By Steven B. Gorin, Esq.
Thompson Coburn LLP, St. Louis, MO
In Olmstead vs. FTC, No. SC08 1009 (Fla. 6/24/10) (http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf), the Florida Supreme Court held that "a court may order a judgment debtor to surrender all right, title, and interest in the debtor's single-member LLC to satisfy an outstanding judgment." This confirms the trend of courts in "reverse piercing" cases for single-member LLCs.1
Piercing the corporate veil is a doctrine that can apply to any type of limited liability issue.2 "Reverse piercing" is the common name for when a creditor obtains an interest in a business entity and then tries to get to the entity's assets. Courts tend to be reluctant to disrupt business operations, when doing so would be unfair to the other owners of the business. When a partnership or LLC is involved, courts will issue a "charging order," which means that the creditor intercepts distributions to the debtor but cannot force distributions to be made. Regarding interests in LLC and partnerships, states vary on whether they make a charging order the exclusive remedy or allow creditors to foreclose on the LLC or partnership interest and possibly pursue aggressive reverse piercing strategies.3 To maximize asset protection planning, when drafting LLC operating agreements consider limiting any fiduciary duties a manager of an insolvent LLC might owe a lender.4
The "charging order" remedy for a creditor of an owner of a partnership interest or interest in an LLC 5 might be more unattractive than a creditor's remedies of taking possession of stock (particularly voting stock) of a corporation.6 If the entity is already a corporation, consider an F reorganization.7
For more information, in BNA's Tax Management Portfolios, see Rosen and Rothschild, 810 T.M., Asset Protection Planning, and in Tax Practice Series, see ¶4095, Family Business Entities.
2 For a general discussion of such issues and doctrines that go beyond equitable veil-piercing, seeDonn, "Is the Liability of Limited Liability Entities Really Limited?" ALI-ABA seminar on Choice of Business Entity 2/13/08. Elizabeth S. Miller, Professor of Law, Baylor University School of Law, summarizes recent developments in limited liability partnerships and LLCs at http://law.baylor.edu/faculty/profiles/Miller.htm.
5 SeeBishop, "LLC Charging Orders: A Jurisdictional and Governing Law Quagmire," Business Entities (May/June 2010), discussing reverse piercing and whether an LLC is a necessary party to a charging order action brought by a judgment creditor against a member (but not the LLC itself) and, if the LLC was formed in another state, which state law controls the limits of the charging order remedy.
6 SeeForsberg, Spratt and Stein, "Conversion of Business Entities Into Limited Liability Companies: Asset Protection Issues Surrounding LLC Interests," American Bar Association Section of Real Property, Trust & Estate Law, 2009 Spring Symposia.
7 See Riser, "Hiding Your Stuff in Plain Sight (Without Trusts): Dr. FUnbundle (or How I Learned to Stop Worrying and Love Sec. 368(a)(1)(F)," American Bar Association Section of Real Property, Trust & Estate Law, 2009 Spring Symposia, discussing Private Letter Ruling 200701017. See also Rev. Ruls. 64-250 and 73-256 and Private Letter Rulings 200528021 and 200719005. See also Kalinka, "Transfer of an Interest in an LLC Taxed As an S Corporation Raises Many Questions," p. 23 Taxes-The Tax Magazine October 2007.
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