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Florida Limited Liability Companies: How Limited is Your Liability?

A limited liability company (“LLC”) is a form of business entity available under the Florida Limited Liability Company Act. An LLC is controlled either by a Manager or by a Managing Member pursuant to the LLC “operating agreement.” Members hold their investment in an LLC in the form of membership interests.

Similar to S-Corporations and general partnerships, an LLC is a “flow through” entity such that only its members are liable for income tax. The business entity itself, unlike with C-Corporations, is not liable for income tax on its profits. Yet though similar in structure to a general partnership, an LLC enjoys limited liability for its “members” similar to corporate shareholders.

Subject to restrictions in the operating agreement of an LLC, a membership interest, being intangible property, is assignable and transferable. As such, though an individual member may not be liable for company debts, a member’s interest may be taken to satisfy a judgment against him – that is unless there is a statute that says otherwise. Florida has such a statute that until recently was less than clear.

In Florida, a judgment creditor was faced with Section 608.433, Florida Statutes, which allowed a judgment creditor to obtain a “charging order” against a judgment debtor’s LLC membership interest. A charging order only allows a creditor to receive LLC distributions normally payable to the member against whom there is the judgment. Of course, the LLC could always decide against distributions leaving the creditor empty handed.

What Section 608.433, Florida Statutes, did not expressly provide was the charging order as the ONLY remedy for judgment creditors.

The Supreme Court – Olmstead

The Florida Supreme Court’s decision in Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010), interpreted the statute and Florida law to mean that in a Florida single-member LLC, a charging order is NOT the creditor’s exclusive remedy. The court ordered the judgment debtor to surrender all of his right, title, and interest in his LLC to the creditor to satisfy the judgment.

The widespread uncertainty created by Olmstead immediately got the attention of concerned business attorneys and their clients. Did the reasoning in Olmstead only apply to single-member LLCs or could it, and in any case would it, be used against multiple-member LLCs? The ruling appeared to most as contrary to Section 608.433 and the Florida Legislature’s intent.

Legislative Amendment – The Olmstead Patch

The legislature took action quickly and amended Section 608.433, Florida Statutes, which amendment became effective May 31, 2011, and is known as the Olmstead Patch.

The amendment expressly provides that a charging order is the exclusive remedy available to creditors seeking to enforce judgments using the interests of LLC members. This exclusive remedy applies in both single-member and multiple-member LLC contexts. However, and only in the case of single-member LLCs, if a creditor shows that charging order distributions will not satisfy the judgment in a reasonable time, a court may permit the foreclosure of the membership interest.

The amended statute does NOT address treating a multiple-member LLC as a single-member LLC where additional members are added with only nominal interests. This will no doubt be an area of future commercial litigation.

Benefits of Doing Business as a Limited Liability Company

LLCs are useful because they are flexible as to how membership interests can be held (by other business entities or trusts) without losing their flow through income tax treatment as would otherwise occur in the case of an S-Corporation.

LLCs are also useful for asset protection and with the Olmstead Patch, even more so. Compare the treatment of a membership interest in an LLC with the fact that shareholders’ stock certificates in corporations can be taken by a judgment creditor.

Where a charging order is obtained, the creditor must wait for profits to be distributed or distributions to be made upon closing a business run as an LLC. The LLC can meanwhile loan money to the debtor-member or pay a salary to him which, if head of household, is further given exempt treatment.

Meanwhile, a 1997 Revenue Ruling may create a tax liability for the creditor where distributions are not made, the creditor has a charging order, and profits are allocated to the debtor-member. The income tax liability on that member’s allocated income may need to be paid by the judgment creditor.

The Florida Department of State on its website reports there were almost 550,000 LLCs and 743,000 corporations in Florida by the end of 2010. LLCs are being increasingly utilized with over 138,000 Florida LLCs formed in 2010 to the approximate 104,000 Florida corporations formed.

As such, the LLC has become an increasingly important business structure in Florida.

Foreclosure Attorney General Investigation: What It Really Means

The foreclosure investigation of all 50 states’ Attorney Generals that began in October 2010 has led to a proposed settlement among the largest banks for up to $20 Billion dollars and commitments to alter their foreclosure practices.  The issue erupted when it was discovered that many documents, included documents filed in state court foreclosure actions, where the product of “robo-signers.” Nowhere has this been more a problem than in Florida Foreclosure Defense.

Robo-signers are mortgage default personnel that had no personal knowledge of the particulars of a mortgage but signed affidavits filed with courts swearing they had reviewed the home loan file and were familiar with the circumstances of the loan default. In the name of expediency, robo-signers were used to simply sign pre-prepared documents in order to complete mortgage foreclosure.

Recently the New York Attorney General has objected to the proposed settlement spear headed by the Iowa Attorney General. The big disagreement appears to be whether banks will be released from future civil liability in connection with the way they securitized the loans.

Banks wish to avoid continued lawsuits against them. They are currently being sued by investors who claim improper and incomplete disclosures were given about the mortgage backed securities they purchased through which billions have been lost. And most recently, the Federal Housing Finance Agency filed suit claiming that banks misrepresented the quality of the mortgage loans sold to Fannie Mae and Freddie Mac.

The robo-signing practices of the largest banks involved in the settlement (the banks do not admit liability in this matter), resulted in thousands of falsified foreclosure documents filed in loan foreclosure actions across the country. When you consider that the banks involved include Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and Ally Financial, another problem arises for the economy trying to get past the mortgage foreclosure crisis.

When the Mortgage Loan Foreclosure Machine Starts Up Again

Many of these banks have halted or significantly slowed their foreclosure activities. Cases recently filed remain pending without any movement toward final resolution. Cases that are about to be filed are held back. Finally, loans that are already in default are not being moved forward at all.

Meanwhile, HAMP loan modifications are not alleviating this building pressure. Because HAMP modifications are voluntary on the part of the lender and because the lender and the “Investor” in the mortgage backed securities covering the particular mortgage in question need to agree on the loan modification, loan modifications are painfully slow – even though the government is footing part of the bill to get loans modified.

What this means is that without drastic relief, the dam of overflowing loans in default could break resulting in another sudden explosion in foreclosures when and if the Attorney Generals finally settle the investigation with mortgage lenders.

Troubled homeowners in loan default should nonetheless vigorously pursue the HAMP loan modification process and stay on top of it. Every request for additional information that lenders invariably ask for to get the loan modification should be provided immediately. Lender representatives spoken to over the phone should be made note of together with their extension number and full details of the conversation including the time and date. All correspondence should be in writing and copies should be maintained in good order.

For troubled homeowners who have a very good paper trail, they may be in the best position to resolve a potential foreclosure filing once lenders restart their foreclosure machine.

Personal Injury – Letter to Insurance Company for Coverages

This is a form letter that I send to confirm insurance coverages for clients that were in automobile injury accidents. Motor Vehicle Accident Lawyers use this to get complete insurance coverage disclosures pursuant to section 627.4137, Florida Statutes. In addition, the letter requests copies of any written or oral, recorded or unrecorded statements obtained from my injured client concerning the car accident. It’s not advised to talk to the insurance company or sign anything from the insurance adjuster before you talk to a Car Accident Law Firm. But if you have, your personal injury attorney needs to know about it. Download here or click image below. Personal Injury – Letter to Insurance Company for Coverages

Personal Injury - Letter to Insurance Company for Coverages

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The information contained in this website is provided for informational purposes only, and should not be construed as legal advice on any subject matter
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Nickolas C. Ekonomides is licensed in Florida with main office Clearwater.