Setting the Record Straight on Florida LLCs
These past two weeks have resulted in an influx in calls from concerned clients regarding their asset protection structure in light of the Olmstead decision out of Florida. I myself have written a few articles on this case over the past year and a half. (My latest can be found here on BiggerPockets) However, as with most things in today’s society the opportunity to create drama is not lost on the peddlers of asset protection who desire nothing more than to create fear amongst the uninformed for personal gain. It is equally unfortunate that some bar associations have utilized this same technique to generate fees from attorneys under the pretense that this case could affect their clients. Here are some of the headlines I have come across in case you missed them:
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- WARNING: Single-Member Limited Liability Companies May Be Hazardous To Your Financial Health
- Your Single-Member LLC: Not A Mighty Fortress
- The Olmstead decision and the problem of single member LLCs
- Are Single Member LLCs a Ticking Time Bomb
- Single Member LLC Protections Eroding
Are the authors of these various posts providing unbiased opinions that assist the reader in implementing a sound asset protection plan for their investments? Unfortunately, in the majority of the articles, the answer is no. It appears that the purpose is to create doubt and hence entice the reader to seek help from the author before it’s too late. Let me set the record straight by giving you some background on the case and explain its implications.
Background: The FTC got a $10 million judgment against Shawn and Julie Olmstead, and sought to collect from the Olmsteads’ Florida single member LLCs. (The Olmsteads had placed several million in various Florida LLCs for asset protection.) The issue before the Court was whether the FTC could levy on the Olmsteads’ LLC interest, thereby gaining access to the millions stashed therein. The Olmsteads argued the FTC was limited to a “charging order” which would give the FTC something akin to a lien on the Olmsteads’ interest i.e., if the Olmsteads attempted to sell their interest or issued distributions, the FTC would be entitled to the distributions up to the judgment amount.
The case turned on Fla. Stat. Section 608.433(4) which sates – “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….” Emphasis added.
Without digressing into the history of partnership law and the purpose of the “charging order”, the Court held that the statute above does not state the “charging order” is the exclusive remedy available to a member’s creditors, i.e., the FTC. Once this intellectual leap was made the Court easily rationalized its ability to force the Olmsteads to surrender their various LLC interests to the FTC.
What is all the fuss about? In my opinion, it is nothing unless you are member in a Florida LLC or a LLC that is filed in a state with a similar statute. Many state LLC statues, Alabama, Alaska, Arizona, Kansas, Minnesota, Nevada, New Jersey, (North Carolina by case law), North Dakota, Oklahoma, Tennessee, Washington, and Wyoming provide that the “charging order” is the “exclusive remedy” and many others state it is the “sole remedy.” Unfortunately for Florida its statue provided neither.
How does this decision truly impact you and your LLCs?
Most likely it doesn’t unless of course you are a member in a LLC that is filed in a state that does not have the “special” language the Florida Supreme Court sought out before deciding to give away the Olmsteads’ LLC interest. For those of you who are members in a Florida LLC, or for that matter a state with a similar statute, the answer is clear – set up a LLC in a state like Nevada and assign your membership interest in your existing LLC to your new Nevada LLC. This simple move may have saved the Olmsteads millions but, if anyone has read the background of the case, it was probably a good thing they didn’t receive the advice.