We attorneys LOVE LLCs and advised many of our clients to create LLCs to protect their assets inside the LLC from lawsuits by creditors against our clients individually. Prior to 2010 it was generally understood that if an LLC member was sued by an outside creditor and obtained a judgment against that member, then the creditor was limited to a charging order only and not to the assets inside the LLC. The charging order basically provides the creditor with monies only if the debtor member receives distributions from the LLC.
Then the world changed. In 2010 a Florida Supreme Court decision questioned that protection…Olmstead v. The Federal Trade Commission. The Olmstead court determined that a creditor was not limited to a charging order but that the debtor had to surrender all “right, title and interest” in their single member LLCs. While this language applied to single member LLCs, other language in the case had many attorneys concerned that the exclusive remedy of the charging order would not apply to multi-member LLCs.
The Legislature, in 2011, passed Fla. Stat. 608.433 which clarifies that the “charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distribution from the limited liability company”. There are still certain exceptions for single member LLCs. Attorneys affectionately call this the “OLMSTEAD PATCH” because it’s the Florida legislature’s attempt to fix the hole in the Florida LLC statute as a result of the Olmstead decision.
Fast forward to now; Florida’s Fourth District Court of Appeals recently published an important LLC opinion in Young v. Levy.
Due to business-management differences, Levy removed Young from the business. This led Young to sue Levy for injunctive relief and damages. Initially, the trial court granted Young’s requests. However, Levy soon after filed a motion to dissolve the injunction, which was granted. Then Levy moved for damages regarding attorneys’ fees. These fees were awarded to Levy, totaling $41,409.45.
To obtain this money, Levy looked to use a writ of garnishment on distributions by the LLC. The garnishee (LLC) owed over $44,000 to Young. Young claimed that he was exempt from the garnishment, while Levy filed objections, stating that the garnishment was proper.
This was the key issue analyzed by Florida’s Fourth District Court of Appeals.
Young asserted that the language in Section 608.433(5) in the Florida Statues did not allow garnishments as a proper remedy.
Levy argued that the distributions owed to Young were “profits” or “dividends”; and thus, a writ of garnishment would be an acceptable remedy.
The Fourth District Court of Appeals did not accept this argument, because the term “interest” is defined as share of profits and the right to receive distributions. This led the court to hold that a garnishment of distributions is not a proper remedy to satisfy judgment. The court reiterated the importance of the plain language of Florida Statues which emphasized that “[A] charging order is the sole and exclusive remedy by which a judgment creditor of a member . . . may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions.”
The interpretation of “exclusive remedy” only allows plaintiffs to obtain charging orders on the members’ distributions by the LLC. Plaintiffs cannot obtain a garnishment on these distributions. So the Court Ruled for Young.
The takeaway from this case for asset protection purposes is one thing, but the implications for partners starting/running a business together is another.
Should a charging order be the exclusive remedy between partners?
It is important to note that attorneys drafting operating agreements can probably get around this by having the members agree through the LLC’s Operating Agreement that in a suit between members, the exclusivity shall not apply, and members can use whatever other remedies are available by law to collect against the other member. At a minimum, the topic should at least be discussed. This would avoid the legal fees, cost, expenses and time wasted pursuing a Charging Order.
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