In June 2010, the Supreme Court of Florida sent shivers down the collective spines of attorneys and estate planning experts everywhere in deciding Olmstead, et al. v. Federal Trade Commission, 44 So. 3d 76 (2010). The question presented in Olmstead was "[w]hether Florida law permits a court to 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." Olmstead at 78. In answering the question, the Court allowed a judgment creditor to levy the membership interest of a judgment debtor in a single-member limited liability company ("LLC"), sell the underlying assets of the LLC in partial satisfaction of the judgment and dissolve the LLC. Does this decision spell the end of the liability protections afforded to the member of a single-member LLC or to the members of a multiple member LLC? Not in the Commonwealth of Virginia.
The Federal Trade Commission sued the Olmstead appellants and various corporate entities for unfair and deceptive trade practices. Id at 78. The appellants were found to have operated an "advance-fee credit card scam" through their various entities, and the FTC obtained injunctive relief and a judgment of more than $10,000,000 in restitution from the appellants. Id. To partially satisfy the judgment, the FTC obtained an order from the District Court compelling the appellants to endorse and surrender their membership interest in certain single-member LLC's. Id. On appeal, the United States Court of Appeals for the Eleventh Circuit certified the above referenced question to the Supreme Court of Florida.
The Supreme Court of Florida analyzed the Florida Limited Liability Company Act, Chapter 608, Florida Statutes (2008) (the "Act"). The Court determined that, while the Act grants a judgment creditor the right to access the judgment debtor's profits and distributions from an LLC in which the judgment debtor is a member (i.e., a charging order), such right is not the sole and exclusive remedy for a judgment creditor with respect to the judgment debtor's membership interest in the LLC. Id at 83. The Court found that Section 56.061, Florida Statutes (2008), provides an additional remedy to the judgment creditors, specifically, that a judgment debtor's membership interest in a single-member LLC is subject to levy and sale under execution. Id. The holding issued in the Olmstead case was that "a court may order a judgment debtor to surrender all right, title, and interest the debtor's single-member LLC to satisfy an outstanding judgment." Id.
The Olmstead case could make any attorney or estate planning expert nervous; however, such nervousness is misplaced in the Commonwealth of Virginia. A charging order can be a useful remedy for a judgment creditor to access profits and distributions which would otherwise flow to a judgment debtor as a member of an LLC. A charging order alone does not give the judgment creditor the right to manage the LLC, vote the membership interest or exercise any other incidents of ownership of the LLC. The judgment creditor simply steps into the "economic shoes" of the judgment debtor. By allowing the membership interest of a single-member LLC to be subjected to levy, the Supreme Court of Florida allowed the judgment creditor to sell the underlying assets of the LLC in partial satisfaction of the judgment and dissolve the LLC. In the wake of Olmstead, it appears that a single-member LLC organized in Florida no longer protects the assets of the LLC from judgments against the LLC's single member.
Fortunately for members of LLCs organized under laws of the Commonwealth of Virginia, the General Assembly was one step ahead of the Olmstead Court. In 2006, it took the actions necessary to prevent a similar result for an LLC organized under the Virginia Limited Liability Company Act, §§ 13.1-1000, et. seq., by enacting Section 13.1-1041.1(D). This section of the statute states:
"The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member's assignee may satisfy a judgment out of the judgment debtor's transferable interest in the limited liability company."
The foregoing statute provides that a charging order is the exclusive remedy available to a judgment creditor with respect to the membership interest of a judgment debtor who is a member of an LLC and is applicable to a single-member LLC or a multiple-member LLC organized in the Commonwealth of Virginia. The remedy of levy and sale and the resulting ability to reach an LLC's underlying assets are not available to the judgment creditor with respect to the membership interest of a judgment debtor.
Therefore, while it appears that the protections afforded by a single-member LLC are not what they once were in states like Florida and Colorado (see In re: Ashley Albright, 291 B.R. 598 (2003)), in the Commonwealth of Virginia, an LLC remains a viable option to shield the assets of the LLC from judgments against the individual member or members. In the event of a judgment, such member's profits and distributions may be subject to a proper charging order, but that is the extent of the risk to the member and, importantly, the assets of the LLC remain shielded. Attorneys in the Commonwealth of Virginia can point to this protection when their clients are considering where to organize new LLCs, and members of LLCs organized in the Commonwealth can breathe a sigh of relief.