Last summer, I circulated an Alert about the Florida Supreme Court’s decision in the Olmstead case (44 So.3d 76, June 24, 2010), which held that in the case of a single member LLC (SMLLC), a judgment creditor of the member was not limited to a charging order when executing its judgment on the member’s interest in the SMLLC. In that case the court allowed the creditor to reach the assets of several SMLLCs owned by the defendants. Because of the egregious activities of the defendants in that case and the kind of assets they were attempting to shield in their LLCs, most commentators believe that the Court could have reached the same result by applying equitable principles alone. However, the analyses in the majority and minority opinions raised important jurisprudential issues and provoked national attention worthy of several law review articles and even an immediate legislative response in a few states. Because of the historical reliance of the charging order rules on the “know your partner” principle, the argument for the “exclusivity” of those rules is significantly undermined in the case of SMLLCs, and the majority opinion easily seized upon this point. The Court then went on to note that the Florida LLC statute does not expressly state that the charging order is the exclusive remedy of a judgment creditor while the partnership statutes contain such a reference. The rationale used in the majority opinion raised the question of whether a charging order would continue to be the exclusive remedy with respect to multi-member LLCs, and some practitioners began advocating that their clients should organize LLCs in states where it was clear that the charging order was the exclusive remedy of a judgment creditor.
In response to the uncertainty caused by the Olmstead decision, the Florida Legislature passed a bill to amend the Florida LLC Act (Florida Statutes, Section 608.433), which was signed into law by Governor Scott on May 31, 2011. The bill clarifies that a charging order is the exclusive remedy of a judgment creditor for satisfying its judgment from the debtor's interest in a multi-member LLC. In the case of SMLLCs, however, the new law provides that a charging order will not be the exclusive remedy if the judgment creditor satisfies the court that distributions under a charging order will not pay-off the judgment in a reasonable time. In such a situation, the judgment creditor may press for other remedies, including foreclosure upon the debtor’s interest in the SMLLC. The law also provides that the person who acquires the debtor’s interest in the foreclosure sale succeeds to all of the debtor’s non-economic rights in the SMLLC and becomes a member automatically. It also clarifies existing law governing the rights of secured creditors by providing that nothing in the statute limits the rights of persons holding consensual liens (such as a pledge of the LLC interest), and providing that the principles of law and equity affecting fraudulent conveyances are not limited by the “exclusivity” references in the new law. Likewise, it provides it shall not limit “the availability of the equitable principles of alter ego, equitable lien, or constructive trust, or other equitable principles not inconsistent with this section.” The persons participating in the drafting of the new law (which included bankruptcy judges and commercial litigators) believe that these equitable remedies were already available under existing Florida law (which also points out that the result in Olmstead could have been reached without the tortured analysis that gave rise to this remedial legislation).
Some observers wondered whether the new law would provide rules to deal with situations where a person desiring asset protection organizes a multi-member LLC solely for the purpose of taking advantage of the “exclusivity” provisions applicable to multi-member LLCs. The new law does not contain any provisions for treating a multi-member LLC as an SMLLC in any situation, or disregarding “peppercorn” LLC interests held by nominees such as family members or trusts and other entities under the control of the majority owner. However, the persons participating in the drafting of the new law were generally of the view that fraudulent conveyance, constructive trust and other equitable remedies have always been and will continue to be available to creditors to address actions constituting a fraud upon them by members in multi-member LLCs.
Because the legislation is remedial and for the purpose of clarifying existing law, it will apply retroactively.