Ward on Iowa Limited Liability Company Law

Do Stock Restrictions Belong in the Articles or Bylaws?

This has nothing to do with LLCs, but then I don't limit my practice to just LLCs.

The Iowa Business Corporation Act, like most corporate statutes, permits the articles of incorporation, bylaws or an agreement among shareholders to "impose restrictions on the transfer" of shares.  Iowa Code 490.627.

But Iowa Code 490.601 and 490.602 require certain stock rights and limitations to be exclusively in the articles of incorporation.

How do you know when a provision must be in the articles and not the bylaws?  Kansas Heart Hospital, LLC v. Duick, et al, 184 P 3rd 866 (May 16, 2008) offers a helpful rule of thumb.  In that case, which has little to do with an LLC despite the lead plaintiff, the Kansas Supreme Court concluded that a restriction that affects an entire class of stock instead of certain shareholders of the stock, must be in the articles.  Put another way, if a restriction operates against the holder of the stock, but not the stock itself, it can appear in the bylaws.

In this case, the court upheld a bylaw restriction that permitted the corporation to redeem the stock of stockholders who invested in a competing health care facility.

The case is also worth reading (a) for an explanation of the difference (or lack of difference) between "purchase" and "redeem" (b) as an application of the business judgment rule to what appears to be a situation not requiring "judgment" and (c) as an example where shareholder-directors are independent for purposes of applying the business judgment rule.

-Marc Ward

Beer Bust: InBev takes on Anheuser-Busch

As part of its battle to acquire Anheuser-Busch (AB), InBev filed a declaratory action in Delaware Chancery Court yesterday seeking the court's judgment that InBev could remove all AB directors from the board without cause by obtaining the written consent of a majority of the shareholders to do so.  You might think they would wait for the annual meeting to wage a proxy battle, but the terms of 5 of the 13 directors are not up until 2009.

This issue arises from the fact that prior to 2007 AB's directors were divided into three classes so they could be elected to 3-year staggered terms.  Such "classified" directors could not be removed except for cause under Delaware law.  See 8 Del. C. 141(k).  Unclassified directors can be removed without cause.  Id.

In 2006 the AB shareholders approved an amendment to its certificate of incorporation that declassified the directors beginning in 2007.  Directors elected to 3-year terms in 2006 still have a year to go in their terms. 

The question for the court seems to be whether declassified directors serving out their classified terms can be removed without cause.  You can access the complaint here.

Fascinating question, but it is curious that InBev isn't willing to assert a cause for removal since it implies in paragraph 4 of its complaint that the current directors have not complied with their fiduciary duties.

-Marc Ward

Insolvency at the Time as a Consideration for Piercing the Veil

As I have appointed out in an earlier post, some states (Texas and Idaho, for two) have as an element for piercing the veil of limited liability the nonsensical notation of insolvency at the time of the event giving rise to the cause of action.  South Carolina is another state in this column.  See Ashley II of Charleston, LLC v. PCS Nitrogen, Inc., 2008 US Dist. LEXIS 47262 (June 13, 2008).

The problem, of course, is that this seems to imply that members have a continuing duty to maintain the capitalization of an LLC.  This is contrary to the statutory concept of limited liability as well as the provisions of most LLC operating agreements. 

Unfortunately, Iowa may be one of these states since the Supreme Court has been less than clear in articulating its position.

-Marc Ward

Duties owed by Directors of Insolvent Entities

Occasionally reading one case sends me off in an unexpected direction to another case and then another.  Such was the case, so to speak, recently.

While skimming a run-of-the-mill breach of fiduciary duty case I eventually ended up reading North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A 2d 92 (Del. 2007) and Trenwick America Litigation Trust v. Ernst & Young et al, 906 A 2d (Del. Ch. 2006).

North American Catholic reminds us that when a corporation is solvent the shareholders may enforce the directors' fiduciary duties owed to them and the corporation by derivative action.  When a corporation is insolvent the creditors "take the place of the shareholders" and have standing to bring a derivative claim against the directors for breaches of fiduciary duty.  North American Catholic, 930 A 2d at 101.  This case stands for the additional proposition that creditors do not have a direct claim against directors for breaches of fiduciary duty.  Id. at 94.

Trenwick nips in the bud another cause of action creditors have tried to advance lately; the claim of "deepening insolvency."  Trenwick, 906 A 2d at 174.  As Judge Strine put it in a delightful, if lengthy, 36 page opinion, "Put simply, under Delaware law, 'deepening insolvency' is no more of a cause of action when a firm is insolvent than a cause of action for 'shallowing profitability' would be when a firm is solvent."  Id.

