Unincorporated Business Entities Law

In Olmstead v. FTC, SC01-109 (Fla. June 24, 2010), the Supreme Court of Florida ruling that a charging order is not the exclusive remedy available to creditors of a member of an LLC.  In part, the Court relied on differences between the statutory language of the charging order remedy in Florida’s partnership and limited partnership statutes, both of which expressly make charging orders a creditor’s exclusive remedy, and the LLC provision, which does not. Slip Op., at 11-13.

More significant is the Court’s analysis of the assignment and charging order portions of the Florida LLC Act.  The dissent argues that the majority treats the charging order as applying only to single-member LLCs.  Id.at 15-35.  To be sure, the majority opinion is not amodel of clarity. On first read, the Court seems to suggest a difference between the assignment and charging portions of the LLC statute, so that the general creditors’ remedy has a broader reach than the charging order–“all right, title, and interest in the debtor‘s single-member LLC,”  rather than only “rights to profits and distributions.”  Id. at 3-4.

Ultimately, the Court finds no difference in the assignment and charging order provisions.  In the view of the court, while an assignee does not generally does not become a member, except upon the consent “of the remaining members,” id. at 5-7, in the case of a single-member LLC:

The limitation on assignee rights … has no application to the transfer of rights in a single-member LLC. In such an entity, the set of “all members other than the member assigning the interest” is empty. Accordingly, an assignee of the membership interest of the sole member in a single-member LLC becomes a member—and takes the full right, title, and interest of the transferor— without the consent of anyone other than the transferor.

Id. at 9.  To this extent, the majority views the statute as treating all assignments of the entire LLC iunterest of a SMLLCs differently than it treats a similar assignment by one member in a multi-member LLC.  That said, the court views the charging order in the same manner: 

[stating that] a “judgment creditor has only the rights of an assignee of [an LLC] interest” simply acknowledges that a judgment creditor cannot defeat the rights of nondebtor members of an LLC to withhold consent to the transfer of management rights. The provision does not, however, support an interpretation which gives a judgment creditor of the sole owner of an LLC less extensive rights than the rights that are freely assignable by the judgment debtor.

Id. at 10 (emphasis added).

Even though the majority continually phrases the issue as the exclusivity of the charging order in the context of an SMLLC, it views a charging order as having the same effect as an assignment, which is what would happen under the general creditors’ remedy.  The majority then turns to the differing approaches to exclusivity among the charging order provisions of the vrious UBE statutes.

To a certain extent, the problem is further confused by the fact that the LLC charging order follows the “rights of an assignee” approach of the Revised Uniform Limited Partnership Act, rather than the lien approach of the Revised Uniform Partnership Act.  The former seems inherently less nuanced and flexible than the latter.

There has been extensive discussion of this on LNET-LLC, under the thread Olmstead Case Decided.  Prof. Larry Ribstein also discusses Olmstead on Truth on the Market.

Hat tip to Carter Bishop.

In Allen v. Dackman, 991 A.2d 1216 (Md. 2010), an LLC owned rental property in Baltimore that did not comply with the provisions of the Baltimore City Housing Code regarding lead-based paint.  A resident sued the LLC and the member who managed the LLC.  The trial court entered summary judgment in favor of the member on the basis that members of LLCs are not liable for LLC obligations.  The Court of Appeals reversed on the grounds that the Housing Code, imposed liability on “owners,” defined that term broadly:

… the City Council intended to expand the meaning of the term “owner” so that it referred not only to those who own the title to a dwelling, but also to a wider group of individuals who hold or control the title.

The parties agree that Respondent did not own or hold the title to the property, so we therefore determine whether he controlled the title to the property. We have never defined the term “control” as it was used in the Housing Code, but we agree with the Court of Special Appeals that it “carries with it a requirement that the entity in question have an ability to change or affect the” interest being controlled. This definition is consistent with the common definition of the term “control.” Black’s Law Dictionary 353 (8th Ed. 2004) (defining “control” as having the ability to “exercise power or influence over” property).

* * *

We recognize a number of ways in which a reasonable trier of fact could determine that Respondent had the “ability to change or affect” the title to the property. Respondent … that he was responsible for running the day-to-day affairs of [the LLC] during the time period when [it] both acquired and sold [the property.]  Respondent also executed the deed certification when [the LLC] acquired the property, signed the complaint seeking to remove Petitioners from the property, and signed the deed when [the LLC] sold the property. These facts are sufficient evidence for a jury to find that Respondent may have changed or affected the title. For example, the trier of fact could find that Respondent directed the acquisition of the property, the legal action that led to the ejection of Petitioners from the property, or the sale of the property. Furthermore, even if Respondent did not actually direct these actions, the trier of fact could find that he had the “ability” to do so. This would have also been sufficient to establish that he controlled the title to the property. Finally, there is no evidence that anyone other than Respondent was responsible for the day-to-day management of [the LLC] or for decisions affecting the title to the property, which supports the conclusion that Respondent was the person who made decisions affecting the title to the property.

Slip Op., at 17-19 (emphasis added)(citations and footnote omitted).

Earlier this month, Dackman was discussed on LNET-LLC.

posted by Gary Rosin