By Michael J. Herrick, Esq.
Shaun Olmstead and Julie Connell (collectively herein referred to as “Olmstead”), through certain single-member limited liability companies (“LLCs”), operated an advance-fee credit card scam. In response to this scam, the Federal Trade Commission (“FTC”) sued Olmstead and the LLCs for unfair or deceptive trade practices. FTC obtained judgment and to satisfy it they obtained an order compelling Olmstead to endorse and surrender to the receiver all of their right, title and interest in their LLCs. This ruling called into question the widely-accepted principal in most jurisdictions – including Ohio – that an LLC’s creditor’s sole remedy was to obtain a charging order against the company.
In Olmstead, the Florida Supreme Court had to reconcile two statutes. First, F.S. 608.433(4) provides a charging order remedy for creditors of LLC members:
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. [emphasis added]
F.S. 608.433(1) provides that:
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.
On the other hand, F.S. 56.061 provides that various categories of real and personal property, including “stock in corporations,” shall be subject to levy and sale under execution.” The Olmstead court found that an “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 debtors/defendants claimed that the charging order remedy in F.S. 608.433(4) was an exclusive remedy that displaced the levy and sale under execution remedy under F.S. 56.061.
An important starting point for the court’s analysis was that the sole member in a single-member LLC may freely transfer the owner’s entire interest in the LLC. The general rule under F.S. 56.061 is that the debtor’s legal or equitable interest in any property the debtor may alienate or assign is subject to payment of the debtor’s debts. Accordingly, the court found that F.S. 56.061 “authorizes a judgment creditor with a judgment for an amount equaling or exceeding the value of the membership interest to levy on that interest and to obtain full title to it, including all the rights of membership — that is, unless the operation of F.S. 56.061 has been limited by F.S. 608.433(4).”
Based on its interpretation of F.S. 608.433 as a whole, the court found that the charging order remedy did not override the levy and sale under execution remedy, because the limitation on assignee rights in F.S. 608.433(1) “had no application to the transfer of rights in a single-member LLC,” because in a single-member LLC, “the set of ‘all members other than the member assigning the interest’ is empty.” The court’s interpretation was that an “assignee of the membership interest of the sole member in a single-member LLC becomes a member — and takes the full right, title, and interest of the transferor — without the consent of anyone other than the transferor.”
In the court’s view, the charging order remedy in F.S. 608.433(4) meant that a “judgment creditor cannot defeat the rights of non-debtor members of an LLC to withhold consent to the transfer of management rights” but did not “support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor.”
The court contrasted the similar charging order provisions in Florida’s partnership and limited partnership statutes, which are expressly exclusive, with the LLC charging order provision, which is not expressly exclusive. Due to this lack of exclusivity, the court declined to read the LLC charging order statute as displacing the general judgment levy and sale statute and remedy.
The implications of Olmstead with respect to LLCs governed by Ohio law are uncertain. The relevant Ohio general partnership statute, like the Florida statute, states that a charging order is the exclusive remedy for a creditor in executing on a partnership interest, and the relevant Ohio LLC statute does not state that a charging order is the sole remedy. Furthermore, unlike the Florida statute, the Ohio limited partnership statute does not state that a charging order is the sole remedy. Based on these facts, it would be possible for an Ohio court, using the same logic as the Florida Supreme Court in Olmstead, to come to the conclusion that a charging order is not the exclusive remedy of a creditor of an Ohio single-member LLC, and that the creditor would have the right to take the debtor’s full right title and interest in the membership rights of the LLC.
Under current Ohio law, however, the Ohio Eighth District Court of Appeals, in First Merit Bank, N.A. v. Washington Square Enterprises et al., 2007 WL 2206545, has addressed this matter, and stated that a charging order is the exclusive remedy as to a LLC member’s interest. The lower court had allowed for the appointment of a receiver and held that all of the assets of the LLC (which was not a party to the action and was used for the sole purpose of owning real property) could be used to satisfy a member of the LLC’s personal debts. The court of appeals disagreed, stating
“Limited liability companies are entities separate and distinct from their owners. While Claire Gruttadauria’s membership interest in Claire Gruttadauria, L.L.C. was certainly an asset of hers which could be charged under to satisfy her judgment debt, this membership interest did not include any direct interest in the assets of the company which could be used by her creditors to satisfy her debts. Rather, a member’s judgment creditors have only the rights of assignees of a membership interest. Assignees of membership interests do not become members themselves, but only have the right to receive distributions that would have been paid to the member-assignor (citing O.R.C. 1705.18 and O.R.C. 1705.19)”
The court held that the judgment creditor of the member of a single-member LLC did not have the right to satisfy its judgment with the assets of the LLC itself, nor could the assets of the LLC be placed under the control of the creditor or in receivership.
While the Olmstead decision has not yet had an effect on Ohio law, it is clearly important for our numerous clients who also do business in Florida to be aware of. Furthermore, given the similarity between Ohio and Florida corporate law, it is likely that a case similar to Olmstead will be tried in an Ohio court in the near future. If you own a single member LLC and would like to discuss strategies for dealing with this potential liability, please feel free to contact us.