I recommend both opinions to those interested in the impact of insolvency on the duties of directors.

-Marc Ward

Sometimes Being Stupid can be as Bad as Being Greedy

"This case underscores the reality that it is not only greed that can inspire disloyal behavior by a business fiduciary.  In fact, when a business fiduciary lives a plush and comfortable life, derived from substantial distributions from family trusts, he can afford to place other considerations -- such as the achievement of a personal dream, a desire to prove himself a CEO, or a stubborn refusal to admit failure -- ahead of the prudent pursuit of maximum profit, having a silk-sheeted safety net to fall back upon.  In this case, that is just what happened." Venhill Limited Partnership v. Hillman, 200 Del. Ch. LEXIS 67 (June 3, 2008).

Well said!

-Marc Ward

The No Successor Liability Rule and LLCs

Corporate doctrines continue to be applied to limited liability companies.  A recent example is application of the no successor liability rule to an LLC in Milliken v. Duro Textiles, LLC, 887 NE 2d 244 (Mass. May 30, 2008).

The traditional corporate law principle followed by most courts, including Iowa, holds that the liabilities of a selling corporation (LLC) are not imposed upon the successor corporation (LLC) which purchased its assets.

There are four exceptions to this rule:  (1) the successor entity agrees to assume the liabilities of the predecessor; (2) the transaction is a de facto merger (Iowa doesn't recognize this exception); (3) the successor is a "mere continuation" of the predecessor; or (4) the transaction is fraudulent.

The Milliken case dealt with the mere continuation exception.  The court also noted that many courts consider the de facto merger and mere continuation exceptions interchangeably, which may be the reason Iowa doesn't bother with the de facto merger exception.

Under both exceptions the courts compare the owners, management, assets, operations and physical locations of the predecessor and the successor.  No single factor is dispositive and the facts must be considered on a case-by-case basis.  It is a classic substance over form test or as one court put it, is the buyer "merely a 'new hat' for the seller?"

In Milliken the court concluded that New Duro, as the successor was called, was merely a new hat for Old Duro. The secured lenders owned 51% of Old Duro and all of New Duro, which they created to acquire the assets of Old Duro (but not the unsecured liabilities).  Management was the same between the old and new companies, operations were the same, and the physical location was the same.  Old Duro ceased its old line of business and became the landlord to, you guessed it, New Duro.  The court imposed Old Duro's unsecured obligations on New Duro.

The lesson here, particularly for lenders, is not to assume that form will prevail over substance and secured lenders are not impervious to the equitable power of the courts.

The most recent Iowa case on successor liability is Pancratz v. Monsanto, 547 NW 2d 198 (Iowa 1996).  In that case the Iowa Supreme Court reaffirmed its commitment to the majority rule that "a corporation that purchases the assets of another corporation assumes no liability for the transferring corporation's debts and liabilities."  The Iowa Supreme Court also recognized the exceptions noted in Milliken (other than de facto merger).

The Pancratz case is also significant for the fact that the Iowa Supreme Court refused to create another exception for no successor liability to product liability cases.

-Marc Ward

David Walker's Presentation Outline to the Iowa State Bar Association

Dean David Walker and I made a joint presentation at the Iowa State Bar Association's 135th Annual Meeting on Wednesday regarding the new Iowa LLC Act.  My presentation outline was posted here that afternoon.

David has graciously given me permission to also post his outline.  You can find it here.

-Marc Ward

Existing LLCs under the New Iowa LLC Law

At yesterday's session on the new Iowa LLC Act, Dean Walker and I were asked what lawyers should do about existing LLCs and operating agreements.  A great question.  You need do nothing until January 1, 2011 when the current law expires.  The current articles of organization will be deemed to be the certificate of organization under 489.  Any management provision in the articles of organization will be deemed to be contained in the operating agreement.  See generally, Iowa Code 489.1304 (2009).

If you want to get a jump on 2011 or consider opting-in to Chapter 489 before 2011, consider performing an operating agreement audit of the following subjects:

1.  If the LLC is manager-managed, does it expressly provide that it is "manager-managed," "managed by managers," management is "vested in managers" or words "of similar import" as required by Iowa Code 489.407(1)?

2.  Should the operating agreement restrict, eliminate or alter the duties of loyalty and care or any other fiduciary duties as permitted by Iowa Code 489.409(4)-(7)(2009)?

