Charging Order Protection? Not So Says Florida Supreme Court.
Confusion and chaos. That's what the Florida Supreme Court created in Olmstead v. F.T.C. In Olmstead 
the Florida Supreme Court, in a 4-2 decision with a scathing dissent, ruled that Florida law allows a court to order a judgment debtor to surrender all right, title, and interest in the debtor's single-member limited liability company (SMLLC) to satisfy an outstanding judgment. The court went on to note that the charging order provision set forth in Florida Statute Sec. 608.433(4) was, on its face, a nonexclusive remedy and that the statute "does not in any way suggest that the charging order remedy is an exclusive remedy."
Olmstead correctly pointed out that the Florida statute made no distinction between a SMLLC and a multi-member limited liability company. As the dissent in Olmstead observed, because the statute makes no distinction between SMLLCs and multi-member LLCs, the court's ruling arguably applies with equal force to both SMLLCs and multi-member LLCs, so that a charging order is at best a nonexclusive remedy for multi-member LLCs as well, and "render[s] assets of all LLCs vulnerable."
In its simplest form, a charging order is an order from the court directing an entity to pay over to the judgment creditor any monies or property that the judgment debotor would have received, if and when the judgment debtor becomes entitled to a distribution. A charging order typically remains in effect until the judgment is satisfied in full.
Charging orders originated in England when Parliament enacted the Partnership Act of 1890. Prior to that time, a creditor who had a judgment against a partner of a partnership on a claim wholly unrelated to the partnership could seize partnership assets to satisfy the judgment. This wreaked havoc on partnerships because partners were powerless to prevent judgment creditors from interjecting themselves into the partnership's business.
Both the Uniform Partnership Act and Uniform Limited Partnership Act in the United States borrowed the charging order concept from England's Partnership Act of 1890. When states enacted laws permitting limited liability companies, the charging order concept was carried through to LLCs. With the possible exception of certain Nevada corporations, corporations and their shareholders do not have similar protections.
As the different states enacted legislation allowing for the creation of LLCs, some states, such as Alaska, Nevada, North Carolina (see below), North Dakota, South Dakota, and Texas to name a few, provided that a charging order is the sole remedy of a judgment creditor. Other states, such as California, Colorado, South Carolina, Utah, and West Virginia, permit a judgment creditor to foreclose on member's interest in a LLC. Until Olmstead, many Florida practitioners would have said a charging order was the sole remedy under Florida law.
While the Olmstead decision created much confusion and consternation among the Florida bar, its effects extend well beyond Florida. Many states' LLC statutes contain language similar to Fla. Stat. 608.433(4). For instance, N.C.G.S. Sec. 57C-5-03 is almost identical to Fla. Stat. Sec. 608.433(4), and makes no distinction between SMLLCs and multi-member LLCs. Although the North Carolina Court of Appeals in Herring v. Keasler held that a judgment creditor could not seize and sell the judgment debtor's membership interests in several LLCs, and instead the judgment creditor's "only remedy is to have those interests charged with payment of the judgment under N.C. Gen. Stat. § 57C-5-03," the judgment debtor in Herring only owned a 20% interest in the LLCs at issue.
Like Florida before Olmstead, North Carolina appellate courts, as well as appellate courts in a number of other states with similar LLC statutes, have yet to address this issue. While North Carolina's statute seems plain enough on its face - it should apply equally to SMLLCs and multi-member LLCs - Olmstead illustrates the risks of making any such assumption absent legislative or judicial clarification. Until then, multi-member LLCs provide the safest course of action for charging order protection.
