Charging Orders and Single Member LLCs

Applying partnership principles to single member entities can sometimes create havoc.  Enter the case of Olmsted v. FTC (SC08-1009, June 24, 2010).  The 11^th Circuit Court of Appeals certified a question of Florida law to the Florida Supreme Court asking the Florida court if the charging order provision of Florida’s LLC Act permitted a court to order a debtor to surrender all of his or her rights in a single member LLC membership interest to a judgment creditor, not just the economic rights (the right to distributions).  Applying the hoary judicial principle if you don’t like the answer change the question, the Florida Supreme Court broadened the question to ask whether Florida law permitted the surrender of the entire interest (the right to vote and manage the affairs of the LLC in addition to receiving distributions).

The Florida Supreme Court answered its own question in the affirmative, relying on the theory that LLC interests were akin to corporate stock (wrong!) and therefore subject to the general execution laws of the state.  It also relied on the fact that unlike the Florida partnership and limited partnership statutes that made charging orders the exclusive remedy for judgment creditors, the Florida LLC provision on charging orders omitted the word exclusive.

This decision will create confusion in those states that likewise do not include the word exclusive in their statutes.  Charging orders effectively preclude creditors from becoming “partners” with the other non-debtor owners of the entity.  In single member LLCs it makes sense that charging orders are not the exclusive remedy, albeit it takes some judicial jujitsu to get there.  It does not make sense in LLCs with more than one member, and in effect makes LLC interests more like corporate stock than they are intended to be.

Fortunately, this should not be an issue under Iowa’s new LLC Act because it is the exclusive remedy.  (Iowa Code Section 489.503). Iowa has its own peculiar provision, one that is straight from the Revised Uniform Limited Liability Company Act.  It says that if it can be shown that the distributions from an interest will not be sufficient within a reasonable period of time to satisfy the charging order, then the court can foreclose the lien and sell the interest.  Of course, it depends on the size of the lien, but if the interest isn’t generating enough money to pay the charging order, exactly what will be gained by selling the interest?  Presumably, only the economic interest is sold.  Right?

-Marc Ward