3.  Are the manager-managed rules described in Iowa Code 489.407(3) regarding management rights and decision-making adequately addressed?

4.  Because transferees of transferable interests have few rights under the default provisions of the new law, are they adequately protected in the operating agreement?  See Article 5 of Chapter 489.

5.  Dissociation is a new concept introduced in Chapter 489, although the Chapter 490A concepts of withdrawal, termination and cessation of membership (see in particular 490A.712) are similar.  How is dissociation dealt with in the operating agreement?  Are there any gaps that need to be addressed?

Of course, general rules may not cover the terms of a particular operating agreement, but these 5 points are a good start.

If you wish to adopt Iowa Code 489 before 2011, the new law permits it.  Iowa Code 489.1304(1)(b) allows an LLC formed before January 1, 2009 to elect to be subject to 489 by amending its operating agreement to that effect.

-Marc Ward 

Presentation Outline to the Annual Meeting of the Iowa State Bar Association

This afternoon David Walker and I had the honor and the pleasure of presenting the new Iowa LLC Act at the 135th Annual Meeting of the Iowa State Bar Association. 

As many of you know, David recently retired as Dean of the Drake Law School.  He also chaired the NCCUSL Drafting Committee that created the Revised Uniform Limited Liability Company Act which forms the basis of the new Iowa statute.

In my half of the presentation I discussed (a) Formation (b) Shelf LLCs (c) Series LLCs (d) Dissociation (e) Transferees and (f) Piercing the Veil.

You can obtain a copy of my outline here. 

-Marc Ward

The Case of the Naked Transferee

Without careful drafting in the operating agreement, a transferee of a transferable interest in an Iowa LLC can be an uncomfortable and unsatisfactory status.

Understanding the terminology is important before getting to the specifics.  Under the new Iowa LLC law (Iowa Code §489.102(24) and (25) (2009)):

A.        “Transferable interest” means the right, as originally associated with a person’s capacity as a member, to receive distributions from a limited liability company in accordance with the operating agreement, whether or not the person remains a member or continues to own any part of the right.

B.         “Transferee” means a person to which all or part of a transferable interest has been transferred, whether or not the transferor is a member.

Transfers of transferable interests are permissible and do not by themselves cause a member to dissociate or the LLC to dissolve. Iowa Code §489.502(1) (2009).  And herein lies the problem. When a member transfers a transferable interest, the transferor retains the rights of a member other than the interest in distributions transferred and retains all duties and obligations of a member. Iowa Code §489.502(7) (2009). 

The member can only lose this right if (a) she transfers her entire transferable interest and (b) the other members expel her by unanimous vote.

Transferees of a transferable interest who do not become members have few rights other than to receive distributions:

1.      They have no role in the management of the LLC;
2.      They have no right to information under 489.410; and
3.      They have no right to bring a derivative action.

One right granted to transferees in the Iowa Act not found in the RULLCA is the right of a transferee to seek judicial dissolution if the managers or those members in control of the LLC have acted illegally, fraudulently or oppressively.  See Iowa Code 489.701(1).  Throw the dog a bone.

Because there are a lot of ways a member or his successors in interest can become transferees and many are inadvertent (e.g. death), it is imperative that the issue be addressed in the operating agreement.  Some sort of buy-back clause or other buy-sell provision should be considered by the members and included in the operating agreement.

If a buy-back or buy-sell provision was overlooked, to avoid mere transferee status, it might behoove a transferee who does not expect to become a member to have the transferring member keep a fraction of the transferable interest and agree to exercise its governance rights in a manner that protects the transferee.

-Marc Ward

When Fraud or Injustice Need Not be Shown

Iowa is typical in claiming to pierce the corporate or LLC veil only "where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate a fraud or promote injustice.  See e.g. Briggs Transp. Co. v. Starr Sales Co., 262 NW2d 805, 810 (Iowa 1978).

A recent Connecticut case throws doubt on the need to show fraud or injustice to pierce the veil.  In Double G.G. Leasing, LLC v. Underwriters at Lloyds, 2008 Conn. Super. LEXIS 1305 (May 16, 2008), the Connecticut Superior Court concluded that the "Identity Theory" does not require a showing of fraud or violation of a legal duty (as opposed to the "Instrumentality Theory" which does require such a showing.)  It is vague and contradictory on the matter of proving an injustice.

