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Florida Charging Order Foreclosure Of A Nevis LLC In Barber

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Ms. Sabrina Barber, a Florida resident, was in deep financial distress because of some large outstanding loans that she owned to Wells Fargo Bank and Region Bank.

In 2009, Barber received $1 million from the sale of her home though her divorce, and deposited these funds into a "homestead" account with American Momentum Bank. Later that year, Barber used these funds, and their accrued interest, to purchase a certificate of deposit from the same bank, and also designed the CD as "homestead" proceeds.

Barker transferred the CD to an AIG account in 2010, also designating that account as "homestead" proceeds. That same year, Barber withdrew $227,026 from the AIG account to purchase a home in Florida.

This brings us to 2011, when Barber formed Blaker Enterprises LLC. Barber transferred $641,350 from her AIG account, combined it with $228,650 from another AIG account, and opened an account for Blaker Enterprises LLC with TD Ameritrade which then received the $870,000. This TDA account was then used as an investment account. Later that year, Barber transferred $275,000 from the TDA account back to the AIG account, allegedly to avoid management fees on the latter.

Moving into 2012, in February, Barber transferred $220,000 out of the AIG account -- but claimed (apparently with a straight face) to not know where the money went. In April, Barber caused Blaker Enterprises LLC to set up a second TDA account, into which $110,000 was transferred from the existing TDA account. Barber's story was that the first TDA account was advisor-managed only, while the new TDA account let her manage the funds directly. Eventually, all of Blaker Enterprises LLC's moneys ended up in the second TDA account.

In her deposition, Barber testified that she intended to transfer the money in the second TDA account to an investment advisor located in the Republic of Mauritius. At any rate, by the time that Wells Fargo and Regions got around to suing Barber and Blaker Enterprises LLC, the accounts had been substantially depleted.

In 2013, a Florida state court entered a Deficiency Judgment against Barber and Blaker Enterprises LLC in excess of $62 million in favor of Wells Fargo and Regions. The next year, 2014, Wells Fargo and Regions filed a Complaint in the U.S. District Court for the Middle District of Florida, wherein they made four claims for relief:

(1) A claim for injunctive relief;

(2) A claim to foreclose on Barber's membership interest in Blaker Enterprises LLC, or at least for a charging order against Barber's interest;

(3) A claim to avoid the various transfers made by Barber and Blaker Enterprises LLC as fraudulent transfers as actual fraudulent transfers; and

(4) A claim to avoid the same transfers as constructive fraudulent transfers.

Barber and Blaker Enterprises LLC moved to dismiss the Complaint for failure to state a claim under FRCP 12(b)(6). To cut to the end, since these counts do not interest us for purposes of this article, the Court granted the Motion to Dismiss as to #1 holding that an injunction isn't a claim, and denied the Motion as to #3 and #4 because the Banks had adequately stated claims for relief.

That leaves us with claim #2, the Banks' attempt to foreclose on Barber's membership interest in Blaker Enterprises LLC, or for a charging order against that interest, which as we will see in a second is highly interesting.

Before we get into that part of the Opinion, it might be helpful to first read my article about the Sargeant case, "Florida Says No Turnover Orders Against Foreign Assets In Sargeant" as found at http://onforb.es/1gT2oxt or http://goo.gl/JuI4zf.

The Sargeant case ended up in an extremely poorly reasoned, and frankly awful, opinion of the Florida Court of Appeals which said that a Florida creditor could not levy upon the stock of an offshore corporation held by a Florida debtor, but instead had to go to whichever country or countries where the shares were physically located, and go through whatever levy or similar process the courts of those countries had to gain ownership of the stock.

Now back to the Main Event of the Banks seeking to foreclose on Barber's interest in Blaker Enterprises LLC.

The Court noted that Florida law (like the laws of pretty much every other state) permits a judgment creditor to obtain a Charging Order against a debtor's interest in a Florida LLC, for the amount of the unpaid judgment plus post-judgment interest. As in every state, a Charging Order acts as lien against the debtor/member's interest in the LLC, which has the effect (among other things) of channeling the distributions made by the LLC to the creditor instead of to the debtor/member.

