From Bus Law Prof:
The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order. Although the case was based on a single-member LLC, the Court's rationale could extend to multi-member LLCs as well.
This case is probably the death knell for single-member LLCs in Florida until the Florida legislature fixes the sole remedy issue. Also, because this is a case of first impression in the United States under this type of wording of the statute, it may be precedential to other jurisdictions with similar wording.
My ABA Committee on Corporate Laws colleague Stuart Ames sent along this excerpt from his forthcoming book on Florida business entities:
In Federal Trade Commission v. Olmstead, 528 F. 3d 1310 (11th Cir. 2008), the Court of Appeals certified the following question to the Florida Supreme Court: “Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all “right, title and interest” in the debtor’s single-member limited liability company to satisfy an outstanding judgment” (i.e., is “reverse veil piercing” permitted). The certified question was answered in the affirmative by the Florida Supreme Court in a five-to-two decision rendered on June 24, 2010. Olmstead v. Federal Trade Commission, 2010 WL 2518106 (Fla.). Although ss. 608.433(4) appears to limit the right of a judgment creditor to obtain a charging order and be only an assignee of the member’s economic interest, the Olmstead decision permits the creditor to foreclose on the membership interest of the debtor. Unless the decision is overturned by legislation, it is expected that this decision will have a profound effect on the way single-member LLCs are used in business transactions and for asset-protection and estate planning purposes and may dissuade the formation of such entities in Florida. Moreover, as the dissent in the opinion pointed out, the decision may also have implications for the protection afforded to an LLC and its members in a multi-member LLC. See also, In re: Ashely Albright, 2003 Bankr.Lexis 291 Bank. (D.Colo. April 4, 2003), in which the Bankruptcy Court, applying Colorado law, permitted a bankruptcy trustee of a member of a single-member Colorado LLC to control the LLC and reach its assets, noting that “To the extent a debtor intends to hinder, delay or defraud creditors through a multi-member LLC with ‘peppercorn’ co-members, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse [to the assets of the LLC].” For a discussion of “reverse piercing” in the corporate context, see Section III.D of the Overview to Florida Business Corporations.
On the subject of LLC veil piercing, see my article Abolishing LLC Veil Piercing, which argues that:
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?
On reverse veil piercing, see my earlier post Outsider reverse veil piercing:
This post is specifically prompted by C.F. Trust, Inc. v. First Flight L.P., 580 S.E.2d 806 (Va.2003), in which the Virginia supreme court recently recognized outsider reverse piercing as valid under Virginia law. (For those who want even more information on regular veil piercing, reverse veil piercing, and/or outsider reverse veil piercing, you can buy my Corporation Law and Economics text and flip to Chapter 4.)
The CF Trust court opined “that there is no logical basis upon which to distinguish between a traditional veil piercing action and an outsider reverse piercing action. In both instances, a claimant requests that a court disregard the normal protections accorded a corporate structure to prevent abuses of that structure.” Au contraire. The problem presented by outsider reverse veil piercing is reminiscent of the issues raised by the old "jingle rule" of partnership law. Section 40 of the UPA (1914) provides that personal creditors of a partner have priority with respect to the partner's personal assets and creditors of the partnership have priority with respect to partnership assets. The "jingle rule," however, has been superseded for all practical purposes by section 723 of the federal Bankruptcy Code. That section provides that the firm's creditors will be paid out of firm assets and then have equal rights to participate with personal creditors in dividing up personal assets. The rationale for this change seems to have been that prospective creditors of the partnership rely on the creditworthiness of the individual partners in making lending and contracting decisions. In response to the federal law, UPA (1997) section 807 de facto repealed the jingle rule.
UPA (1997) thus does not allow a personal creditor of a partner direct access to partnership assets. Section 502 limits the partner's "transferable interest" in the firm to "the partner's share of the profits and losses of the partnership and the partner's right to receive distributions." Section 504 then allows a "judgment creditor" of a partner to "charge the transferable interest of the judgment debtor to satisfy the judgment." In effect, the creditor thus gets a lien on the partner's interest. Although a creditor who has foreclosed on that lien may seek judicial dissolution of the partnership, a court will only grant dissolution if "it is equitable to wind up the partnership business." UPA (1997) section 801(6).
Corporate law does not contain comparable provisions, but essentially the same result obtains through application of the standard judgment collection rules. Courts that accept outsider reverse veil piercing, however, disrupt this scheme by allowing personal creditors of a shareholder direct access to corporate assets.
To the extent that outsider reverse veil piercing effectively gives priority to personal creditors in the corporate setting, it seems just as problematic as the old jingle rule, albeit for slightly different reasons. As with the jingle rule question, the issue is: whose creditors shall have priority with respect to which assets? Outsider reverse veil piercing allows the creditor to avoid the more demanding proof required by traditional theories of conversion or fraudulent transfer. Outsider reverse veil piercing also effectively bypasses the standard approach to collecting a judgment against a corporate shareholder, in which the creditor attaches the debtor's shares in the corporation rather than the assets of the corporation itself. Unsecured creditors who relied on firm assets in lending to the corporation are thus disadvantaged. Similarly, if there are other shareholders, their interests are adversely affected if the corporation's assets can be directly attached by the personal creditor of one shareholder. In contrast, in ordinary (i.e., forward) veil piercing cases, a creditor may reach only the assets of the controlling shareholder who is determined to be the corporation's alter ego.
