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The Charging Order Is Wear It's At, LLC, In Intra-Member Dispute

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Wear It's At LLC (yes, that is the actual name) was doing business in Florida, and had two members: Levy, who had a 51% membership interest, and Young, who had the other 49% membership interest.

At some point, the two ceased to get along, and a business divorce ensued. This was accomplished not in friendly, cheerful, and amicable fashion. Instead by Levy lock out Young, took Young's name off the business bank accounts, and fired Young from the employ of the business. Adios, don't bother to write, and what was in your desk will come in a box shortly.

Not being one to take such matters sitting down, Young sued Levy, and sought both an accounting and an injunction against Levy. The latter objected, but the Court sided with Young, and granted an emergency injunction that gave Young the day-to-day control of the business and its bank accounts. The Court required also Young to post a $5,000 bond.

But not being one to go silently into that good night either, Levy moved to dissolve the injunction -- and won. Young appealed, and lost.

The trial court then held several hearings, after which it concluded that Levy was in the right, and awarded her the $5,000 bond plus another $41,409 in attorney's fees. Young again appealed, and again lost -- but she didn't pay Levy any of the award.

Levy then moved the Court to issue a Writ of Garnishment, which in English is an order that seizes income and applies it towards the debt. To get the Writ issued, Levy represented to the Court that the LLC held $44,100 that was otherwise due to Young, and Levy wanted title to that money (Levy already had possession of it through the LLC) to satisfy the debt.

JDA

Young filed a claim for exemption against the garnishment, and lost. Thus, the Court issued the Writ of Garnishment for the $44,100. Young again appealed, this time asserting that under Florida law (as in the laws of nearly every state), Levy's remedy against Young was limited to a Charging Order against Young's membership interest, which was different than the moneys owed to her by the LLC.

Indeed, Florida law provides, as does the laws of nearly every state, that a Charging Order is the exclusive remedy by which a creditor (such as Levy) can get at a debtor-member's interest in an LLC.

For those who aren't familiar with a Charging Order, it is simply an order of the Court that has the effect of creating a lien on the debtor-member's interest, so that if distributions are made to that interest, those distributions go to the creditor instead of the debtor. While often spoken of in asset protection seminars in hallowed terms usually reserved for the great Nordic deities, that's all it is, and does -- an order that places a lien.

Levy attempted to get around this by arguing that the $44,100 represented Young's share of the profits, while a Charging Order would hit only distributions, and Young's profits were not distributions. That didn't make any more sense to the Court than it probably just did to readers, with the Court pointing out that profit distributions are just the sort of thing that a Charging Order would pick up.

While not clear from the Opinion, it appears that Levy made a much better argument, which is that the purpose of the so-called "Charging Order exclusivity" (i.e., the limitation of the creditor's remedy to a Charging Order as opposed to some other collection remedy) is not meant to protect the debtor-member's interest, so much as it is to protect the other member's of the LLC from interference by an outside creditor. In other words, in an intra-Member dispute, the Members should not be restricted to the sole and exclusive remedy of the Charging Order.

In this case, since Levy was the only other member of the LLC, it made no sense to limited Levy's remedy to a Charging Order, since she was the one supposedly "protected" by it, and Levy was the one seeking it.

Be that as it may, the Court basically ruled, the Florida state was clear and unambiguous in limiting a creditor's remedy to a Charging Order, and thus it was unnecessary for the Court to consider that argument, no matter how much sense it made. And with that, the Court held that the Writ of Garnishment was improper, and ruled in favor of Young.

ANALYSIS

Of course, this doesn't mean at all that Levy is out-of-luck. Presumably, Levy will now have a Charging Order entered against Young's interest, and then as the managing member of the LLC cause the LLC to distribute the $44,100 to the "charged" interest, i.e., right back to Levy.

But fundamentally, Levy was right: Restricting one member's remedy to a Charging Order in a suit between members makes little practical sense, and it is frankly a failure in the drafting of the statute to require such a thing.

But even if the application of "Charging Order exclusivity" is a statutory glitch that needs fixin', it is important to note that planners can probably get around this glitch by having the members agree through the LLC's Operating Agreement that in a suit between members, the exclusivity shall not apply, and members can use whatever other remedies are available by law to collect against the other member.

A good argument can be made that such a provision should be in every Operating Agreement, maybe not so much for this case, as for circumstances where one Member has embezzled money from the LLC and the other Members want to immediately freeze and execute upon the bad Member's share to make up for the embezzlement, while they simultaneously disassociate the bad Member from the LLC. This would avoid the legal fees, cost, expenses and time wasted pursuing a Charging Order, which can easily run well in excess of $10,000 in an average case.

Of course, all the Members would have to agree to the provision, but if one Member balked, you'd better be asking deeper questions as to why.

CITE AS

Young v. Levy, 2014 WL 2741060 (Fla.App., June 18, 2014). Full Opinion at https://chargingorder.com/opinion-2014-florida-young-charging-order.html

This article at http://onforb.es/1uPjXGr and http://goo.gl/vc8S5D

 

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