52 Pages Posted: 26 Oct 2010 Last revised: 24 Apr 2012
Date Written: 2011
Every state permits a limited liability company to be formed and operated with one member (SMLLC) and every state permits a judgment creditor of that member to seek a court order charging the SMLLC ownership interest with a lien. A “charging order” requires the SMLLC to pay all future distributions to the judgment creditor until the judgment is fully satisfied. Since the member alone retains discretionary control over when and if such distributions will be made, the charging order is usually ineffective because the member simply accumulates distributions. Further judgment creditor remedies are highly diverse among states, ranging from none to a sale foreclosing the lien and terminating the member's equitable right of redemption. Even when a foreclosure sale is permitted, such statutes follow a traditional unincorporated entity anti-transfer approach in which the creditor or third-party purchaser acquires only rights to future distributions. The purchaser does not become a member unless the judgment debtor member consents. Since the debtor member traditionally will not grant the consent, the purchaser remains locked out of management and control over the timing of distributions. Paradoxically, the member remains in control and controls employment even though owning no further economic interest in the SMLLC operations while the owner of all the economic interests has no control. This creates a troublesome opportunistic structure, that courts have been forced to deal with by employing creative statutory and equitable maneuvers. For example, if the member files for personal bankruptcy, the trustee uses federal law to preempt the state law outcome and assume the management rights of the bankrupt member, liquidate the entity and sell its assets for the benefit of the bankruptcy estate. Outside of the bankruptcy realm, courts are confined to purchaser lockout by state statutes. The important case, Olmstead v. F.T.C., in Florida is the first to attack this odd paradigm using questionable statutory interpretation. 44 So. 3d 76 (Fla. 2010). Olmstead is controversial because the court fashioned a remedy not clearly intended by the legislature (full transfer without foreclosure procedural protections). This Article explores the statutory diversity regarding state law charging order remedies as well as federal bankruptcy law and suggests that a statutory solution reaching the Olmstead result is superior to the judicial solution. A statutory solution will inevitably create externalities by encouraging a second peppercorn member, thus shifting the debate to the related policy question of when a peppercorn member should be recognized as a member. Nonetheless, courts are better equipped to determine whether a peppercorn member should be disregarded than to craft unintended remedies from unambiguous statutes. Moreover, given that over twenty states have language similar to Florida and given the ease of changing the state of formation through domestication, the Olmstead case will encourage SMLLCs in Florida and other similar state language states to either add a peppercorn member or domesticate in states with a different policy such as Delaware. Under Delaware law it is clear that the charging order is the exclusive remedy and its lien may not be foreclosed. Inevitably, even this approach will eventually result in law conflicts as judgments obtained in one state seek registration in other states with different policy approaches.
Suggested Citation: Suggested Citation
Bishop, Carter G., Desiderata: The Single Member Limited Liability Company Olmstead Charging Order Statutory Lacuna (2011). Stanford Journal of Law, Business, and Finance, Vol. 16, p. 222, 2011; Suffolk University Law School Research Paper No. 10-59. Available at SSRN: https://ssrn.com/abstract=1697621 or http://dx.doi.org/10.2139/ssrn.1697621