Posted on September 29, 2010 by Scott Tippett

FTC v. Olmstead - Eleventh Circuit Speaks: Charging Order Is NOT Sole Remedy.

Though the result was preordained, the United States Court of Appeals for the Eleventh Circuit issued its decision in FTC v. Olmstead.  At issue in Olmstead was whether Florida law allowed a court to order a judgment-debtor to surrender all "right, title, and interest" in the judgment-debtor's single-member LLC to satisfy the claims of a judgment-creditor.  The Florida Supreme Court, in a 4-2 decision with a harshly worded dissent, ruled that a court does indeed have such power.

In a previous post, I discussed the Florida Supreme Court's decision in Olmstead v. FTC.  Briefly, in Olmstead the defendant argued that because Florida's LLC Act made no distinction between single-member and multi-member LLCs, a charging order was the sole remedy of a judgment-creditor.  Drawing an analogy to stock in corporations, which the dissent in Olmstead argued was incorrect, the Florida Supreme Court held that F.S.A. Section 608.433(4) does not establish the exclusive remedy for judgment-creditors of single-member LLCs.  Instead the Florida Supreme Court held that judgment-creditors of single-member LLCs also have the right to levy upon and sell through an execution sale, a member's interest in a single-member LLC pursuant to F.S.A. Section 56.061-even though that statute deals with stock in corporations, not membership interests in LLCs.

The Eleventh Circuit noted:

Where an LLC has only one member, no need exists to protect the interests of other members by restricting judgment-creditors to a charging-order remedy.

As flawed as the statutory interpretation behind the Florida Supreme Court's decision in Olmstead v. FTC may be, because that decision has now been adopted in a published decision of the Eleventh Circuit Court of Appeals, courts in other states with similar LLC acts, such as North Carolina, will likely look to FTC v. Olmstead for guidance.  As a result, where limiting a judgment-creditor's remedy solely to a charging order is an important planning consideration, caution would dictate steering clear of single-member LLCs.

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Posted on July 21, 2010 by Scott Tippett

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.

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