The Florida Supreme Court, in its Olmstead v. FTC decision in 2010, ruled that a judgment creditor’s rights were not exclusively limited to the charging order and that the creditor could satisfy the judgment from the judgment debtor’s interest in a single-member limited liability company. This decision sent jitters through the business community as the Court in this instance had basically altered the certainty landscape of existing laws.
What Happened In Olmstead?
The FTC had secured a judgment of $10 million against the Olmsteads. The plausible way to enforce this judgment were if the FTC could assert it against the Olmstead’s Florida single-member LLC. Now, the general rule of thumb was that, just like a partnership, judgment creditors could not attack the governing rights of members as non-debtor members should not suffer the consequences of the debtor member’s actions outside the scope of the LLC’s activities. However, economic rights of judgment debtors that were also LLC members do not enjoy as much protection so distributions from the LLC when made, could certainly be attached to satisfy the judgment. This scheme was essential in that it protected the rights of the non-debtor members such that they could still continue to run the business without fear or worry. What a judgment creditor with a charging order then had to do was to sit tight and wait for the distributions to occur before attaching such proceeds.
However, an evident problem exists in this situation if the judgment debtor is the sole member of the LLC. Knowing that there is a charging order sitting on the pavement outside the door of the LLC, would a judgment debtor that has, in this case, the sole discretion to make distribution decisions actually make a decision for the distributions to be attached for judgment satisfaction? It is a no brainer to say that distribution decisions may never happen because the single-member judgment debtor may leave such distributions as equity safely within the confines of the LLC, shielding it from the reach of the charging order. So what is a judgment creditor to do in this instance? According to the Florida Supreme Court, with its Olmstead decision, you need not worry if you are the judgment creditor. The charging order is not the exclusive remedy available at your disposal. The Court said it was permissible for the “judgment debtor to surrender all right, title, and interest in the debtor’s single-member limited liability company to satisfy an outstanding judgment.” Thus, the Court is forcing the single member to surrender governing rights, whether management or voting, among others, to the judgment creditor. That obviously is not a good position to be in if you are the judgment debtor knowing that LLCs do provide a measure of asset protection to membership interests.
In response, the Florida legislature passed a law to patch this gap created by the Florida Supreme Court decision. The legislature’s solution was to offer maximum protection essentially in favor of multi-member limited liability companies versus single-member limited liability companies. The new statute said the exclusive remedy available to judgment creditors in both single-member and multi-member limited liability companies was the charging order; however, in the case of the former, the legislature created an exception that benefits the judgment creditor. Here, if the creditor’s efforts at judgment satisfaction would be frustrated because distributions to satisfy the judgment were not happening in a reasonable time, the charging order would not be the exclusive remedy and that the court could order the sale of membership interests in foreclosure. Interestingly, the creditor could after judgment make a showing that distributions may not happen in a reasonable time possibly in the same proceeding when applying for the charging order. This leaves single-member limited liability companies without the greatest protection as membership interests are still vulnerable in the execution of such a judgment.
What Is The Situation In New York?
New York courts have rendered no decision concerning judgment creditor rights in single-member limited liability companies. However, does this Florida decision mean that single-member limited liability companies in New York should worry about such treatment in judgment creditor situations? While there is no answer to this question, in entity formation, it is important to plan around such eventuality to eliminate the possibility of the Florida outcome in the single-member context in the foreseeable future. A simple solution to the problem is to form a multi-member limited liability company in most cases. However, issues of control come to the fore as individual business owners may like to exercise control and not cede management decision-making to other members in the entity. But this should not be a sticking problem as membership rights could be demarcated along various dimensions to ensure management control lies with the majority business owner such that minority owners do not have such powers. In addition, minority interest owners need not be living persons, but other forms of entities, including trusts, could share membership interests in this multi-member limited liability company. As always, a well-drafted operating agreement that governs the rights and obligations of members in the limited liability company should be prepared towards this end.
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