Olmstead v. FTC Charging Order Decision Will Not Affect Delaware LLC’s

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg,com.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.

In June, 2010 the Florida Supreme Court decided the case of Olmstead, et al. v. FTC, a case certified to the Florida Supreme Court by the United States Court of Appeals for the the 11th Circuit. This is a case of bad facts making bad law. The decision of the Court of Appeals indicates a massive fraud had occurred and the assets of the defendants were to be found in several single-member Florida LLC’s. The FTC sought to require that the defendants hand over ownership of the LLC’s by way of execution process, the defendants countered that the sole remedy was a charging order and that the court could not require them to surrender ownership.
The question certified to the Florida Court was “Whether, pursuant to Fla. Stat. Sec. 608.433(4) a court may order a judgment-debtor to surrender all ‘right, title, and interest’ in the debtor’s single member limited liability company to satisfy an outstanding judgment.”

Florida Section 608.433 reads in part as follows:
608.433  Right of assignee to become member.
(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.
(4)  On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member’s interest.

The Court held in part that “…we conclude that the statutory charging order provision does not preclude application of the creditor’s remedy of execution on an interest in a single-member LLC. In line with our analysis, we rephrase the certified question as follows: ‘Whether Florida law permits a court to order a judgment debtor to surrender  all right, title and interest in the debtor’s single-member limited liability company to satisfy an outstanding  judgment.’ We answer the rephrased question in the affirmative.”

The Florida Court examined the “Generally Available Creditor’s Remedy of Levy and Sale under Execution” under Section 56.061 of the Florida Statutes. The Court recites that the remedy against a judgment debtor’s “interest in a corporation has been part of the law of Florida since 1889.” but then goes on to observe, incorrectly I would suggest, that [a]n LLC is a type of corporate entity, and an ownership interest in an LLC is personal property that is reasonably understood to fall within the scope of ‘corporate stock'”. The Florida Court bootstrapped this unusual conclusion by citing to a 1940 and to a 1911 Florida decisions. Most commentators would take strenuous exception to this conclusion. Much bad LLC law is based upon judges who went to law school when LLC’s did not exist and who fall back incorrectly upon their knowledge of corporate law to decide LLC cases.

The Florida Court next looked at the interplay between 608.433(1)&(4) and concluded first that in the case of a single-member LLC the interest in the LLC is freely assignable by the single member as there is no third party whose consent is required for the transfer an no third party whose interet needs to be protected. More significantly the Court looked at the specific language of (4) and compared it to the language found in Florida’s Limited Partnership Act and its Uniform Partnership Act. The LP Act states in Sec 620.1703(3) that it “provides the exclusive remedy which a judgment creditor of a partner or transferee may use to satisfy a judgment out of the judgment debtor’s interest in the limited partnership or transferable interest.”  The language in the GP Act was similar to the LP language. The court then concludes that as (4) does not specifically state that a charging order is the sole remedy available to the judgment creditor of the member of the LLC, then execution process is available.

Turning now to the Delaware LLC Act, Section 18-703
§ 18-703. Member’s limited liability company interest subject to charging order.
(a) On application by a judgment creditor of a member or of a member’s assignee, a court having jurisdiction may charge the limited liability company interest of the judgment debtor to satisfy the judgment. To the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of such limited liability company interest.
(b) A charging order constitutes a lien on the judgment debtor’s limited liability company interest.
(c) This chapter does not deprive a member or member’s assignee of a right under exemption laws with respect to the judgment debtor’s limited liability company interest.
(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest.
(e) No creditor of a member or of a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.
(f) The Court of Chancery shall have jurisdiction to hear and determine any matter relating to any such charging order.

The Delaware language in 18-703(d) is similar to the language found in both the Florida LP and GP Acts.  (The identical language is found in 17-703(d) of the Delaware LP Act.) The Florida Court held “The legislature has shown-in both the partnership statute and the limited partnership statute-that it knows how to make clear that a charging order remedy is an exclusive remedy.” Likewise the Delaware legislature has made clear in 18-703(d) that a charging order is the “exclusive” remedy available to the judgment creditor. An added protection afforded to Delaware LLC’s is 18-703(f) which grants jurisdiction to the Delaware Court of Chancery to hear and determine any matter relating to a charging order. While 18-703(f) does not provide exclusive jurisdiction in the Court of Chancery, the judgment debtor could commence a case in Delaware Chancery which would create a logical basis for a motion in the non-Delaware court to transfer jurisdiction.

We believe that the Delaware Act provides the best asset protection available to the member of a single-member LLC. Histroically Delaware courts have pierced the corpoate veil to allow judgment creditors to reach the assets of the stockholders of corporations in cases involving the use of the corporation to commit actual fraud by the cstockholder and other limited bad acts. The courts have applied the same reasoning to LLC’s. Bad facts will continue to result in courts looking to “do justice” and an attempt to fashion a remedy to prevent the bad actor from keeping his or her assets to the detriment of an innocent creditor. The dissent in the Florida case is illustrative and is well reasoned.

We continue to believe that the Delaware LLC Act provides the most flexible LLC law in the nation and a framework that best protects the interests of the members of the LLC.