By Bill Yanger
I was recently reminded of a grade school game in Miss Bailey's class at Forest Hills Elementary. We'd sit in a circle and she'd give one kid a sentence to pass along in a whisper to the next kid who would do the same and so on and so on until it made the complete circuit. Then we'd all cackle with glee when "The big black dog chased the stick into the water" turned into "Your momma wears army boots to church" or some such nonsense. The lessons, lost on us then, are now obvious and last a lifetime.
It seems many folks have been sitting around in similar though virtual small business circles and passing along the news that in Florida, LLCs no longer provide a corporate veil of protection and one should run from them as fast as they possibly can.
Bullhonkey. They may as well have said, "Your momma wears army boots to church."
Let's try to straighten this out.
In June 2010, the Florida Supreme Court threw lawyers and their business clients a curveball when it held in Olmstead v. Federal Trade Commission that a creditor's right to recover against judgment debtors' interests in a single member LLC goes beyond a statutory charging order and allows the creditor to in essence seize the entire entity. Charging orders permit a judgment creditor to only grab distributions that the judgment debtor receives from an LLC. Under previous Florida law the creditor could receive the distributions but had no control or stake in management decisions. Then, the Olmstead Court held essentially that a judgment debtor may be forced to surrender all right, title, and interest in the debtor's single member LLC. Would multi-member LLCs be next?
But, the legislature to their credit acted quickly and in April 2011 passed legislation subsequently signed by Gov. Scott that amends the old law, addresses the Olmstead confusion and balances the rights of judgment debtors and creditors. Notably, it does prevent some judgment debtors from stashing assets in a single-member limited liability company but this was no LLC armageddon.
Keep in mind also that while Olmstead's fallout may have hinted at consequences beyond single member LLCs, the new legislation specifically states in effect that Olmstead does not apply to multi-member LLCs and that the old charging order process is still the only remedy. A judgment creditor cannot dismantle your multi-member LLC or show up one morning claiming to now own it. The charging order is also still required in a single member LLC situation and a creditor must convince the court that the charging order will not satisfy the judgment within a reasonable time in order to foreclose on the entire ownership interest.
So, when your buddy leans over and whispers in your ear that his Delaware LLC is better than your Florida LLC, just smile and tell him you know better...and that his momma wears army boots to church.