Single Member LLCs and Olmstead

A recent Florida Supreme Court ruling in the case Olmstead v. Federal Trade Commission, SC08-1009 (Fla. June 24, 2010), has significantly changed the asset protection afforded to single member limited liability companies under Florida law.  Previously, a judgment creditor was limited by Fla. Stat. 608.433(4), which provided that a judgment creditor may charge the LLC membership interest of the debtor, but that the creditor would have only the rights of an assignee.  Essentially, the creditor would be entitled to receive distributions but not participate in management.  As the creditor could not compel a distribution, the debtor controlling a single member LLC could engage the creditor in a waiting game, particularly where non-liquid, long term assets were held by the LLC.  For this reason, LLCs have been used as asset protection vehicles.  Olmstead, however, now provides that, with respect to a single member LLC, a judgment creditor may levy on a membership interest under the general execution statute (Fla. Stat. 56.061) and obtain full title to the interest, including the full rights of membership.

The Court’s reasoning, and a lengthy dissent, are set forth in the 46-page opinion.  In short, the majority reasoned that Fla. Stat. 608.433(4) did not provide for an exclusive remedy preventing execution under Fla. Stat. 56.061.  This is contrary to the popular view among commentators and academics that the charging order is intended to be the sole remedy in the context of LLCs, just as it is in the body of partnership law which has influenced the LLC statutes.  It should be noted that Olmstead is not the first case where a court reached beyond the economic interest; a prior decision in the bankruptcy context similarly resulted in the creditor obtaining governance rights despite the applicable state statute (In re Albright, 291 B.R. 538 (D. Colo. 2003)).  It is also important to understand that Olmstead on its face applies only to single member LLCs, although, as pointed out by the dissenting Justices, it could arguably apply to multi-member LLCs.

From a legal perspective, Olmstead stands to influence rulings in other states, and is certain to be a topic of discussion during the future drafting meetings of the Florida Bar Business Law Section’s LLC Drafting Task Force, which has been preparing proposed revisions to Florida’s LLC statutes.  As a practical matter, if Olmstead is to be undone it will be by amendment to the LLC statutes.

For businesses operating as a single member LLC, Olmstead may not necessitate a change in structure.  Often the business assets will be subject to liens in favor of trade creditors or business lenders, leaving minimal unencumbered assets, and Olmstead does not broaden the ability of a creditor to “pierce the veil” and reach the individual assets of an LLC member.  However, for those utilizing a single member LLC with the goal of protecting assets placed into the LLC, that strategy must now be re-evaluated.  Contact a Florida business law attorney if you have questions about the impact of Olmstead to your LLC.

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