In Double GG the plaintiff brought an action against Lloyd's of London to recover on an insurance policy.  The plaintiff was an LLC whose sole member and manager was Carl Glatzel, Jr.  The LLC's only asset was a duplex purchased on February 25, 2005.  The LLC obtained an insurance policy against loss or damage to the property by fire on March 19, 2005.  Less than 5 weeks later, on April 24, 2005, the duplex was destroyed by fires "of incendiary origin that were ignited at two separate locations at the rear of the building with the use of flammable liquid accelerant."

How does this case become a piercing the LLC veil case?  Because Lloyd's sought Glatzel's personal tax returns and denied the claim when he refused.  His refusal was based on the theory that the policy only requires the LLC to turn over financial records including tax returns.  The Court agreed that the policy only applies to the LLC, but then pierced the LLC veil under the Identity Theory and held that duties under the insurance policy are imposed on Glatzel as well as the LLC.

The sole fact that caused the court to reach this conclusion was the fact that when his wife was threatening divorce Glatzel had, on the advice of counsel but without his father's knowledge, transferred his interest in the LLC to Glatzel, Sr., but continued to manage its affairs, and had his father reconvey the LLC interests to him once marital harmony was restored.

The court concluded that such facts revealed "a unity of interest and ownership between Glatzel and the company and a complete lack of independence of the latter" sufficient to pierce the veil.  The court also made some noise to the effect that recognizing a separate identity for the LLC would "defeat justice" but that can be said in just about every case; why else is there a dispute?

To guard against such outcomes members of single member LLCs need to be sure that separate books are kept, commingling of funds prohibited, and other distinctions between the LLC and the sole member are observed.

-Marc Ward

Exculpatory Provision? What Exculpatory Provision?

Modern corporate and LLC statutes (including the New Iowa LLC law) permit corporations and LLCs to limit or exclude the personal liability of directors and managers for money damages for breach of a fiduciary duty.  There are exceptions, of course.  In the case of the New Iowa LLC law the exceptions are (i) any breach of the duty of loyalty, (ii) deriving a personal benefit for which the manager was not entitled, (iii) an improper distribution, (iv) an intentional infliction of harm on the LLC or member or (v) an intentional violation of criminal law.

You might think that such a clause in an operating agreement (or the corporate articles) would exculpate a director from liability for a breach of the duty of care.  You would be wrong.

Returning to In re Bridgeport Holdings, Inc., 2008 Bankr. LEXIS 1586 (May 30, 2008), the court refused to dismiss a claim of breach of the duty of care even though the the corporation's certificate of incorporation contained the appropriate exculpatory clause.  The court cited a number of Delaware cases in support of its decision.  The rationale in this and the other cases was the presence of other claims by the plaintiff, notably a claim of breach of the duty of loyalty.

Since a breach of the duty of loyalty claim can be constructed to look and smell like a breach of care claim, as opposed to what one would naturally think would be a breach of the duty of loyalty (improper personal benefit, conflict of interest, competing with the LLC...See Iowa Code 489.409(2)(2009)), there does not appear to be much left of this supposed exculpatory provision.  And you thought legislation was supposed to mean something.

-Marc Ward

The Duty of Good Faith as a Duty of Loyalty

On May 30, 2008, the United States of Bankruptcy Court for the District of Delaware handed down a significant decision involving the duty of loyalty that directors owe a corporation.  This has important ramifications to LLCs organized under the new Iowa LLC Act.  See In re Bridgeport Holdings, Inc., 2008 Bankr. LEXIS 1586 (Del. May 30, 2008).

The Delaware courts have recently expanded the duty of loyalty to include a duty to act in good faith.  See Stone v. Ritter, 911 A.2d 362 (Del. 2006).  Failure to act in good faith has been interpreted to mean a failure to act in the best interests of the corporation or abdicating directorial duties or demonstrating "faithlessness or lack of true devotion to the interests of the corporation and its shareholders."  See Ryan v. Gifford, 918 A. 2d 341 (Del. Ch. 2007).  It has also been described as "consciously and intentionally" disregarding the responsibilities of a director "by knowingly failing to make decisions critical to the company on an informed basis." See Boles v. Filipowski, 345 B.R. 426 (Bankr. D. Mass. 2006).

This sounds a lot like a breach of the duty of care to me, which is not surprising.  Many corporate statutes, and the new Iowa LLC Act, permit a corporation or LLC to eliminate or limit a director/manager's liability to the corporation/LLC for monetary damages except for "a breach of the duty of loyalty." See e.g. Iowa Code 489.110(7)(2009).  By using the concept of good faith to construe the duty of loyalty to be just another way of saying a breach of the duty of care the courts avoid this limitation on liability.  Another example of ignoring the plain language of a statute.

