Anyone with ownership interest in a single member Florida limited liability company (LLC).

Executive Summary:

On June 24, 2010, the Florida Supreme court held that a single member Florida limited liability company does not protect against an outside creditor with a judgment against the sole member of the LLC. Olmstead V. F.T.C., — So. 3d.—, 2010 WL 2518106 (Fla. June 24, 2010.)

Analysis: Facts: The facts in this case could not have been worse for the debtor. Shaun Olmstead, the debtor, ran a credit card scam operation, and the creditor in this case was the ultimate gorilla, the Federal Trade Commission (FTC). The FTC sued Olmstead and his corporate entities for deceptive trade practices and obtained a judgment. Olmstead’s assets were frozen and placed in a receivership. To partially satisfy a 10 million dollar judgment against Olmstead the FTC obtained an order compelling Olmstead to endorse and surrender to the receiver all of his right, title and interest in his various single member LLCs.

Issue: May a court order a judgment-debtor to surrender all interest in a single member LLC to satisfy an outstanding judgment pursuant to F.S. 608.433(4), or is a charging order the exclusive remedy available to a creditor of a single member LLC?

Holding: Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor’s single member LLC to satisfy an outstanding judgment and does not limit a creditor to a charging order as its sole remedy. Note: Justice Lewis wrote a strong and detailed dissent.

Discussion: The majority’s opinion rests on the uncontested right of the owner of the a single member LLC to transfer the owner’s full interest in the LLC, and the absence of any specific basis in the LLC act for negating the creditors remedy of levy and sale pursuant to Fla. Stat. § 56.061. The sole member of a single member LLC does not have to seek approval of the other members of the LLC to assign his interest in the LLC to a third party. The ownership interest is therefore fully alienable because there are no other members to fulfill the requirement of “approval of all members” for participation in management. The charging order is only a remedy for creditors when the debt is not freely transferable, but is subject to the right of other LLC members to object to the assignee becoming a member and exercising management rights that come with membership status.

In the Florida Partnership Act, which governs partnerships, a charging order is the exclusive remedy for a judgment creditor. In the LLC Act such language is omitted. Without the expressed language limiting the remedy of a judgment creditor to a charging order in the LLC Act the court reasoned there is no reasonable basis for inferring that the provision authorizing the use of charging orders under §608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor’s interest in a single member LLC.

Take Away Points For Clients:

1. If you have a single member LLC, consider adding an additional member, even if only a 5-10% interest.

2. If adding an additional member is not feasible, (a) convert to a limited partnership or specifically, a limited liability limited partnership (LLLP); or (b) consider an off-shore LLC, such as a Nevis LLC.

3. Every LLC should have a robust Operating Agreement that limits a creditor’s rights to a charging order, and has numerous other provisions preventing a creditor from interfering in the business operation of the LLC. If you do not have an up-to-date asset protection operating agreement, talk to your attorney immediately.

4. Prior to choosing an entity, consider the two primary advantages of the LLLP over the LLC: (a) A charging order is clearly the exclusive remedy against an LLLP; (b) In a LLLP, a bankruptcy filing by a debtor limited partner does not trigger a right to withdraw causing monetization of Partner’s interest; in an LLC such a filing does cause such a monetization absent contrary language in Operating Agreement.

5. Don’t mess with the FTC.

Conclusion:

If you have a single member LLC, contact your attorney to discuss options to restructure the company to provide a higher quality of asset protection. Whether you have a single member or multi-member LLC, make sure you have a strong Operating Agreement that severely limits a creditor’ rights to interfere in your business.