclude the application of the levy and sale remedy, and that a debtor holding an interest in a single-member LLC may be compelled to surrender all right, title and interest to it. 

The Court’s ruling extended only to single-member LLCs, but as the dissent points out, the reasoning may apply with equal force to multi-member LLCs.  If the holding were to be applied to multi-member LLCs, it is unclear what effect that would have on the entity as a whole.  Could the creditor gain management authority in the LLC?  Could the creditor be able to force the liquidation of LLC assets to satisfy its debt?  Would any fiduciary duties attach to the creditor vis-à-vis the LLC, or its other members?  For now those questions all remain unanswered.  In the meantime, practitioners have to deal with an LLC entity which has been weakened for single-member planning, and which is fraught with uncertainty in the multi-member form.