Charging Order Protection for Florida Limited Liability Companies after Olmstead

On June 24, 2010, the Florida Supreme Court issued a much anticipated decision in the case of Shaun Olmstead, et al., v. Federal Trade Commission, SC08-1009 (Fla. 2010).  The Court ruled that a charging order is not the only remedy available to a judgment creditor of an owner of a Single-Member LLC ("SMLLC") under Florida law.  The Court's ruling permits a court to order a debtor to surrender the debtor's SMLLC and its assets to satisfy a judgment.  The Court came to this conclusion primarily because Florida's Limited Liability Company ("LLC") statute does not expressly state that a charging order is the only and exclusive remedy available to a judgment creditor. The Court compared the LLC statute to the statute applicable to Florida partnerships, which in contrast to the LLC statute, does specifically provide that the charging order is the only and exclusive remedy to a judgment creditor of a partner.

By way of background, a judgment creditor holding a charging order in effect has a lien against the debtor LLC member's ownership interest. However, the creditor cannot manage or liquidate the LLC or force a distribution to satisfy the claim. However, if and when distributions are made (as authorized by the LLC Manager) the creditor would be entitled to apply some or all of the distribution to satisfy the outstanding claim.

It should be noted that Olmstead does not affect or reduce asset protection for those using LLCs as a "firewall" to shield personal assets owned outside the LLC from claims that may arise from property owned inside the LLC. Olmstead only applies to claims arising outside of the LLC where the LLC owner is using the charging order to shield assets inside the LLC.

The Florida Court's decision will have impact beyond Florida in that other state courts addressing this issue may look to Olmstead for guidance in reaching their decisions.  Further, practitioners when advising clients on the creditor protection afforded by SMLLCs should be aware that as a result of Olmstead, along with other cases such as Albright (Colorado) and Ehmann (Arizona), a SMLLC may not be a good choice for protection of property from claims arising outside of the entity.

The result in the Olmstead case is bad news for owners of SMLLCs who are relying on a SMLLC to protect assets inside the LLC, such as securities or real estate, from potential future creditors whose claims arise outside the LLC (for instance, from a malpractice claim or claim arising from an automobile accident). Further, the result is troubling for owners of multi-member LLCs ("MMLLCs").  This is because the Court reached its decision based on the charging order language in the Florida LLC statute, which is applicable to all LLCs, regardless of the number of members. The decision would appear to open the door for creditors to attack all LLCs, including MMLLCs. The good news is that this case solidifies the creditor protection provided by the Florida Limited Partnership statute, which specifically states a charging order is the only remedy available, and is generally thought to be one of the most protective statutes in the United States.

Advisors counseling clients who own Florida LLCs for creditor protection purposes might consider the following options.  If a client currently owns a SMLLC, one possible solution could be to form a Florida Limited Liability Limited Partnership (LLLP) and contribute the SMLLC ownership interests to the LLLP.  At the end of the day, the client (along with a minority partner required to make a contribution to establish the partnership) would own the LLLP, which would be the owner of the SMLLC, which would own the assets to be protected.

Another solution to consider would be to convert or merge the Florida SMLLC into a SMLLC in a jurisdiction where the charging order is the sole remedy of a judgment creditor, such as Delaware. However, depending on the particular facts and circumstances it may be unclear which state's LLC law would apply to resolve a potential claim.

Further, if a client is concerned about the protection provided by a MMLLC, it may be advisable to convert the MMLLC (treated as a partnership for federal income tax purposes) to a LLLP, which is permissible under Florida law.  All assets and liabilities of the MMLLC by operation of law become the assets and liabilities of the LLLP.   At that point the client will own a partnership and benefit from a statute where the charging order is a creditor's sole and exclusive remedy.



*Editor's Note: This article was originally published in the January 2011 issue of The WealthCounsel Quarterly, published by WealthCounsel.