Limited Liability Protection Issues (Piercing of the Veil; Charging Order)
Closely-held business owners often select “limited liability” or corporate entities, out of a desire to achieve liability protection against piercing of the veil claims of individual creditors. The liability shield is often misunderstood, and may better be viewed as involving both an external and internal component. First, one can speak of the liability shield arising so as to protect the individual owners or insiders from claims of creditors seeking to pierce the corporate-like shield and hold the individual owners or insiders liable (i.e., piercing of the veil claims). Second, one can speak of the effort by creditors of owners of an entity seeking to foreclose on the interests of the owners, to potentially get at the assets of the entity (i.e., charging order claims). Unfortunately, breaking the analysis into these two components neglects to cover other legal theories that can arise (e.g., de facto merger, continuation theory, fraud, intentional torts, agency theory, and many more). That being said, owners can take some comfort when it comes to the limited liability protections offered by the LLC. Here in Florida, courts speak of a strict standard applying for those who wish to pierce the corporate veil of a LLC, Rosy Blue, N.V. v. Chad Davis & Davis & Assocs., LLC, 2008 U.S. Dist. LEXIS 42637 (M.D. Fla. 2008):
“[T]he Florida Supreme Court has imposed a strict standard upon those wishing to pierce a corporate veil. Generally, the rule is that the corporate veil will not be pierced absent a showing of improper conduct. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1121 (Fla. 1984) ; accord Steinhardt v. Banks, 511 So. 2d 336 (Fla. 4th DCA 1987). [*8] Under this standard, it must be shown that the corporation was organized or used to mislead creditors or to perpetrate a fraud upon them. See id. Three factors must be proven by a preponderance of the evidence: (1) the shareholder dominated and controlled the corporation to such an extent that the corporation's independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation; (2) the corporate form must have been used fraudulently or for an improper purpose; and (3) the fraudulent or improper use of the corporate form caused injury to the claimant. In re Hillsborough Holdings Corp., 166 B.R. 461, 468 (Bankr. M.D. Fla. 1994) (citing Dania Jai-Alai). Whether there has been improper conduct is a jury question.
Seminole Boatyard v. Christoph, 715 So. 2d 987, 990 (Fla. 4th DCA 1998). ”
Under the Florida Limited Liability Company Act (F.S. § 608.701), in any case in which a party seeks to hold the members of a LLC personally responsible for the liabilities or alleged improper actions of the LLC, the court is to apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under the laws of this state. It may be significant that a similar statute was not enacted with RE-FRULPA, effective January 1, 2006, given the other changes made to the Florida LLC Act at the time.
On the other side, practitioners often will point to the charging order lien limitations on judicial efforts to foreclose on the interests in entities like Florida limited partnerships and LLLPs. See, e.g., F.S. § 620.1703(3)(modeled after a provision in Alaska, and specifically pointing out that charging order lien limitations set forth in Section 620.1703(1) set forth the “exclusive remedy” which a judgment creditor of a partner or transferee may use to satisfy a judgment out of the judgment debtor’s interest in the limited partnership or transferable interest” and how other remedies, including foreclosure on the partner’s interest in the limited partnership or transferable interest and a court order for directions, accounts, and inquiries that the debtor general or limited partner might have made are not available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited partnership and may not be ordered by a court).
However, practitioners must now deal with the fact that with the Florida Supreme Court's decision in Olmstead v. FTC
, 2010 Fla. LEXIS 990 (June 24, 2010), courts are permitted to order a judgment debtor to surrender all right, title, and interest in the debtor's single-member limited liability company to satisfy an outstanding judgment, notwithstanding F.S. § 608.433(4)(LLCs). Language in the Olmstead decision suggests that the Florida Supreme Court finds that Section 56.061 and references to "stock in corporations" are to include as an "ownership interest in an LLC" under this standard. The Florida Supreme Court found it further significant that when enacting changes to the limited partnership statute, inserting "exclusive remedy" language into the provisions governing creditor's rights with regard to those interests, the Legislature did not make changes to the Florida LLC Act. As the Florida Supreme Court noted, "(o)n its face, the charging order provision establishes a nonexclusive remedial mechanism. There is no express provision in the statutory text providing that the charging order remedy is the only remedy that can be utilized with respect to a judgment debtor's membership interest in an LLC. The operative language of Section 608.433(4)--'the court may charge the (LLC) membership interest of the member with payment of the unsatisfied amount of the judgment wit interest'--does not in any way suggest that the charging order is an exclusive remedy. In this regard, the charging order provision in the LLC Act stands in stark contrast to the charging order provisions in both the Florida Revised Uniform Partnership Act, Sections 620.81001-9902, F.S. (2008) and the Florida Revised Uniform Limited Partnership Act, Sections 620.1101-2205, F.S. (2008). Although the cord language of the charging order provisions in each of the three statutes is strikingly similar, the absence of an exclusive remedy provision sets the LLC Act apart from the other two statutes. With respect to partnership interests, the charging order remedy is established in section 620.8504, ....with respect to limited partnership interests, the charging order reemdy is established in 620.1703,...The Legislature has shown--in both the partnership statute and the limited partnership statute--that it knows how to make clear that a charging order remedy is an exclusive remedy. The existence of an express exclusive-remedy provision in the partnership and limited partnership statutes therefore decisively undermines the appellants' argument that the charging order provision of the LLC Act--which does not contain such an exclusive remedy provision--should be read to displace the remedy available under section 56.061." at 15-16.
The implications of the Olmstead decision on all LLCs remain to be determined and consumers and practitioners are well advised to monitor Legislative and/or court reaction to the decision.
If you are an owner of a closely-held business entity and want to know more about piercing of the veil and charging order liens, especially when it comes to the Olmstead decision, please do not hesitate to contact us.