CHARGING ORDERS AND LLC
When attempting to enforce a judgment in Florida, a creditor may discover that the judgment debtor has a membership interest in a Florida limited liability company (LLC). The procedure for executing on that membership interest involves the imposition of a charging order by the court. Florida Statute §605.0503 governs. The first question that must be addressed is whether the LLC is a single member LLC or multi-member LLC. If the judgment debtor is the only member of the LLC, collections becomes easier. The reason is found in Florida Statute §605.0503(4), which clarifies that the judgment creditor may satisfy its judgment against a judgment debtor of a single member LLC via a foreclosure sale of the LLC. Prior to ordering the foreclosure of the LLC however, the court will require the judgment creditor to prove that distributions under a charging order will not satisfy the final judgment within a reasonable time.
CHARGING ORDERS EXPLAINED
A simple example of the Florida’s charging order statute at work is as follows. A judgment creditor obtains a $250,000 judgment against a judgment debtor, an individual who has no readily identifiable assets in his name, but who does own 100% of the membership interest in a Florida LLC. This Florida LLC holds title to a parcel of property in Miami-Dade County. With merely the judgment in hand, the creditor in this example has no direct recourse against the LLC, and cannot simply execute on the LLC’s real estate. The creditor must look to Florida Statute 605.0503 for recovery. By petitioning the court for a charging order against the debtor’s interest in the LLC, the creditor is setting the wheels in motion for recovery of the judgment. The creditor, perhaps armed with post-judgment discovery such as the debtor’s tax returns or financial statements, will proffer evidence to the court that distributions under the charging order will not satisfy the $250,000 judgment within a reasonable time. At this point, the court will likely allow the foreclosure of the single member LLC. The purchaser at the foreclosure sale (likely the judgment creditor), obtains the judgment debtor’s entire LLC interest, not merely the rights of a transferee. Moreover, the purchaser at the foreclosure sale becomes the member of the LLC and the judgment debtor ceases to be a member of the LLC. This means that a decent sales price (depending on the value of the LLC’s real estate) may be possible at the foreclosure sale. The proceeds from the sale would go to satisfy the unpaid judgment.
DEBT COLLECTION LAWS
When a judgment creditor has a judgment against one member of a multi member LLC, the prospects for meaningful recovery are far more limited. This is because foreclosure of the LLC is not possible in the multi-member LLC setting. Conceptually this makes sense, as it is unfair to the non-debtor members of an LLC for a creditor of one member to compel a foreclosure sale of the entire LLC. In this case, the creditor can still obtain a charging order, but is only entitled to distributions otherwise made to the judgment debtor. Many LLCs are small, closely held companies. Accordingly, the judgment debtor’s business partners (who may be friends or even family of the judgment debtor) may not be too keen on cooperating with a pesky judgment creditor. In many instances, there is nothing compelling the remaining members of the LLC to distribute anything to the judgment debtor, hence the judgment creditor may be left with nothing. Of course, a creative judgment creditor could make things difficult for the remaining members and leverage some type of settlement with the debtor, but there are no guarantees. If you have a judgment you would like us to take a look at, or more information on charging orders, please give us a call.
DEBT COLLECTION LAWYER
At Law Offices of Paul A. Humbert, P.L., we have successfully dealt with charging orders and LLCs in Florida. Across our website, you can find valuable information concerning our law firm and the judgment enforcement process. If you are an out-of- state creditor seeking to enforce a judgment in Florida, we are happy to provide a free consultation. Early consultation with a Florida debt collection attorney will ensure a much smoother process.