By: Edward D. Brown, Esq., CPA, LL.M
The states (Florida in this case) have again reinforced the law that if a limited liability company (LLC) has two or more owners, a creditor of any owner cannot take the LLC interest from such owner (i.e., cannot initiate a foreclosure action). In the case of Pansky v. Barry S. Franklin & Assoc., 2019 WL 581620 (Fla.App., Feb. 13, 2019), a law firm attempted to seize an LLC from one of its ex-clients for non-payment of legal fees.
The LLC laws generally direct that if an LLC is wholly owned (i.e., a single member LLC) by one person, then not only can a creditor bypass any charging order protections under state law, but may also compel a transfer of the LLC interest to the creditor. See Section 502(f) of the Uniform Limited Liability Company Act.
On the other hand, if an LLC has at least a second member, then foreclosure is forbidden and the creditor may only seek a charging order, meaning that the creditor shares only in the distributions that the manager (who may well be the debtor too) decides make, if any. Creditors are not generally attracted to seeking charging orders because (i) the manager/debtor is likely to withhold all distributions, which frustrates the creditor’s enjoyment of any payoff of a judgment owed to that creditor, and (ii) the creditor may be concerned it will be taxed on the LLC income without receiving any distributions with which to pay such tax.
In the Pansky case, the Florida Court of Appeals had to reverse the lower court’s allowance of an attempted LLC foreclosure because the debtor raised the allegation that the LLC had a second member (although the identity of the second member is unknown, perhaps it was an asset protection trust?).
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