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Pitfalls of Single Members LLCs in Florida – Judgment Creditors Can Foreclose on Your Interest

April 11, 2016

Disclaimer:  This article does not constitute an advertisement or legal advice and does not create an attorney/client relationship. The comments herein should not be relied upon by anyone who reads them.

Limited liability companies (“LLCs”) have become one of the most popular types of entities used by businesses in Florida. Like a corporation, one of the primary purposes of the LLC is to shield the personal assets of members and limit liability for corporate debts and obligations to the assets of the company. However, the protection from personal liability is not absolute. For instance, an individual member is not shielded from liability for engaging in fraudulent or tortious conduct. Likewise, if a person forms or uses an LLC to defraud or mislead creditors or to engage in other improper conduct, then that person will be personally liable for any resulting damages.

Generally, a charging order is the sole and exclusive remedy by which a judgment creditor may satisfy a judgment from a member’s interest in an LLC or distributions therefrom. A charging order issued under the Florida LLC Act acts as a lien on the member’s interest in the limited liability company and grants the judgment creditor the right to receive distributions from the LLC that  the member would have otherwise received.

However, in the case of a single member LLC, Florida law now allows a judgment creditor to foreclose the member’s interest in the company. In the landmark decision of Olmstead v. F.T.C.,1 the Florida Supreme Court, in holding that the charging lien remedy set forth in the LLC statute is not the sole and exclusive remedy available to a judgment creditor, contrasted the nonexclusive charging order provision of the LLC Act with the exclusive charging order provisions of the Florida Revised Uniform Partnership Act. TheOlmstead Court found that Florida Statutes Section 608.433(4) does not displace a creditor’s remedy available under Florida Statutes Section 56.061 with respect to a debtor’s ownership interest in a single member LLC, and a court may properly order a judgment debtor to surrender all right, title, and interest in the debtor’s single member LLC to satisfy an outstanding judgment.2

In response to the Olmstead decision, the Legislature amended Section 608.433 to clarify the exclusive remedies available to a judgment creditor as to a judgment debtor’s interest in an LLC: (1) a charging order; or (2) a charging order followed by a foreclosure sale of the debtor’s interest in the solely owned LLC.3

Specifically, pursuant to the new Florida LLC Act, Section 605.0503, if a judgment creditor establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company. Upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. The purchaser at the court-ordered foreclosure sale obtains the member’s entire limited liability company interest, not merely the rights of a transferee. The person whose limited liability company interest is sold pursuant to a foreclosure sale or is the subject of a foreclosed charging order ceases to be a member of the LLC.

[1] 44 So. 3d 76, 80 (Fla. 2010).
[2] Id. at 83.
[3] Regions Bank v. Hyman, 2015 WL 1912251, at *6 (M.D. Fla. April 27, 2015); see also Young v. Levy, 140 So. 3d 1109, 1112 (Fla. 4th DCA 2014) (permitting garnishment violated express language of Section 608.433(4)(b)).