Sometimes state legislatures react slowly to judge-made law and sometimes they move swiftly to correct perceived problems created by court rulings. Often, such rash legislative action is not well thought-out or properly drafted, making the solution worse than the fix. However, in Florida, within one legislative session, the Florida Legislature and governor considered and enacted a set of amendments to Florida’s limited liability statute that hopefully will signal the business community that Florida knows how to pass laws that make sense.
On April 29, 2011, the Florida Senate, following the action of the Florida House, passed House Bill 253, which was intended to partially overrule the Florida Supreme Court’s ruling in Olmstead v. Federal Trade Commission. The Olmstead decision affects a creditor’s rights against a judgment debtor’s ownership interest in a Florida limited liability company. The new law was signed by Governor Scott and became law effective May 31, 2011, as an amendment to Section 608.433, Florida Statutes. Those amendments1 strike a balance between the rights of judgment debtors and creditors, and prevent a judgment debtor from parking assets in a single-member limited liability company (SMLLC).
In June 2010, the Florida Supreme Court held in Olmstead that, primarily due to a slight difference in language in the Florida limited partnership statute, that a creditor’s right to recover against judgment debtor’s interest in a SMLLC is not limited to a statutory charging order, which had previously been the understanding in the legal and business community. A charging order permits the judgment creditor only to receive any distributions that the judgment debtor actually receives from the SMLLC. In other words, under old Section 608.433(4), as a general rule, the assignee has no right to participate in the management of the business and affairs of the LLC; rather, the assignee is entitled only to share in profits and losses and to receive such distributions to which the assignor was entitled. However, the Supreme Court held, over a strong minority dissent, that a trial court may order a judgment debtor to surrender all right, title, and interest in that debtor’s SMLLC to the judgment.
Immediately after the publication of Olmstead, there was concern in much of the Bar and business community (both in and outside Florida) that courts might apply the decision to multi-member limited liability companies (MMLLC), which would severely impact the rights of non-judgment debtors and the business enterprise itself. One potential outcome of Olmstead was that businesses would simply incorporate or re-incorporate in Delaware or elsewhere where Olmstead is not the law in order to avoid the result. Were that to occur, the State of Florida would lose both franchise tax fees as well as fees for the filing of uniform commercial code financing statements. On the other hand, creditors argued that a SMLLC is effectively a type of revocable trust where a judgment debtor could “park” untold assets and simply use his or her control to refuse to make distributions and build up untouchable wealth.
The amendments created by HB 253 make the following modifications to the Florida’s charging order statute covering limited liability companies:
- It expressly states in effect that holding in Olmstead does not extend to an MMLLC. The amended statute states a charging order is the “sole and exclusive remedy” by which a judgment creditor of a member or member’s assignee may satisfy a judgment from a judgment debtor’s interest in an LLC, and says the judgment creditor cannot foreclose on a judgment debtor’s membership interest.
With respect to a SMLLC, it provides that a charging order is the “sole and exclusive remedy” by which a judgment creditor of a member or member’s assignee may satisfy a judgment from a judgment debtor’s interest in an LLC or rights to distributions from an LLC, unless the creditor “establishes to the satisfaction of the court that distributions under a charging order will not satisfy the judgment within a reasonable time.” Upon such a showing, the court may order the sale of a member’s interest in the LLC pursuant to a foreclosure sale. The judgment creditor may proceed on a dual track — that is move for the additional relief at the same time the judgment creditor applies for entry of a charging order. If successful and the court orders a foreclosure sale, the purchaser at the sale obtains the member’s entire interest in the LLC and becomes the member of the LLC, and the judgment debtor’s interest is terminated.
The new law provides that nothing in the amendments to the charging order statute shall limit: (i) the rights of a secured creditor who has been granted a consensual security interest in the LLC interest; (ii) the principles of law and equity that affect fraudulent transfers; (iii) the availability of equitable principles of alter ego, equitable lien, or constructive trust, or other equitable principles not inconsistent with this charging order statute; or (iv) the continuing jurisdiction of the court to enforce its charging order in a manner consistent with this charging order statute.
- Importantly, this new legislation is expressly stated to apply retroactively2, which means a judgment debtor can preclude a creditor from obtaining the entire membership interest without that creditor first satisfying the burdens under the amendment.
The author of this Legal News Alert was a member of the Florida Bar Business Law Section’s Study Group that, in addition to analyzing Olmstead
and its projected impact and negotiating with various other interests groups, co-drafted the proposed amendments that became law.
2 This aspect is likely constitutional as to any Olmstead order not final before the effective date of the amendments, although there likely are few cases this provision will impact.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:
Mark J. Wolfson