On May 31, 2011, Governor Scott signed into law amendments to the Florida Limited Liability Act that significantly impact the remedies available to the creditors of an individual owning membership interest in a Florida limited liability company. These amendments, which apply retroactively, were in response to the 2010 Florida Supreme Court opinion in Shaun Olmstead et al. v. Federal Trade Commission, SC01-109 (Fla. June 24, 2010). The Supreme Court’s controversial opinion in Olmstead impacted all Florida LLCs and even caused many attorneys to reconsider their use of these Florida entities.
In Olmstead, two individuals transferred their proceeds from a credit-card scam into separate single member Florida LLCs. The Federal Trade Commission (“FTC”) obtained a judgment for more than $10 million in restitution against the individuals. To satisfy that judgment, the FTC obtained a District Court order compelling the two individuals to endorse and surrender all of their right, title, and interest in their LLCs and allowed the FTC to liquidate the assets owned by the LLCs to satisfy the individual owners’ judgments. This decision was a shock to many business lawyers because one of the main reasons that attorneys have recommended LLCs in the past was because the exclusive remedy for collections against owners of LLCs was a charging lien (meaning that a creditor could not take control of the LLC but could only attach to distributions and profits paid to the debtor-owner from the LLC).
On appeal, the Florida Supreme Court upheld the District Court’s opinion and forced the individuals to turn over their membership interests to the FTC. In its decision, the Supreme Court found that a charging order against distributions was not the sole and exclusive remedy available to a creditor of an individual owning membership interests in a Florida LLC. This decision supported the District Court’s ruling that the creditor could levy against the membership interest owned by a debtor.
The Olmstead decision significantly (and negatively) impacted individuals conducting legitimate business through a Florida LLC. Instead of only being entitled to the member’s share of distributions and profits, as is the case with partnerships and was the case with LLCs prior to this opinion, under Olmstead, creditors could lien the debtor’s membership interest. Once the creditor controls the membership interest in the LLC, the creditor can liquidate the LLC’s assets to satisfy the creditor’s judgment. For individuals operating a business as a single member LLC, this meant that their personal creditors could take control of their business and wind down the LLC’s operations. In addition, although Olmstead involved a single member LLC, the impact of the Court’s analysis on multimember LLCs remained unknown until May of this year when Governor Scott approved the new legislation.
As a result of the Supreme Court’s decision in Olmstead, the Business Law, Tax, and Real Property Probate and Trust Law Sections of the Florida Bar worked together to draft proposed legislation to protect Florida’s LLCs. With the new changes to the Florida LLC Act, a charging order (i.e., collection against distributions and profits) is now the sole and exclusive remedy by which a creditor of a member may satisfy a judgment from the member’s interest in an LLC. Fla. Stat. §608.433(5) (2011). This limitation applies to both single member and multimember LLCs.
Worth noting is that the new changes to the Act provide one significant exception to the charging lien remedy: if a creditor can show to the court’s satisfaction that the distributions from a single member LLC will not satisfy the creditor’s judgment against the member within a reasonable time, the court may order a foreclosure sale of the membership interest. Fla. Stat. §608.433(6) (2011). If the membership interest is foreclosed upon, the debtor will no longer be a member of the LLC after the judicial sale and the purchaser will become the new, sole member of the LLC. Fla. Stat. §608.433(7) (2011). In the event that purchase price at the foreclosure sale exceeds the amount of the judgment owed, the debtor will receive the excess amount. If and/or when this exception will apply depends on each specific situation. It is also worth noting that the foreclosure sale does not automatically trigger dissolution of the LLC. Accordingly, any contracts or third party considerations, such as employment contracts and lease agreements, applicable to the LLC remain intact.
With the changes in Florida’s LLC law and Act since 2010, we have made every effort to notify our current and past business law clients of the new laws. We hope that this article has been informative for you. At Bret Jones, P.A., we take great pride in staying abreast not only of the changes in Florida’s business law, but also in investigating alternative means and avenues of protecting your most valuable asset: your business. If you have any questions about your company structure, corporate or company formalities, or whether any of the recent changes in the law will affect you or your business, please call to schedule a consultation.
An intensely critical thinker, Attorney Cazobon focuses on the facts and the application of the law to the acts, rather than through social needs or media. Attorney Cazobon is one of the significant reasons that Bret Jones, P.A. rarely does “basic” estate plans but rather customized and creative means to accomplish a client’s personal goals whether those be short-term, long-term, tax-related, or part of an overall business or life plan.[/author_info] [/author]