In our last post, we discussed the process for attaching a Debtor’s interest in a closely held corporation. In that post we discussed the following example. Debtor, an individual, holds a 45% interest (non-controlling) in a corporation that rents luxury properties, and is cash flowing. Your Debtor’s other obvious assets (house and car) are exempt from levy. In that post we discussed what the procedure for attachment of his shares was. What if instead of a corporation the entity was a limited liability company? This poses a different issue, but the interest is attachable (in a way) and we will discuss.
Charging Order
A charging order is the primary way to collect upon the debtor’s business interest in a partnership, limited partnership or limited liability company (LLC). See Fla. Stat. § 620.8504; Fla. Stat. § 620.1703; Fla. Stat. § 608.433(4)(a). Once a final judgment is entered, and the creditor has knowledge of the debtor’s business interest(s), the Creditor can motion the court for a charging order. The process is very straight forward.
Single Member Multi-Member Distinction
A charging order provides the creditor with only the rights of an assignee as to the Debtor’s interest. This allows the creditor to receive Debtor’s distributions but does not allow Creditor to assert control over the business through the Debtor’s interest. In the case of a partnership and a single-member LLC, however, the charging order creates a lien that Creditor can foreclose upon pursuant to a court-ordered foreclosure sale. See Fla. Stat. § 608.433(6); Fla. Stat. § 620.8504(2). A foreclosure sale via charging order is not available against an interest in a multi-member LLC or a limited partnership. Fla. Stat. § 620.1703(3).
The Supreme Court of Florida ruled in Olmstead v. Federal Trade Commission, 44 So.3d 76 (2010), that a judgment debtor could surrender all right and title in the debtor’s limited liability company to satisfy an outstanding judgment.” 44 So.3d at 78. The Court recognized that a “LLC is a type of corporate entity, and an ownership interest in an LLC is personal property that is reasonably understood to fall within the scope of corporate stock.” Id. at 80. The Court in Olmstead reasoned “the general rule is that where one has an ‘interest in property which he may alien or assign, that interest, whether legal or equitable, is liable for the payment of his debts.’” Id. at 80 (quoting Bradshaw v. Am. Advent Christian Home & Orphanage, 199 So. 329, 332 (1940)).
Conclusion
While the Charging Order Remedy in our example would not allow for Creditor to take over the Debtor’s 45% interest outright, the Creditor would serve a copy of the charging order on the LLC and the business would be forced to pay the distributions that would flow to the debtor to Creditor until the judgment is satisfied. The Charging Order is a great tool when you have a profitable limited liability company or partnership. If you have any questions about the Charging Order process or any collection questions contact Andre Law today.