When it comes to charging orders, the key asset protection feature of LLC’s and LP’s, there are two opposing trends.
First, some states do not provide charging order protection for a single member (one owner) LLC. The rationale is that the charging order exists to protect innocent partners, the people who were not sued by someone trying to reach their partner’s assets.
The second trend is to protect even single owners from an outside attack with a charging order. The states of Wyoming, Nevada and Delaware offer this strong protection in their state statutes. Everyone thought Florida offered strong protection until the Olmstead case was decided. The federal government was going after the single member LLC assets of a scamster named Olmstead.
The Florida Supreme Court, wanting to accommodate their government brethren found a way to declare multi member LLC’s protected by the charging order but not single member LLC’s. And so the feds were able to reach Olmstead’s assets.
But Florida law has been a bit confused ever since.
The Pansky Case
In Pansky v. Barry S. Franklin & Associates, P.A. (Fla. 4th DCA, Feb. 13, 2019), a judgment creditor brought a motion for a charging order and for transfer of the judgment debtor’s interest in an LLC. The trial court authorized both the charging order and transfer of the judgment debtor’s interest. The judgment debtor appealed, and the District Court of Appeal for the Fourth District reversed and remanded, holding that the exclusive statutory remedy available to a judgment creditor as to a judgment debtor’s interest in the LLC was a charging order.
More specifically, the Court of Appeal concluded that the exclusive statutory remedy available to a judgment creditor as to a judgment debtor’s interest in an LLC was a charging order, and that the trial court’s order transferring right, title, and interest in the LLC to the judgment creditor exceeded the allowable scope, at least where there was a factual dispute was whether judgment debtor was the sole member of the LLC.
The Facts of Pansky
The underlying facts in Pansky show that the law firm had previously represented Pansky in a divorce proceeding. The law firm withdrew as counsel, claiming it was owed attorney’s fees that Pansky had not paid. The law firm obtained monetary judgments for the claimed fees and attempted to collect on the judgments by filing a motion for a charging order against Daniel Pansky, LLC, in which Pansky had an ownership interest.
The law firm also sought transfer of Pansky’s ownership interest in the LLC to the law firm. Pansky conceded that the law firm was entitled to entry of a charging order, but objected to any transfer of his ownership interest in the LLC.
The trial court held a hearing on the law firm’s motion and orally ruled that, based on Pansky’s concession, an agreed order granting a charging order would be entered. The court stated that it would reserve ruling on any additional relief beyond a charging order that the law firm requested. The trial court entered a written order granting the charging order; however, the trial court also transferred Pansky’s “right, title, and interest” in the LLC. It is from this latter order that Pansky appealed.
The Rationale in Pansky
The District Court of Appeal for the Fourth District noted that above-quoted Section 605.0503(3), Florida Statutes, provides that a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s transferee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company; and that above-quoted Section 605.0503(1) provides that a charging order constitutes a lien upon a debtor’s transferable interest and requires the LLC to pay over to the judgment creditor a distribution that would otherwise be paid to the judgment debtor.[1]
The Court of Appeal found that a factual dispute existed as to whether Pansky was the sole member of the LLC. Pansky maintained that it was a two-member LLC, such that only a charging order was authorized, and the law firm contended that Pansky was the sole member.
The Court of Appeal observed that, at the hearing on the law firm’s motion, the trial court stated, “I don’t have enough in front of me to show it’s a one-member LLC that I can give you-all [sic] that other relief. But since there’s no opposition to the entry of the charging order, that’s granted.”
As such, the trial court stated it would “reserve jurisdiction on the other prayers for relief, such as [a freeze order] and transferring Mr. Pansky’s ownership interest” until the factual disputes were determined at a later proceeding. The law firm contended that the trial court’s order did not make a transfer of conveyance of property or assets.
The firm asserted that the order merely adjudicated the law firm’s entitlement to a charging order. The Court of Appeal found this argument unconvincing, and stated that the trial court’s order plainly contained language transferring Pansky’s “Right, title and interest” in the LLC to the law firm.
The Court of Appeal disagreed with the trial court, and concluded that the trial court’s order plainly contained language transferring Pansky’s “right, title, and interest” in the LLC to the law firm and went beyond granting a charging order–as was agreed to by the parties and authorized by statute. The Court of Appeal noted that in Abukasis v. MTM Finest, Ltd., 199 So.3d 421, 422 (Fla. 3d DCA 2016), the District Court of Appeal for the Third District reversed a trial court’s order which transferred the appellant’s “membership interest” in an LLC toward the satisfaction of a debt, finding no authority for an order directly transferring an interest in property to a judgment creditor in partial or full satisfaction of a money judgment, and stating that the trial court failed to conform with even the most rudimentary requirements of Section 605.0503.
The Court of Appeal further noted that, in McClandon v. Dakem & Assocs., LLC, 219 So.3d 269, 271 (Fla. 5th DCA 2017), the District Court of Appeal for the Fifth District explained that a charging order should only divest a debtor of his or her economic opportunity to obtain profits and distributions from the LLC, and should charge only the debtor’s membership interest, and not managerial rights. The Court of Appeal further noted that, in Capstone Bank v. Perry-Clifton Enter., LLC, 230 So.3d 970, 971 (Fla. 1st DCA 2017), the District Court of Appeal for the First District explained that a charging order instructs the entity to give the creditor any distributions that would otherwise be paid to the member of the entity.
Because the Court of Appeal found that the trial court’s order went beyond granting a charging order, as was agreed to by the parties and authorized by statute, the Court of Appeal reversed and remanded the case to the trial court.
Discussion
It would appear that the opinion of the District Court of Appeal for the Fourth District did not go far enough. Section 605.0503(4), Florida Statutes, provides:
“(4) In the case of a limited liability company that has only one member, if a judgment creditor of a member or member’s transferee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the transferee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. A judgment creditor may make a showing to the court that distributions under a charging order will not satisfy the judgment within a reasonable time at any time after the entry of the judgment and may do so at the same time that the judgment creditor applies for the entry of a charging order.”
If the trial court truly believed that the LLC had only one member, rather than two members, and relied upon the provisions of Section 605.0503(4), then the trial court perforce should have adduced evidence that distributions under the charging order would not satisfy the judgment within a reasonable time. The trial court did not do so.
Although the Court of Appeal tacitly concurred with the District Court of Appeal for the Third District in Abukasis, supra, 199 So.3d at 422, that the trial court failed to conform with even the most rudimentary requirements of Section 605.0503, the Court of Appeal failed specifically to note the trial court’s failure to comply with the explicit provisions of Section 605.0503(4).
Conclusion
Thus, in Florida, it is safe to say that charging order protection is the exclusive remedy available to a judgment creditor of an LLC, at least where there is a factual dispute as to whether the judgment debtor is the sole member of the LLC.
[1]The Court of Appeal carefully distinguished single-member LLCs, and pointed out that above-quoted Section 605.0503(4) provides that, for single-member LLCs, a charging order is “not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment”; rather, in the case of a single-member LLC, “if a judgment creditor of a member or member’s transferee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time … upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale.”