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Single Member LLCs

March 23, 2012 / in

A recent decision of the Supreme Court of Florida has called into question the previously-held belief that a creditor of an individual could not reach the assets of the individual’s single-member limited liability company (LLC).  In Olmstead v FCC, decided in June, 2010, a divided panel of the Florida high court determined that a creditor of the sole member of an LLC could force the individual debtor to “surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment.”

This language may send shivers down the spines of those individuals who thought the assets owned solely by their single-member LLC’s were completely safe from judgment creditors of the individual.  Take, for example, an individual who purchases a parcel of, real property, and does so by forming a single-member LLC, with title to the property vested in the LLC.  Now, presume this individual is sued and a judgment is entered against him or her.  Under the rationale of the Olmstead ruling, the creditor could seize, control of this person’s membership interest and essentially take title to the real
property. This hypothetical presumes there is no mortgage interest in the real estate.

This possible result is sometimes referred to as “reverse veil piercing,” meaning a creditor can “pierce the corporate veil” and reach past the limited liability into the personal assets of the shareholder(s).  This seems to go against all reasonable beliefs about the asset protections afforded by an LLC.  Thankfully, a more careful review of the Olmstead decision, the Florida statutes it relies on, and the similar statutes in Michigan reveals a key difference in the applicable statutes that makes a decision like that in Olmstead unlikely to surface in the Wolverine State.

In Florida, the applicable statute authorizes a judgment creditor to be appointed as an “assignee” by virtue of a “charging order.”  The judgment creditor then can take the interest of the sole member in the LLC based on this provision:

“Unless otherwise provided in an operating agreement, an assignee of a limited liability company may become a member only if all members other than the member assigning the interest consent.”

The Olmstead court determined that, in the case of a single-member LLC, the set of “other members” was “empty,” and as such the judgment creditor needed no consent at all, and could simply stand in the shoes of the single member and seize his interest in the company’s assets.

Michigan’s sister statute, MCL 450.4506, is nearly identical to the Florida statue, except it contains the following second sentence:

“an assignee of a membership interest in a limited liability company having 1 member may become a member in accordance with the terms of the agreement between the member and the assignee.”

This seemingly innocuous language is vital because it keeps the right to grant LLC membership in the hands of the sole LLC member, rather than an “empty set” of non-existent members. It is hard to imagine a member willingly agreeing to allow a judgment creditor to become a member by virtue of its assignment of that member’s interest.  In turn, this means that the judgment creditor, as a non-member, does not step into the shoes of the individual member, and cannot seize the member’s interest in the company’s assets.

It would appear that the Michigan Legislature purposely clarified this layer of protection for single-member LLC’s, to keep them from being subjected to “reverse veil piercing.”  As such, while the Olmstead case should be a warning sign, it should not signal the end of the single-member LLC in Michigan as an asset protection tool in the proper case.

For more information regarding asset protection or any business matters, contact Keith Jablonski by email at kjablonski@bhlaw.us.com or call (248) 645-9400.

 

 

This publication is distributed with the understanding that Beier Howlett, P.C. is not rendering legal or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.  Forward your comments, change of address, or additions to our mailing list at Feedback@bhlaw.us.com.

 

Is Your Liability Waiver Unenforceable?

March 23, 2012 / in

Toss out the liability waivers and replace them with an increased insurance policy? According to a recent decision by the Michigan Supreme Court, the traditional pre-injury liability waiver, signed by parents to allow their child’s participation in a range of activities, will no longer hold up in court.

Although the liability waiver has long been the accepted release form for organization hosting activities from day camp to travel sports, on June 18, 2010, the Michigan Supreme Court held that a pre-injury waiver is unenforceable under Michigan’s common law. The Court noted that a parent or guardian has no authority to bind his child by contract (absent special circumstances), and a parental pre-injury waiver is a contract. Michigan’s common law rule is that a minor also lacks the capacity to contract for his or herself. The court also held that it is clear a minor cannot empower an agent or attorney to act for him in Michigan.

The case, Woodman v Kera LLC, 2010 Mich LEXIS 1125, involved a five-year-old child who was injured after falling off an inflatable at a birthday party held in a Bounce facility. Although the parents signed a waiver before the child engaged in the activity, they were able to successfully sue the facility for negligence after the injury.

Ramifications of this decision are expected to be far-reaching, as organizations of all types are left open to liability. From school districts hosting field trips to soccer teams traveling to games, the hosting organization is no longer protected by a parent’s signature on the pre-injury waiver.

Although a 2009 Estates and Protected Individuals Code (EPIC) proposed parents be allowed to sign enforceable waivers, the code was adopted without this provision. A child can be bound by a parent’s act when a statute grants that authority to a parent. Legislation to modify the common law rule at issue was introduced into the Legislature on May 19, 2009 – HB 4970. On March 10, 2010 the House Judiciary Committee reported the bill with a substitute and recommended that the House of Representatives adopt the statute. The HB 4970 would add Section 5109 to the EPIC. However, as of July 26, 2010 the statute has not been adopted.

Justice Young, in dicta, suggested that perhaps an alternative to the pre-injury liability waiver is a parental indemnity. However, the other Justices commented that such issue was not before the Court and would likely be held to directly contravene the compelling policy reasons that exist for the historic common law rule. Furthermore, courts in a number of States have held that such indemnity agreements are unenforceable because they produce the same effect as parental pre-injury liability waivers.

