The legislative response to Olmstead

Larry Ribstein —  9 September 2011

I wrote last year about how the Florida Supreme Court had messed with the LLC “charging order” remedy to give the creditors of the sole member of an LLC access not just to the members’ financial rights, as the statute allows, but also to the member’s governance rights, which the statute arguably forecloses. The dissenters cited academic opposition (including from me) to the majority’s approach, its usurpation of the legislature’s role, and potential application beyond single-member LLCs.  I pointed out that

Now it’s back in the legislature’s court – and not just Florida, since this opinion is likely to be cited under any of the many statutes that resemble Florida’s. One possible fix is to change the statute to provide that creditors are not restricted to charging orders in smllcs. That might not work completely because it invites using nominal members with very small governance interests. More drastically, legislatures also might remove the temptation for asset protection by reinstating the business purpose requirement for LLCs, or at least qualifying the use of the charging order for LLCs used primarily for protecting assets from creditors.

I also discuss the law on this in Ribstein & Keatinge, §7:8, n. 17.

Now the legislative shoe has dropped in at least a couple of states:

  • Florida Stat. §608.433(6)-(8) tries to cabin the damage from Olmstead by providing special provisions for foreclosure on an interest in one-member LLCs.
  • Nevada Rev. St. §86.401 (2) clarifies that the charging order is the exclusive remedy for members’ creditors in all LLCs (thus cutting off the attachment or other route to taking over governance rights) and that foreclosure is unavailable even in one-member LLCs.

This swift legislative action indicates how state law can adjust rapidly to changes in a competitive legal environment.  Of course one might quarrel with these particular adjustments on policy grounds.  For a deeper discussion of the issues involved, see my article Reverse Liability and the Design of Business Associations.

The legislative response in these particular states highlight the bifurcated market in LLC law — the national market for formations of large LLCs dominated by Delaware, and the market for very small LLCs dominated by Florida and Nevada. See Kobayashi and Ribstein.  I suspect that these latter states may be competing for asset protection business, which is consistent with their actions here in quickly shoring up LLC members’ protection from creditors.

Larry Ribstein

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Professor of Law, University of Illinois College of Law