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Contract & Business

What is a Charging Order and How it Can Impact Your Single Member Limited Liability Company

By June 29, 2022No Comments

A Charging Order is an Order from a competent court in Florida entitling a Creditor to collect a judgment on the interest of a debtor in a Limited Liability Company (LLC)

Imagine you won a lawsuit and have a $200,000 judgment in your hands. Oftentimes, the defendant—the one against whom you prevailed in your lawsuit—won’t just hand you a check or zelle you $200,000 to your account. On the contrary, debtors often hide assets in LLCs which are a separate juridical person against whom you cannot collect your judgment directly.

This is where obtaining a charging order under Florida Statute §605.0503 comes into play. Under §605.0503 “the court may enter a charging order against the transferable interest of the member or transferee for payment of the unsatisfied amount of the judgment with interest.”

Importantly, section (4) §605.0503 states that “[I]n the case of a limited liability company that has only one member, if a judgment creditor of a member or member’s transferee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the transferee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale.”

In short, if you have a judgment against you, and you hold assets via a single member LLC, §605.0503 permits your creditor to foreclose on your business. Once he forecloses, the creditor can purchase your business at a sale, and then collect on the assets of the LLC it just obtained.

A completely different scenario occurs if your LLC is multimember (i.e.: two or more). In that case,  §605.0503(6) specifically states that in an LLC that has more than one the remedy of foreclosure is not available to satisfy a judgment. Importantly, §605.0503(6) plainly speaks of “multimember.” This means that as long as your LLC has one other member, it will be much harder for Creditors to reach the asset of your LLC. Percentage don’t appear to matter either. In other words, you could have a 1% other member, and your LLC still qualifies as a “multimember” LLC. This is all of course, subject to other more complex laws governing fraud and doctrines such as “alter ego” (when the LLC is sham) but generally, you should feel that your assets are much safer in a multi member LLC—even if that second member has a small minority stake in the LLC.

For more information about asset protection, Limited Liability companies, commercial litigation, or entity formation and structuring, contact an experienced business attorney at Ayala at 305-570-2208.

You can also schedule a case evaluation online at https://www.lawayala.com/consultation/

Alternative, you can directly email experienced miami business lawyer Eduardo A. Maura at eduardo@ayalalawpa.com

 

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