Florida Asset Protection Law Blog | Attorney Jon Alper

People are trying to find a way to protect single member LLCs after the Florida Supreme Court said that creditors can levy or foreclose a debtor’s single member LLC interest. I frequently hear questions from clients and from emails sent by blog readers about forming a single member LLC in states such as Wyoming or Nevada whose laws restrict creditors to charging liens against single member as well as multi-member LLCs.

 I’ve stated previously on this blog my opinion that courts enforcing a Florida judgment against a Florida debtor’s single member LLC would apply Florida law (charging lien not exclusive remedy) rather than the law of the foreign state where the LLC was formed. I still have no knowledge of any judicial ruling on this issue. Not surprising, since the question became important only this past summer when the Florida court drew the distinction between the asset protection of single and multi member LLCs.

 

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You can file a new LLC yourself at Florida’s business website: www.sunbiz.org. The website has the forms with instructions, and it take just a few minutes. File your own LLC and save legal fees. It appears to be very simple. Yet, my experience is that about half the asset protection clients with a “do-it-yourself” LLC screw it up.

The Sunbiz form requires that you name at least one LLC manger and that you designate that manager as either “mgr” or “mgrm.” You are not required to file with the State the owners of the new LLC. Ownership can be determined as part of the operating agreement which is a private contract. However, when you designate an individual as an “mgrm” you are telling the State and the world that the person has an undivided  ownership interest in the LLC.

Here is an example of the problem. A husband and wife want to start a new business as an LLC to be run and managed by the husband but owned jointly as tenants by entireties. The husband assures his wife: “don’t worry, I can do it myself.” Husband files the new LLC on Sunbiz and puts his own name as “mgrm”. He is the manager and he is also an owner so the “mgrm” designation seems to fit. However, the husband arguably has registered an individual ownership position in the LLC which is inconsistent with his intention to own all the equitable membership interest as tenants by entireties. You cannot tell your creditors you hold all your LLC membership interests by the entireties if you previously have told the State of Florida(or the IRS) that you have an individual interests.

The above hypothetical example is but one of many problems I have seen with LLCs formed by legally  unsophisticated business owner who  find themselves seeking asset protection of their LLC ownership. My advice: do it yourself at Home Depot, but not a Sunbiz.org.
 

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The Florida Supreme Court decision this summer which removed charging lien protection for single member LLCs has caused business owners and their attorneys to search for ways to make sure their LLCs have more than one member. When only one person has invested money in a business it is difficult to turn that same LLC into a multi-member entity. One possibility is for the current owner to sell a portion of his LLC to a third party for reasonable value. The sale would have to withstand creditor challenge of the sale price and whether the sale is really “arms length.” A second possible plan is for the LLC membership interest to be divided into voting interests and non-voting interest, and for the owner to invite a third party to join the LLC as a voting member. The debtor would retain all the financial interest, but important LLC actions would require the consent of the new voting member.

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One of my Florida  clients has a joint account with his spouse at an internet bank. The bank has no branches other than its main office in Utah. The husband is facing personal liability from a failed commercial real estate venture. The client asks if the bank account is exempt as a tenants by entireties account.

A bank account is deemed to located where the account was opened. In most cases, a financial account is opened at a branch location. Because internet banks have no branches, I suspect a court may find the account is situated at the bank’s home office. A debtor could argue that in the case of an internet bank without branches the account is opened where the debtors resided at the time they applied for the bank account. The issue could go either way, but I think the better answer is that this account is anchored at the internet bank’s home office in Utah. Utah law does not recognize tenants by entireties ownership. I think the account is not protected as an entireties account.

If I’m right, then Florida debtors may be exposing joint bank accounts at national internet banks where the internet bank home office is in a state without entireties law. 

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Many homeowners with upside down mortgages have told me they are seeking a mortgage modification in order to lower their monthly mortgage payments. Under the government’s HAMP program, mortgage modification usually involves lowering the interest rate to 2 % intially and adding deferred interest and past-due payments to the loan principal.  

I find that most people do not comprehend the practical reality of a mortgage modification. If you continue to live in a currently upside down house with a modified mortgage payment you are essentially renting the property from the lender. You are renting because it is unlikely you will see any profit when the house is sold unless there is an explosive recovery in real estate value. Even if real estate values were to inflate at a 10% annual rate very few people will break even on their modified mortgage because the deferred interest and arrearage is continuously increasing the mortgage balance.

“Renting” through a modification still makes business sense for homeowner and lender. If the homeowner did not modify the mortgage payment and could not afford to pay the mortgage the homeowner would face foreclosure, and after foreclosure the owner would have to rent an apartment or rent someone else’s home. It will take several years before the homeowner will qualify for a new home mortgage. From the lender’s standpoint, permitting the current homeowner to remain in the property in what is effectively a rental status is better than taking back the property in today’s real estate market.

To be clear, I am not criticizing mortgage modifications. If you like your home and want to live in your home then you should modify the mortgage payment to something you can afford. Just be aware the for practical purposes you are on the same position as a tenant because you it is very unlikely that you will retain any  home equity.

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The Florida Supreme Court’s Ohmstead decision regarding LLC asset protection has caused surge of academic debate about LLC planning. Some of the discussions involved suggestions to form or move LLCs to states other than Florida because the other states’ laws expressly provide that a charging lien is the creditor’s sole remedy against a debtor’s LLC interests. These other state statutes do not distinguish single member and multiple member LLC protection. The academic issue is which state has the best LLC law? I think the question is provides an interesting academic exercise and comparison charts of various state statutes, but it does not address the real question, which is: would a Florida court dealing with a Florida judgment against a Florida debtor apply the LLC law of the state where the debtor formed his LLC (Nevada, Wyoming etc) or would the court apply Florida’s LLC law to the creditor’s collection enforcement?

A discussion of this issue is too involved for a brief blog post, and in any event, I don’t believe anyone knows the answer with certainty. I do have a suggestion, however, if you want to located an LLC outside of Florida for better asset protection. If you are going to form an LLC in another state, or move your Florida LLC elsewhere, your position will be improved if your LLC owns assets in the state where it is formed. The LLC’s bank accounts should be in banks located in the LLC’s home state at banks that have no Florida branches. If the LLC owns securities, transfer the securities to a broker whose offices are located only within the LLC’s home state. Successfully maintaining an LLC in a state other than Florida probably requires more than just registration. The more assets the LLC owns in its home state the more likely a Florida court will apply that state’s laws to a creditor action against your LLC interest.
 

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