-Marc Ward

Member Approval of Mergers Under the New Iowa LLC Law

A merger of an LLC requires the unanimous consent of the members of an LLC under the new Iowa LLC Act, but the operating agreement may provide otherwise.  It will not be unusual for operating agreements to provide for less than unanimous approval of mergers, but what will the minority members expect in return for giving up their right to approve a merger?

If the history of corporations is any indication, appraisal rights will be the protection sought by minority members.  As many of you know, corporate law use to require unanimous shareholder approval of mergers.  The modern trend, adopted by Iowa and most other states, allows mergers to be approved by a majority of the shareholders but also allows shareholders who dissent to the proposal to assert appraisal rights as the "exclusive remedy" if they believe they are not receiving fair value for their shares.

That sounds reasonable enough, but be careful when drafting such a provision for your operating agreements.  It will be important to make it clear that appraisal is truly the exclusive remedy for dissenting members.  Several courts have interpreted the "exclusive remedy" or similar language in the corporate statutes not to be exclusive when the majority shareholders are using the merger process to eliminate minority shareholders.  See McMinn v. MBF Operating Acquisition Corporation, 164 P. 3d 41 (New Mexico 2007).  These courts have allowed claims for breach of fiduciary duty to survive in such circumstances.

-Marc Ward

Operating Agreement Do's and Don'ts

As explained in an earlier post, the operating agreement (if there is one, be it oral, written or implied) dictates the relationship among members and the rights and duties of the managers.  The new Iowa LLC Act only matters when the operating agreement is silent (or non-existent).  But  of course, there are exceptions.

An operating agreement may not:

1. Vary an LLC's capacity to sue;

2. Vary the applicability of Iowa law regarding (a) internal affairs of the LLC and (b) the liability of members and managers for the debts, obligations and other liabilities of the LLC;

3. Vary the power of a court to require a person to sign a record, deliver a record to the Secretary of State or order the Secretary of State to file a record;

4. Unreasonably restrict the duties and rights with regard to providing information about the LLC to the members, managers and dissociated members;

5. Vary the power of a court to dissolve an LLC unlawful, fraudulent or other extraordinary misconduct;

6. Vary the ability to wind up the affairs of a dissolved LLC;

7. Unreasonably restrict the right of a member to maintain a derivative action;

8. Restrict the right to approve a merger, etc. by a member who will have personal liability as a result of such fundamental change; and

9. Restrict the rights of a person other than a member or manager with one minor exception.

The duty of loyalty may be restricted or eliminated, the duty of care can be altered (except authorization of intentional misconduct and knowing violations of the law), as can all other fiduciary duties so long as such restrictions or eliminations are not manifestly unreasonable.

The operating agreement can also prescribe standards to measure the contractual obligation of good faith and fair dealing.

The operating agreement may also establish a process by which an act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure.

Finally, the operating agreement (not the certificate of organization) may eliminate or limit a member or manager's liability to the LLC for money damages except for (a) breach of the duty of loyalty, (b) a financial benefit to a member or manager to which the member or manager is not entitled, (c) receipt of an improper distribution, (d) intentional infliction of harm to the LLC or a member,and (e) an intentional violation of law.

See Iowa Code 489.110 (2009).

-Marc Ward

S Corp stock can be owned by Single-Member LLC

In a trio of private letter rulings released on April 18, 2008, the IRS concluded that S corporation stock can be owned by a single-member LLC (SMLLC) so long as (1) the SMLLC did not elect to be treated as a corporation and (2) the single member of the LLC could own the stock directly without causing the S corporation to lose its S status. 

The fact pattern in these rulings involved existing single shareholder S corporations.  The shareholder proposed to transfer his/her shares in the S corporation to a SMLLC.  In essence the LLCs were treated as disregarded entities and the shareholder continued to be considered the shareholder of the S corporations. See PLRs 200816002, 200816003, and 200816004 (January 14, 2008; released April 18, 2008).

-Marc Ward

Charging Orders and the Albright Decision

The charging order is an arcane legal construct that will be getting a lot more attention as the increasing popularity of LLCs meets the new economic realities.  Many judgment creditors will be surprised and disappointed to learn that their judgment entitles them to nothing more than the distributions (if any) from an LLC. That is why you see challenges to the charging order like the one I wrote about yesterday. 

