In a much anticipated decision, the Florida Supreme Court closed a statutory loophole that permitted debtors to use a wholly owned limited liability company (LLC) to put their assets beyond the reach of their judgment creditors. In Olmstead v. FTC, Case No. SC08-1009 (Fla. June 24, 2010), the Florida Supreme Court ruled that a court may order a judgment debtor to surrender all right, title, and interest in the debtor's single-member Florida limited liability company to satisfy an outstanding judgment.
Until the Florida Supreme Court's decision in Olmstead, it was generally believed that a charging order was the exclusive remedy available under Florida law.
The charging order, which originated in partnership law, permits the judgment creditor to collect distributions otherwise payable by the LLC to the judgment debtor until the debt is paid. However, the debtor's interest in the underlying company is preserved. The charging order does not permit the creditor to seize and force the sale of the debtor's ownership interest of the LLC or to vote or otherwise participate in management of the LLC.
The drafters of the Florida LLC statute never specifically focused on the hardship to judgment creditors created by application of the charging order remedy to single-member LLCs. Instead, the Florida drafters, like the drafters of many other LLC statutes, followed the general framework of charging orders in the partnership context, which by definition requires two or more co-owners.
The Olmstead case presented the Florida Supreme Court with a difficult decision between what lawyers believed to be the plain language of the statute, with its inadvertent resulting hardship to creditors in the single-member context, and recognition of an equitable remedy consistent with historical commercial law concepts.
The Florida Supreme Court solved the dilemma by ruling that the provision of the Florida LLC statute authorizing the use of charging orders does not constitute the exclusive remedy for a judgment creditor against a judgment debtor's intent in a single-member LLC. The Florida Supreme Court based its decision on the provisions of the Florida Revised Uniform Partnership Act and the Florida Revised Uniform Limited Partnership Act providing that a charging order is the exclusive remedy. In contrast, the Florida LLC statute does not specifically state that a charging order is an exclusive remedy.
Many will view the Florida Supreme Court's Olmstead decision as straining mightily to reach the equitable result, though for lenders, the court's decision will be welcome news.
A copy of Olmstead v. FTC is available at http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf.
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