Bill Callison’s article, Charging Order Exclusivity: A Pragmatic Approach to Olmstead v. Federal Trade Commission, recently came out on SSRN and should be available soon in Volume 66 of The Business Lawyer. Callison’s article reviews the Olmstead court’s analysis of charging orders for single-member LLCs and suggests how the court should analyze charging orders for multi-member LLCs.
Background. In Olmstead the FTC won a judgment against Olmstead, and then obtained an order allowing it to execute on Olmstead’s member interest in his single-member Florida LLC, including his right to vote and control the LLC. Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010). By executing on all of Olmstead’s member rights, the FTC could cause the LLC to make distributions, liquidate the LLC, or take other actions.
Florida’s LLC Act gives a judgment creditor of an LLC member the right to obtain a charging order against the member’s LLC interest. Olmstead contended that the charging order remedy was exclusive and provided the only way for a judgment creditor to reach the member-debtor’s interest in the LLC.
A charging order requires that any LLC distributions payable to the member be paid instead to the creditor.Fla. Stat. § 608.433(4). A charging order does not require the LLC to make any specific distributions, so if the FTC were limited to having a charging order, it might not receive distributions or any other value from Olmstead’s rights in the LLC for a very long time. Very, very long.
Olmstead Decision. The Florida Supreme Court pointed out that the LLC Act’s charging order provision was nonexclusive on its face, and ruled that the FTC could execute on Olmstead’s full member interest. “[W]e hold that a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment.” Olmstead, 44 So. 3d at 83.
The Olmstead decision has received a lot of attention. It reduces the asset-protection usefulness of single-member LLCs, and it is from the highest court of a populous state with large centers of commerce. And many states have LLC acts with charging order provisions that, like Florida’s, lack exclusivity language. E.g., Wash. Rev. Code § 25-15-255; N.Y. Ltd. Liab. Co. Law § 607 (McKinney 2007).
As Callison points out, Olmstead leaves several questions unanswered. Is the court’s holding limited to single-member LLCs, i.e., would the result have been the same if Olmstead’s LLC had other members? How is “single member” interpreted? For example, should an LLC with two spouses as the only members be treated as a single member LLC? If the Olmstead result applies to multiple-member LLCs, to what extent can the members’ operating agreement limit the rules that would otherwise apply to a judgment creditor’s rights?
The Olmstead court saw the charging order as a special remedy, responsive to the basic principle of Section 608.433(1): “Unless otherwise provided in the articles of organization or operating agreement, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent.” This is the “pick-your-partner” principle, which is integral to partnership and limited partnership law and is a part of most partnership and limited partnership statutes. But because in a single-member LLC no other member’s consent is necessary to admit an assignee as a member, the court saw no need for the charging order to be the only remedy available to the judgment creditor.
The court also examined Florida’s general and limited partnership statutes. Both expressly provide that the charging order on a partnership interest is the judgment creditor’s exclusive remedy. Fla. Stat. §§ 620.8504, § 620.1703. As a matter of statutory interpretation, the presence of exclusivity in the partnership charging order statutes and the lack of such a provision in the LLC Act supported the conclusion that the LLC charging order was not intended by the legislature to be exclusive. Olmstead, 44 So. 3d at 82.
Extrapolation. How should the Florida court rule when a charging order case involves a multi-member LLC? Callison notes that the default rules of Florida’s LLC Act include pick-your-partner principles, and concludes that there should be a rebuttable presumption that charging orders are exclusive. Callison, supra, at 12. He proposes that in single-member LLCs, and in multiple-member LLCs whose operating agreement allows complete transferability of interests, the presumption would be overcome and the charging order would not be the exclusive creditor’s remedy. Id. at 12-13.
Callison also proposes a similar rebuttable presumption for incorporation into LLC statutes, using statutory language such as:
Charging orders are the exclusive remedy by which a member’s judgment creditors can reach the member’s interests in the company; provided, however, that if the judgment creditor can demonstrate that all or any part of the member’s interest in the company can be assigned by the member to a third party without the other members’ consent, then the charging order shall not be an exclusive remedy with respect to such freely assignable interest.
Id. at 20. This is an interesting approach – an attempt to pragmatically balance the policies of implementing “pick your partner” principles against the goal of providing judgment creditors with reasonable remedies.