One of the first cases to deal with charging orders and the single-member LLC was In re Albright, 2003 Bankr. LEXIS 291 (April 4, 2003).  Ashby Albright was the sole member of a Colorado LLC.  She was also its manager.  The LLC owned Colorado real estate.  Ashby, not the LLC, was the debtor in bankruptcy.

The bankruptcy trustee wanted to take control of the LLC and sell the real estate to satisfy Ashby's debts. Albright contended that the trustee was acting on behalf of her creditors and was entitled to nothing more than a charging order under Colorado law (the Colorado charging order provision at the time was almost identical to the current Iowa provision).  Of course, this was a case about the bankruptcy trustee's authority, not that of a judgment creditor.

The bankruptcy court rejected Albright's argument. The court concluded that (1) the LLC membership interest was personal property transferred to the bankruptcy estate when she filed for bankruptcy (including both the governance rights as well as economic rights even though Colorado law made it clear that a membership interest meant only economic rights), (2) because she was a sole member of the LLC, a transferee/assignee of an LLC membership interest could become a member without the consent of the members (as required by Colorado law), and (3) the charging order serves no useful purpose with respect to single-member LLCs.  The court granted control of the LLC to the bankruptcy trustee.

Albright is an example of a reverse piercing case.  Piercing the corporate/LLC veil is achieved by going through an entity to get to the assets of the owners to satisfy the entity's debts.  In a reverse piercing the creditor goes through an individual to get to the entity's assets to satisfy the individual's debts.

Albright also raises a lot of issues regarding the treatment of single-member LLCs in the context of charging orders and bankruptcy of the single member.  To be  continued...

-Marc Ward

Charging Orders and the Single Member LLC

Anyone who spends much time with LLCs soon realizes that some of the statutory provisions have some awkward concepts. Take the definition for example.  Under current Iowa law an LLC is defined as "an unincorporated association having one or more members."  Never mind how one person associates alone ("to join or collect in a relationship"  American Heritage Dictionary).  The new definition (actually two definitions) is not much better.  Section 489.102(9)(2009) describes an LLC as "an entity formed under this Act." (not very helpful).  Section 489.104(1)(2009) describes an LLC as "an entity distinct from its members."  This also describes corporations and the New York Mets.

Which brings me to charging orders.  The concept makes a lot of sense in the context of partnerships with multiple members.  It also makes sense with multi-member LLCs.  Things start to break down when the concept is applied to single member LLCs.  Consider the following example from Florida.

Defendants, Shaun and Julie, defrauded over 200,000 individuals in a credit card scam.  A receiver was appointed over their assets including several single-member Florida LLCs in which one or the other was the member.  The defendants objected to the order requiring them to surrender "all of their right, title and interest" in their membership interests in the single-member LLCs.

Florida's charging order provision is almost identical to Iowa's current law.  However, the new Iowa LLC law is much different (see prior post). 

Defendants claimed that the "plain language" of the Florida law makes no distinction between single and multiple-member LLCs.  Therefore, all the receiver was entitled to were distributions from the LLCs (fat chance).

The FTC (for whom the receiver was appointed) countered that a charging order makes no sense in the context of a single-member LLC and is not the exclusive remedy under Florida law.  As I explained in a prior post, the FTC argued that the point of a charging order is to protect the other partners from the uninvited guest, a purpose rendered meaningless in the single-member context.

Strict interpretation of the statute, the FTC argued, leads to absurd results.  For example, the Florida LLC Act provides that an assignee only becomes a member with the consent of the other members.  Unless single-member LLCs are treated differently than multiple-member LLCs the FTC, no assignee could ever become a member.

The FTC also made the point that under Florida law an LLC member ceases to be a member upon assignment of the member's interest.  Under the charging order provision this would leave a single-member LLC without a member to dissolve and wind up the LLC. 

Thus, according to the FTC the law must be harmonized to resolve these inconsistencies and allow a judgment creditor to step in and liquidate the assets of the LLC.  I think on this final point the FTC may be stretching the statute a bit;  having the rights of an assignee is not the same thing as being an assignee.

The 11th Circuit Court of Appeals certified this issue to the Florida Supreme Court in FTC v. Olmstead, et al, 2008 US App LEXIS 11393 (May 29, 2008).  The Florida Supreme Court's decision could have a huge impact on creditors of current Iowa LLCs through 2010, but limited applicability, if any, under the new Iowa LLC law.

I'll analyze this fact pattern in light of the new Iowa LLC Act in a future post.

-Marc Ward