Are Company Assets Really Protected From the Acts of the Owner?

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 our Business Law department or call (248) 645-9400.