Let me here digress with a reminder about some very basic law. A lien simply evidences the creditor's security interest in the debtor's property. If you buy a car with a loan, the bank takes a lien against the title to your car to secure its repayment of the note that you have given the bank. If you fail to pay on the note, the creditor can foreclose on its lien, i.e., cause the car to be seized by the sheriff (or, more likely, a repo man) and sold at auction.

JDA

A charging order is simply the device by which a creditor takes a lien in a debtor's interest in an LLC -- think of the charging order as a spray can that paints the interest with a lien. In most states, the creditor can then foreclose on the lien (just like foreclosing on the lien on your car in my above example), meaning that the debtor's interest is put up for auction.

Very importantly, the only interest that a creditor gets a lien on through the charging order process is the debtor/member's right to distributions, nothing else. The creditor doesn't take over the interest entire (as is the case when a creditor levies on stock), but just gets the rights to distributions, no more, no less, until the judgment is paid.

When the creditor later forecloses on the lien, and the interest is sold at auction, whoever buys the interest simply gets the rights to distributions, no more, no less -- with one key difference: They get all distributions in the future, and not just until the judgment is paid.

It is this latter point (and, arguably, some gross misunderstandings as to what a charging order is all about) that has caused the legislatures of some states to amend their LLC laws such that a creditor cannot foreclose on the lien created by the charging order.

So, most states allow creditors to foreclose on charging orders, but some states don't -- and then we have Florida. The Sunshine State has adopted what is known as the "Olmstead Patch", named after a court case in which one of the parties was named Olmstead, that essentially allows a creditor holding a charging order to foreclose on the lien against the debtor/member's interest in an LLC, but only if that debtor/member is the sole and only member, what is referred to as a "single member LLC".

In effect, the Olmstead Patch allows a creditor of a single-member  to get at the assets of the LLC through the foreclosure process. To look at the matter somewhat differently, the Olmstead Patch does not allow a person to hide asset from creditors in a single-member LLC.

And now back to our regularly scheduled Opinion involving the Bank, Barber, and Blaker Enterprises LLC, where I will now reveal the plot-twist that makes this case particularly interesting: Blaker Enterprises LLC was formed as a Nevis company.

For those of you who have never heard of Nevis, it is a small island in the outer Caribbean belt that is part of the two-island Federation of St. Kitts and Nevis. It is also, by far, the most prolific seller of LLCs of any offshore haven due to its utter absence of anything approaching regulation or oversight.

Barber and Blaker Enterprises LLC argued that the Court, i.e., the U.S. District Court for the Middle District of Florida, lacked the jurisdiction to allow the Banks to foreclose on Barber's interest in Blaker Enterprises LLC, since the Court didn't have personal jurisdiction over Blaker Enterprises LLC.

This brings us back to the Sergeant opinion mentioned above, where the Florida court said that if a creditor wanted to levy on the stock in a foreign corporation, it couldn't do so in Florida, but would have to go through the courts of the offshore havens where the corporation were physically located (which, in Sergeant, were spread over five countries). Barber and Blaker Enterprises LLC said that the same result should obtain here: If the Bank wanted to foreclose on Barber's interest in Blaker Enterprises LLC, then the Banks could only do that in Nevis.

Unlike Sergeant, the Court here did not buy this reasoning. The key difference was that Sergeant involved the shares of a stock company, whereas Blaker Enterprises LLC was not a stock company, but a limited liability company, which is a different form of entity altogether. With an LLC, the debtor's membership interest is deemed to be an interest in "intangible personal property", and such property is found wherever its owner resides. Because Barber resided in Florida, her interests in Blaker Enterprises LLC were in Florida.

Barber and Blaker Enterprises LLC next argued that Nevis law controlled both the charging order process and foreclosure of the charging order, in particular the Nevis Limited Liability Company Ordinance of 1995.

Both Florida law and Nevis law allow for a charging order against the debtor/member's interest in an LLC, so they don't conflict initially. It is on the issue of foreclosure where there is an actual conflict: Florida law allows foreclosure in the case of a single-member LLC, but Nevis law doesn't allow foreclosure at all. Similarly, Nevis law allows the LLC to redeem the debtor/member's interest which has been made subject to a charging order, but Florida law does not allow such redemption.

So how to resolve the conflict? Engage in a conflict-of-laws analysis, of course.

Since the Court was a federal court sitting in diversity jurisdiction, it applies the choice-of-law rules as if it were a state court sitting in that same district; in other words, Florida choice-of-law rules would apply.

