We wrote previously about Olmstead v. FTC and its possible effect on asset protection plans. This article is an in depth look at the Olmstead decision itself, the reasoning employed by the Justices of the Florida Supreme Court, and the dangers of using only domestic asset protection planning as opposed to a plan that incorporates offshore asset protection strategies when needed.
In the Olmstead opinion, the Florida Supreme Court decided whether the charging order is the exclusive remedy for judgment creditors of limited liability companies. Charging orders are legislatively created remedies available to judgment creditors of certain types of entities. Charging orders allow judgment creditors to collect distributions or other payments made to the members or partners against whom a judgment creditor has a claim, but the charging order specifically disallows any foreclosure of a member or partner’s interest in the entity itself. In other words, a creditor who receives a charging order with respect to a member’s (or partner’s) interest in an entity is not authorized to mandate distributions or otherwise have any managerial decision-making authority with respect to the entity.
Single Member LLC at Issue
The specific limited liability company at issue in Olmstead was a single-member LLC, and the Court held that Florida’s charging order statute was not the exclusive remedy available to a judgment creditor of a single-member LLC. The Court premised its conclusion upon “the uncontested right of the owner of a single-member LLC to transfer the owner’s full interest in the LLC and the absence of any provisions in the Florida Limited Liability Company Act for abrogating in this context the long-standing creditor’s remedy of levy and sale under execution.”
As a result of the Florida Supreme Court’s decision, the defendants in Olmstead were ordered to surrender “all right, title and interest” in their single-member LLCs. In essence, the assets held in those single-member LLCs were completely unprotected.
While the Olmstead decision clearly makes single-member limited liability companies a poor entity choice for domestic asset protection purposes, there is still uncertainty as to whether the charging order will be the exclusive remedy available to creditors of multiple-member limited liability companies. The majority of the Court premised much of its decision upon the idea that charging order protection is not the exclusive remedy available to LLCs in general, even though (i) Florida Statutes make no distinction between multiple and single-member LLCs, and (ii) the question before the Court dealt only with the latter.
Moreover, the dissent in Olmstead highlights the single most important reason that almost every protection strategy should incorporate offshore asset protection planning: “This Court does not possess the authority to judicially rewrite those operative statutes through a speculative inference not reflected in the legislation. The Legislature has the authority to amend chapter 608 to provide any additional remedies or exceptions for judgment creditors, such as an exception to the application of the charging order provision to single-member LLCs, if that is the desired result. However, by basing its premise on principles of law with regard to voluntary transfers, the majority suggests a result that can only be achieved by rewriting the clear statutory provisions. In effect, the majority accomplishes its result by judicially legislating section 608.433(4) out of Florida law.”
While the bolded portion of the dissent quoted above expresses the right sentiment, it is exactly wrong, as illustrated by the majority’s holding and the ultimate outcome for the defendants in Olmstead. It is also the reason why individuals need to avail themselves of state laws with long standing precedents and clear statutory provisions and, more importantly, why offshore asset protection strategies must be included in any comprehensive plan.
If you are currently using Florida business entities, it is recommended that you contact an asset protection attorney to discuss your planning and current situation so as to avoid a perilous outcome in the event that your assets are attacked. If you are a client of Lodmell & Lodmell, you are already protected, because we anticipate that the judiciary will legislate from the bench, and we plan accordingly.
In California, if you form an LLC with one member being yreosulf as an individual and the second member an S-Corp in which you are the sole shareholder, would this still be seen as a single member LLC being that you in reality own 100% of the newly formed LLC or would this be seen as a multi-member LLC when it comes to charging order protection?
This structure would likely not pass muster as a multi-member LLC. The other problem is that CA allows for more than just a charging order as a remedy for a creditor. You typically do not want to rely simply on a CA LLC for your asset protection. A single-member LLC in CA can be held, for example, by a Limited Partnership organized out of CA. This would ad a stronger layer of protection in most cases.