A recent case illustrates the difference in the protection afforded debtors who own an interest in a Multi-Member Limited Liability Company (“ MMLLC”) versus an interest in a Single Member LLC (“SMLLC”).
In Pansky v. Franklin & Associates, P.A. , a law firm (“Franklin”) attempted to collect a debt from Mr. Pansky’s interest in his LLC in connection with legal services provided to Pansky by Franklin. A money judgement was obtained and Franklin filed a charging order against Daniel Pansky, LLC and also sought a transfer of Pansky’s LLC interest to Franklin.
Pansky stated that Franklin was entitled to a charging order but not the transfer of Pansky’s LLC interest. The trial court entered a charging order AND transferred the LLC interest to Franklin. Pansky appealed.
The appellate court noted that Florida Statutes provide that a charging order is the SOLE and exclusive remedy for a creditor against a MMLLC. However, the charging order is NOT the sole remedy against a SMLLC.
A charging order is merely a right of the creditor to get distributions IF distributions are otherwise made to the member. A right to foreclose allows Franklin to sell the interest to satisfy their claim. Thus, it was to Franklin’s advantage to not only obtain a charging order, but to also access to the interest to sell in a foreclosure sale.
Prior to a Florida Supreme Court Case, Omstead v. Federal Trade Commission , many practitioners were unclear as to whether a creditor could only obtain a charging order against an interest in a SMLLC. The Olmstead court answered that question in the negative and the Florida Statute was amended.
Under Florida law, if Pansky owned an interest in a SMLLC, then Franklin had to show the court that the charging order distributions would not satisfy the judgement in a reasonable time. If not, then the court could order the sale of the interest pursuant to a foreclosure sale to satisfy Franklin’s claim.
The facts were unclear to the appellate court whether Pansky owned his interest as a SMLLC or a MMLLC and reserved jurisdiction. However, as the charging order was not contested, the court granted the charging order to Franklin.
The court then remanded the proceedings to the lower court to determine whether Pansky’s LLC was a SMLLC or a MMLLC and whether, if a SMLLC, whether the interest could be transferred and foreclosed.
ADVICE: This case illustrates the difference between creditor rights against a MMLLC and a SMLLC. In Florida, the SMLLC does NOT have the same protection as a MMLLC and a creditor can foreclose on the interest in the SMLLC IF the creditor can prove that the charging order will not satisfy the judgement within a reasonable time. The rationale is that a creditor is limited to ONLY a charging order against a MMLLC is that the multi members of a MMLLC “answer” to the other members and a creditor should not be allowed to interrupt or change the operations of the LLC as to other members.
Do not forget that other states, such as Delaware, Nevada and Wyoming, DO protect SMLLCs and thus, you may want to consider those states if creditor protection of an SMLLC is important to your client.
WORD OF THE WEEK: Foreclosure is a process whereby a mortgagor (the person that is paying a debt) is terminated. The creditor can sell the interest to pay off the debt and the debtor no longer has an interest in the property.
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