Since the base legal issue is whether the debtor/member's property interest in an LLC can be used to satisfy the judgment, and that interest is considered to be personal property, then the laws of the jurisdiction where that personal property is located would apply. As discussed above, personal property such as LLC interests is deemed to exist where the debtor resides, which in this case was Florida. Thus, Florida law would apply, and not Nevis law.

Finally, the Court engaged in an analysis as to whether foreclosure was necessary, or whether the distributions from the LLC to the charged interest were likely to pay off the judgment in a reasonable amount of time.

Think of it this way: If a creditor with a $10,000 judgment holds a charging order against a debtor's interest in an investment partnership paying $2,000 per month in distributions, the creditor will see the judgment paid off in five months, so there is no need to allow the creditor to foreclose.

Here, by stark contrast, Barber owed the Bank over $62 million and it was quite unlikely that Blakely Enterprises LLC was going to pay that anytime soon (or even keep up with accruing interest). This meant that the Banks could foreclose on Barber's interest, and so the Court denied her and Blakey Enterprises LLC's Motion to Dismiss on this point.

ANALYSIS

The area of asset protection planning has long been overrun with hucksters. There are the guys from Utah who sells elaborate but pretty much worthless do-it-yourself kits to doctors. There are the militia types who sell utterly worthless Pure Trusts to the paranoid Dale Gribbles of the world. And then there are lots of internet promoters, almost all non-attorneys and many with bad backgrounds, to hawk Nevis LLCs as the cure-all for one's asset protection needs.

As we see here, they are not. Nonetheless, these promoters have helped to make Nevis one of the most prolific formation jurisdictions for LLCs on Earth. I can't honestly say that I care much about any of these issues, having become quite cynical over the years to the plight of folks who are dumb enough to be taken in by these hucksters. I've come to look at it as little more than a form of Financial Darwinism.

What is much more important about this case is the conflict-of-laws analysis, which would apply with equal fervor and probably the same effect to LLCs formed in any jurisdiction.

Quite a few states compete for LLC formation business, not the least of which being Delaware, Wyoming and Nevada ("non-foreclosure states). One of the biggest claims these states have over the laws of other states, where most prospective clients actually live, such as California or New York ("foreclosure states"), is that their laws prohibit the foreclosure of interests in LLCs.

However, as this case illustrates, the benefits of using an LLC from a non-foreclosure state is largely illusory, since the applicable law will be that of the state where the debtor resides, and that will be a foreclosure state if that is where the debtor resides.

I asked Christopher L. Pitet, a litigator in Southern California who often deals with business disputes, for his thoughts on the matter:

It seems that one must be careful in weighing the possibly negligible creditor-debtor benefits of forming an LLC in another state, against the potentially significant downside that if a dispute does arise within the business, the members might end up under the Internal Affairs Doctrine having to expensively litigate the dispute in whatever distant place the company was formed.

There may still be some benefits in some circumstances to forming an LLC in another state, such as lower costs of formation and ongoing annual costs. Considering that California has an $800 minimum gross receipts tax on its LLC formed or qualified to do business there, and it is easy to see why residents of the Golden State often try to take their LLC business elsewhere, particularly when it relates to business activity outside of California.

In terms of asset protection, we see again that LLC is simply not much of a front-line asset protection defense against creditors, and particularly if the LLC will have only one member (and, frankly, not that much better if there are multiple members). Where LLCs are best used in asset protection planning are as holding subsidiaries for Trusts, or to try to contain the liabilities of certain business activities. Like many other things, LLCs can be strong tools when used in the right hands in the right circumstances, but poor tools when used otherwise.

Unfortunately, here we see the worst use of an LLC, which is as a last-minute solution to try to hide the assets of a distressed debtor. Such an LLC was unlikely to work whether formed in Nevis or Delaware or Nebraska -- it just would not have made much of a difference.

But, hey, I'm sure that forming a Nevis LLC sounded cool at the time.

CITE AS

Wells Fargo Bank v. Barber, 2015 WL 470589 (M.D.Fla., Feb. 4, 2015). Full Opinion at https://chargingorder.com/opinion-2015-florida-barber-charging-order.html

This article at http://onforb.es/1JqluPI and http://goo.gl/9K33Yg

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