Bad Facts Make Bad Law
Shaun Olmstead and Julie Connell were residents of Florida when the trouble started. Shaun and Julie operated a credit card business and were charged by the FTC with perpetrating an advance-fee credit card scam. The FTC eventually obtained a $10 million judgment against Shaun and Julie, individually, and then sought to collect the judgment. Shaun and Julie each owned separate single-member limited liability companies (“SMLLCs”) and the FTC sought an order compelling each of them to surrender all their right, title, and interest in their SMLLC to satisfy the judgment. Shaun Olmstead, et. al., v. The Federal Trade Commission [Supreme Court of Florida. Case No. SC08‑1009. (June 24, 2010)] The Florida Supreme Court actually granted the order, which allowed the judgment creditor to seize, control, and sell the debtor’s SMLLC sending a shock wave through the business world.
Breach in the Firewall
Many small business owners choose to conduct business through a limited liability company, rather than a corporation or partnership. The LLC is supposed to act as a bi-lateral firewall protecting (i) each individual member from personal liability for business debts, and (2) the LLC and underlying business from personal liabilities of each individual member. The Olmstead decision basically disregarded an SMLLC as separate from its owner, which defeats the purpose of having an LLC in the first place. All states, including Louisiana, provide that a judgment creditor of a member can obtain a “charging order” against the member’s LLC interest. A charging order is a lien that affords the judgment creditor the right to distributions, if any, from the debtor member’s LLC interest, but not the right to vote, access records, or compel a distribution from the LLC. Public policy enabling charging order protection seeks to balance (i) creditor’s rights with (ii) the need to protects the company and innocent members from claims against a debtor member. The open question in Louisiana is whether charging order protection applies to SMLLCs where there are no innocent members. Because of the similarities between the Louisiana LLC Act and the Florida statute at issue in Olmstead, a member of a Louisiana SMLLC could very easily suffer the same fate.
A Charging Order is Not an Exclusive Remedy In Louisiana
The Florida Supreme Court based its decision on the construct of the Florida LLC Act, which failed to provide that a charging order was the exclusive remedy available to a judgment creditor of an individual member. As such, the Florida Supreme Court allowed the judgment creditor to employ other means to satisfy its judgment, including the seizure and sale of the SMLLC. Florida is not the only state to allow a judgment creditor to seize an SMLLC to satisfy a claim against an individual member. The common denominator in each state which allowed the seizure of an SMLLC was that the applicable LLC Act failed to provide that a charging order was the exclusive remedy available to a judgment creditor of a member. Louisiana fits squarely in this box. The Louisiana LLC Act mirrors the Florida statute at issue in the Olmstead case in that it does not provide that a charging order is the exclusive remedy of a judgment creditor of an individual member. As such, if/when the issue is tested in Louisiana, a Louisiana court may well follow the Olmstead decision allowing a creditor to reach inside a debtor’s SMLLC to satisfy a claim. Other states, such as Alaska, Nevada, and Delaware, have been more proactive. These states have taken steps to legislatively override the Olmstead decision by adopting legislation that specifically provides that a charging order is an exclusive remedy available to a judgment creditor of a member of an LLC. SMLLCs are protected in these jurisdictions, but not in Louisiana.
Play Your Hand
Anyone with an SMLCC in Louisiana should be aware of the potential for a Louisiana court to effectively disregard an SMLLC as separate from its owner and to allow a judgment creditor to reach inside an SMLLC to satisfy a claim. Organizing an SMLLC under the laws of a more favorable jurisdiction, such as Alaska, has many advantages, but will not – alone – avoid the issue because a Louisiana court may choose to apply Louisiana law to a foreign LLC if the suit is pending in Louisiana. If protecting the business of a Louisiana SMLLC is a priority, an alternative approach would be to use a multi-member LLC rather than an SMLLC. A recent case of the first impression in Louisiana (and the subject of a different blog post) establishes that multi-member LLCs provide “different and greater” protection under Louisiana law compared to partnerships and corporations. As such, charging order protection exists for multi-member LLCs in Louisiana. Layering an SMLLC with a specially designed trust with trust protector features controlled by the member would result in a multi-member LLC with enhanced asset protection, and without any loss of control. If properly structured, neither the LLC nor the trust would be required to file a tax return, which preserves the simplified tax status of an SMLLC as a “disregarded entity” for tax purposes. There are many other options to fortify or enhance liability protection associated with SMLLCs. Given the current uncertainty in Louisiana law in the wake of the Olmstead decision, owners of SMLLCs should review and carefully consider existing business and estate planning structures that employ SMLLCs.
Theus Law Offices provides a complete range of estate and business planning services with integrated asset protection techniques, including domestic asset protection trusts (a/k/a domestic asset preservation trusts). If you are facing an estate planning, business planning, or asset protection issue and need help from a Louisiana asset protection lawyer in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, or elsewhere in Central Louisiana, let our estate planning, business planning, and asset protection attorneys help you and your business.