Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

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.

The use of voting and non-voting membership interests raises some interesting issues which may someday be answered in court cases. For instance, does a second member with voting rights, but without a financial interest, make the LLC a multi-member LLC for charging lien purposes? The charging lien remedy is supposed to protect non-debtor member’s LLC interest, but a member with voting rights only has no financial interest to protect from the debtor member’s creditors. Another issue is whether the voting member should give consideration for acquisition of his voting interest in what had been a single member LLC? Is this plan simply another fraudulent transfer to avoid creditors? These are not the only issues.

Even with potential legal challenges, I think that a business owner can increase LLC protection by giving away some voting rights to a trusted associate or employee without relinquishing or selling financial stake in a single owner business.
 

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A few days ago an attorney submitted an interesting question about creditor remedies against general partnership interests. As background, a general partnership is an equal partnership among two or more joint venturers as opposed to a limited partnership which consist of a general partner/manager and limited partner/investors. Florida law permits a creditor to foreclose the interest of a partner in a general partnership. Florida law states that a charging lien is the exclusive creditor remedy against limited partnership interests. The question is whether a creditor can foreclose the interest of a general partner of a limited partnership. In other words, is the creditor remedy determined by the type of interest or the type of partnership?

I’ve come across this question previously. I could not find any Florida court decisions on this issue last time I looked. In my opinion, a creditor cannot foreclose the partnership interest of the general partner in a limited partnership. The reason is that the relevant statutes restrict creditors to a charging lien against the interest of a "partner" in a limited partnership and permit foreclosure of "a partners" interest in a general partnership. The limited partnership creditor section does not distinguish general and limited partnership interest when it makes charging liens the exclusive remedy.

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Nevada passed a law this year applying the charging lien remedy to stock in a multi-shareholder  Nevada corporation. Charging liens are the creditor’s remedy to attack a debtor’s interests in limited partnerships and LLCs in most states. In Florida, the charging lien is a creditor’s exclusive remedy against limited partnership interests and an optional, but non-exclusive, remedy against debtor’s Florida LLC interests. Prior to the Nevada law, no state had said that judgment creditors are restricted to a charging lien , instead of levy and sale, of a debtor’s stock in a corporation.

Does the Nevada statute provide an asset protection tool for Florida debtors? There are no cases on this brand new statute, but I think the likely answer is that a Florida creditor may levy upon a Florida debtor’s stock in a Nevada corporation notwithstanding the Nevada statute stating that creditors a limited to charging liens. A levy is an action against the debtor’s stock certificate and not against the corporation. A creditor does not have to make the corporation a party in a levy proceeding, and therefore, the forum of the corporation is not controlling on the Florida remedy. I think a Florida judge will be able to permit creditors to levy upon Nevada corporate stock.

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Effective asset protection planning requires anticipation of what creditors’ attorneys may and will do to collect their judgments. The best way to learn creditor attorney strategy is to ask them. My social relationships with creditor attorneys are very valuable to me professionally, as well as personally, because they give me the opportunity to learn about their methods.

I recently had a lunch with one of Orlando’s preeminent collection lawyers. We discussed collection practices and asset protection strategy, and I found some of his comments to be interesting. I asked him what was the most effective debt collection tool. His answer was, without hesitation: bank account garnishments. Bank garnishments, he explained, was the only way to capture a significant amount of a debtor’s cash quickly and without lengthy legal proceedings. Bank accounts are where the money is. Bank garnishments strike a surprise blow to debtors which freeze their funds and usually force them to settle the remaining debt.

I next asked him whether wage garnishments were effective assuming the debtor is not head of household. He said that garnishments were not a good collection tool. First, the creditor collects small amounts of money each month toward the judgment, and his clients are not interested in long-term payback. Next, he explained, that wage garnishments usually force debtors to file bankruptcy because debtors will not work for an indeterminate future for the benefit of creditors. Wage garnishment, he felt, usually backfire against his clients' debt collection.

Many of my clients spend much time asking about charging liens a creditor could get against their LLC which operates their small business. This creditor attorney has not sought a single charging lien for many years. He cannot recall the last time he used a charging lien. From the creditor perspective, he explained, charging liens are ineffective against an LLC business managed by the debtor or the debtor’s family. The attorney explained that charging lien collection against a closely held LLC depends upon the honesty of the debtor; the creditor collects money only if the debtor voluntarily reports an LLC distribution subject to the lien. He found that most debtor LLC owners circumvent the charging lien with salary and loans, and that neither he nor his clients are able to monitor effectively the Debtor LLC distribution practices. It seems that an LLC properly formed and clear of fraudulent transfer challenges is practically a very effective asset protection too.

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