Currently, with no clear solution to the liability issue at hand, organizations hosting activities for minors should consult with their attorneys and insurance providers to determine how best to protect themselves from claims of negligence, whether it be through additional safety measures or insurance coverage. Liability waivers should continue to be used in the interim to inform your clients of the risks involved in participation. Beier Howlett will keep you informed of any updates to the EPIC that would offer solid legal protection to your organization.

For more information, contact Victor Veprauskas at Beier Howlett, P.C. (248) 645-9400, or email vveprauskas@bhlaw.us.com.

The L3C

Michigan’s New Business Hybrid Offers Benefits of Non-Profit Status With Reduced Regulatory Structure

Michigan is one of only six states that currently offers a new, legal form of business entity: the low-profit limited liability company, or L3C. The new structure is gaining momentum nationwide, yet many have never heard of the advantages afforded by this hybrid between a non-profit and for-profit venture. The designation was created in Michigan in 2009 to help spur business and advance socially beneficial ventures.

 

Designed specifically to bridge the gap between for-profit and charitable sectors, the L3C is similar to a traditional limited liability corporation, or LLC. However, its primary purpose is not to make a profit, but to achieve a socially beneficial objective. (Though making a profit is allowed.) The L3C must follow these requirements:

  1. The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s);
  2. “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit); and
  3. The company must not be organized “to accomplish any political or legislative purposes.”

Importantly, these three requirements closely mirror those of the IRS rules for “Program Related Investments,” making L3C businesses eligible to receive PRIs – a distinct advantage designed to spur economic growth. However, L3C entities do not qualify as charities and therefore are not exempt from taxes, nor are investments in an L3C tax deductible, as they would be for a 501c3 non-profit.


The L3C legal structure is similar to the LLC in many ways:

  • The L3C offers a flexible ownership structure, wherein each member’s management responsibility and financial stake may vary according to individual needs.
  • The L3C’s members enjoy limited liability for the actions and debts of the company.
  • The L3C is classified as a “pass-through entity” for federal tax purposes, like a partnership or sole proprietorship, so no federal income tax is imposed on the L3C itself.

Of the many advantages an L3C offers, perhaps the most attractive is that it offers the operating efficiencies of a for-profit along with a reduced regulatory structure. As an LLC, it can bring together foundations, trusts, endowment funds, pension funds, individuals, corporations, other for-profits and government entities into an organization designed to achieve social objectives while also operating according to for-profit metrics. Importantly, a foundation or business owner retains ownership and management rights, as opposed to the board-managed, non-profit operating status requirements.

What types of businesses would best qualify as an L3C?  It may provide a new structure for museums, concert halls, recreational facilities and the hundreds of thousands of nonprofits that perform service for the government under contract.  It may possibly help the flagging newspaper industry as well, as the designation is tested under this arrangement.

In Michigan, the L3C legislation was introduced by Traverse City Republican State Senator Jason Allen on July 24, 2008. Senate Bill 1445 was signed into law on January 16, 2009 as an amendment to the Michigan Limited Liability Company Act by Governor Granholm. The bill was supported by the Council of Michigan Foundations and the Michigan Department of Labor and Economic Growth.

For more  information on the L3C designation, contact Peter Gojcaj at pgojcaj@bhlaw.us.com.

 

News From The Firm

March 23, 2012 / in

Beier Howlett is now on facebook!  For regular updates, news and information from the firm, join us on our facebook page.

Jeff Haynes, chair of the firm’s environmental law practice group, announces the launch of the Michigan Environmental Law Deskbook, second edition, available at www.envdeskbook.org . Haynes served as co-editor and contributing writer for the Deskbook, a free service of the State Bar of Michigan prepared by its Environmental Law Section. The Deskbook provides up-to-date legal analysis of environmental law issues, and includes hyperlinks to environmental statutes, rules and cases.

Peter Gojcaj has been named to the board of directors for the Albanian American Chamber of Commerce.  Gojcaj is a founding member of the newly formed, Detroit-area organization.

Beier Howlett attorneys were recently spotted volunteering at the Woodward Dream Cruise, helping to control traffic throughout downtown Birmingham.

CONGRATULATIONS

 

Beier Howlett has been named to the inaugural edition of the U.S. News Best Law Firms rankings.

“U.S. News is the world’s leading publisher of institutional rankings based on both objective data and peer evaluations,” says Steven Naifeh, President of Best Lawyers. “By combining hard data with peer reviews, and client assessments, we look forward to providing users with the most thorough, accurate, and helpful rankings of law firms, both as providers of legal services and as places to work.”

Three firm attorneys were also selected by their peers for inclusion in The Best Lawyers in America®:

Tim Currier, CEO of the firm, was named in the field of municipal law;
Jeff Haynes was named in the field of environmental law;
Stephen Jones was named for probate and estate planning.

Stephen Jones of the firm’s Probate & Estate Planning Practice has also been named a Five Star Wealth Manager by HOUR Detroit and dBusiness magazines. Less than 7% of metro Detroit wealth managers are named to this list. Jones specializes in taxation and will preparation.

Tim Currier, CEO, along with partners Jeff Kragt and Frank Galgan, have been named to the annual Super Lawyers list. Only 5% of Michigan attorneys are included in this list. The selection process includes a statewide survey of lawyers, independent evaluation of candidates by the attorney-led research staff, a peer review of candidates by practice area, and a good-standing and disciplinary check. This is Currier’s fifth consecutive inclusion on the list, and Kragt’s second.