By Phillip B. Rarick, Esq., Miami Asset Protection Attorney
Executive Summary:
Last summer in the case of Olmstead V. F.T.C the Florida Supreme Court held that a charging order is not the exclusive remedy against a single member LLC and indicated that it may not be the exclusive remedy against a multi-member LLC. 2010 WL 2518106 (Fla. June 24, 2010.) This case revealed a major flaw in Florida law for LLC’s: it showed that a Florida LLC could be attacked more easily since the creditor of a single member LLC was not limited to a charging order against a LLC member, but rather could step into the shoes of the member. The new legislation, HB 253, signed by the Governor on May 31, makes clear that a charging order is the exclusive remedy against a multi-member and single member LLC. However, for a single member LLC, the new law provides a significant exception that creditors may be able to utilize to penetrate the LLC, rendering single member LLC’s still vulnerable.
Who is Impacted by this Legislation:
Anyone with an ownership interest in a single member or multi-member Florida limited liability company (LLC).
Key Points of HB 253
1. Clarifies that the application of Olmstead does not extend to multi-member LLC’s.
2. Provides that a charging order is the “sole and exclusive remedy” by which a judgment creditor of a LLC member may satisfy a judgment from a judgment debtors interest in an LLC. Therefore, the remedy of foreclosure on a judgment debtor’s interest is not available to the creditor.
3. With respect to a single member LLC, the charging order is the “sole and exclusive remedy” available to the creditor. However, unlike the multi-member LLC, the new legislation creates an exception: if the creditor establishes that distributions under a charging order will not satisfy the judgment within a “reasonable time” then the charging order is not the exclusive remedy, and the court may order the sale of member’s interest in the LLC pursuant to a foreclosure sale.
Take Away Points
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 Florida limited partnership or specifically, a limited liability limited partnership (LLLP); or (b) consider an off-shore LLC, such as a Nevis LLC.
3. Multi-member Florida LLC’s should provide high-quality asset protection for the members.
4. Every LLC should have an up-to-date, robust and comprehensive Operating Agreement that limits a creditor’s rights and has numerous other provisions preventing a creditor from disrupting the business operation of the LLC.
5. Do not try to set up an LLC by yourself; consult with a Florida attorney who concentrates in asset protection or corporate law.
Conclusion:
The new Florida legislation does fix a major flaw in Florida law for multi-member LLC’s by clearly stating that a charging order is the sole remedy available to a creditor. The fix for a single member LLC is not as good, in fact, it may prove to be illusory: a creditor can still by-pass the charging order restriction by showing that the charging order will not satisfy the judgment within a reasonable time.
Disclaimer
Asset protection law is a specialized and complex area of law. The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an attorney that is experienced in asset protection law. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.
For more information contact:
Phillip B. Rarick, Esq., Miami asset protection attorney, at (305) 556-5209 or email at info@raricklaw.com.