Your LLC – It Protects You; Now, Protect IT – Part 1
It made sense to you – create an entity, an LLC, to protect you from personal liability. If your business gets sued, you may have insurance in place to protect you against the claim. But even if there is no insurance coverage for the particular claim, then the judgment would be against the company and not against you personally. The LLC – much like a corporation – insulates you from personal liability unless perhaps you are personally negligent in providing the service or driving the company vehicle.
But if the claim is against you personally and there is no insurance coverage (such as a claim against you personally by a lender or creditor under a contract), and a judgment is entered against you personally, then the ownership and management of the LLC is at risk. The structure of the ownership of the LLC then is of critical importance. Much depends on whether the LLC has only one member or has multiple members.
If the LLC has only one member, then the creditor which obtains a judgment against that member may be able to force a sale of the member’s ownership interest in the LLC. Under Florida’s Revised Limited Liability Company Act, Chapter 605 of the Florida Statutes, the creditor must convince the court that a charging order (described below) will not satisfy the judgment within a reasonable time.
Under section 605.0503, the court then can order a foreclosure sale of the member’s interest, and the sole member of the LLC will lose his or her ownership interest in the LLC.
If the LLC has more than one member, then the sole remedy for the judgment creditor – even if it has a judgment against all the members – is the entry by the court of a charging order against the member’s interest in the LLC. The creditor cannot force a sale of the member’s interest in the LLC and cannot become the owner of the LLC. Rather, under section 605.0503, the creditor obtains a lien on the membership interest and requires the LLC to pay over to the judgment creditor the distribution that otherwise would be paid to the member/judgment debtor.
Recent case law clarifies and confirms the nature and extent of a charging order. For example, a judgment or a judgment lien alone does not amount to a charging order. See Capstone Bank v. Perry-Clifton Enterprises, LLC, Case No. 1D16-1094 (FL 1st DCA Nov. 30, 2017) (citations omitted). Rather, the judgment creditor must file a motion with the court for entry of a charging order. Id.
If there are competing judgment creditors, the first judgment creditor to obtain the charging order has priority. See Capstone Bank v. Winsouth Credit Union, Case No. 1D16-1484 ( FL 1st DCA Nov. 30, 2017). If a foreign judgment is involved, the judgment must first be domesticated before the charging order can be entered. Id.
In part 2, we look more closely at the nature of and limits on the charging order and related relief.
This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.