Prior to a recent Florida Supreme Court case, it was generally believed that the sole remedy of a judgment creditor of a Florida LLC member was to obtain a charging order against the member’s ownership interest in the LLC.  A charging order is similar to a garnishment of wages and gives the creditor the right to receive any LLC distributions that would have otherwise been made to the member, but only if and when they are made. The charging order remedy is one of the principal asset protection features of a Florida LLC because it does not entitle the judgment creditor to obtain ownership of the member’s interest in the LLC or any of the voting or management rights relating to that interest.  This puts the member of an LLC in a much better position to negotiate a reduction in the amount owed to a creditor, particularly if the member controls the LLC.

However, in Shaun Olmstead, et. al, vs. Federal Trade Commission, the Florida Supreme Court virtually eliminated the usefulness of single-member Florida LLCs for asset protection by holding that Florida law permits a court to order the owner of a single-member Florida LLC to surrender his entire interest in the LLC to satisfy an outstanding judgment against the member.  In this case, the Federal Trade Commission (FTC) sued Shaun Olmstead and Julie Connell in federal court for operating an advance-fee credit card scam.  The FTC obtained a judgment against them for injunctive relief and more than $10 million in restitution.  To partially satisfy that judgment, the FTC obtained an order from the federal trial court compelling the defendants to surrender their interests in their single-member LLCs to a receiver who had been appointed by the court.  The defendants appealed this order and the federal appellate court asked the Florida Supreme Court to decide the issue of whether a court could order the member of a single-member LLC to surrender his interest in the LLC to a judgment creditor.  The Florida Supreme Court answered the question in the affirmative.

The Florida Supreme Court’s holding in the Olmstead case is limited to single-member LLCs.  However, some of the reasoning in the court’s opinion may be used by creditors to try and bypass the charging order limitation when a judgment debtor is the member of a multi-member LLC.  The charging order originated in partnership law and its historical purpose was to protect other partners from having to take on a judgment creditor as one of their partners.  While this basic purpose of the charging order also applies to the members of a multi-member LLC, it is possible that a judgment creditor may try and use the Olmstead opinion to obtain full ownership of a member’s interest in a multi-member LLC, particularly when the members of the LLC are related or ultimately controlled by the same person.

The Olmstead case was decided by a vote of four to two and was accompanied by a very critical dissent.  Further, the Business Law Committee of the Florida Bar is currently working on comprehensive amendments to the Florida Limited Liability Company Act, which will likely include a proposal to clearly make the charging order the sole remedy of a creditor who has a judgment against the member of a Florida LLC.  This would make Florida limited liability company law consistent with Florida limited partnership law and Delaware limited liability company law, both of which explicitly provide that the charging order is the sole remedy of a judgment creditor.  It is also possible that the Florida legislature could change the Florida Limited Liability Company Act to make the charging order the exclusive remedy, but only for multi-member LLCs.  Because of the competing interests involved, it is difficult to predict whether the Florida legislature will take either of these approaches or whether it will instead accept the view of the Florida Supreme Court in the Olmstead case.

The Olmstead case has done away with one of the most important asset protection features of a Florida LLC, at least with respect to single-member LLCs.  It has also created uncertainty as to whether that protection is still available to the members of a Florida multi-member LLC.  Attorneys in our corporate department routinely advise Florida LLCs on alternatives for asset protection.