Pub. 8 2013-2014 Issue 6

www.nebankers.org 10 Extraordinary Service for Extraordinary Members. T his article is the second in a two-part series discussing the adequacy of holding a Limited Liability Company (LLC) mem- bership interest as collateral. In part one, the discussion centered on what rights a creditor obtains upon the fore- closure of an LLCmembership interest. Under the Nebraska Uniform Lim- ited Liability Act (the Act), an LLC member may only pledge its “transfer- able interest.” This “transferable inter- est” provides a creditor economic rights (rights to distribution) in an LLC, but no right to participate in its management. 1 Without management rights, a credi- tor’s avenues to repayment are limited. A creditor has no right to participate in the decisions of the company, no ability to call for distributions to be made from the LLC, and no access to information concerning the LLC’s activities. This article will examine a recent Florida case that expanded the rights of a creditor foreclosing on an LLC membership interest, allowing for judg- ment against the debtor’s economic and management rights; whether the court’s decision can be applied favorably to creditors in Nebraska; and ways in which creditors can further protect their security interests. The “transferable interest” rule pro- hibits creditors from taking over aman- agement role in an LLC and, thereby, trumping the right of LLC members to choose their own partners. However, do these same protections exist when the debtor is the sole member of an LLC? The Florida Supreme Court case of Ol- mstead v. Federal Trade Commission 2 examined such a question, concluding that Florida law permitted a court to order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC. In its analysis, the Florida Supreme Court (the Court) held that under Florida statute, the sole member of a single-member LLCmay freely transfer the owner’s entire membership inter- est; as such, an interest is freely and COUNSELOR’S CORNER What Is the Transferable Interest? Part 2 of 2 Drew Sova , Husch Blackwell LLP LLCMembership Interest as Collateral: fully alienable by its owner. Further, the Court held the generally available creditor’s remedy of levy and execu- tion authorized a judgment creditor to obtain full title, including all member- ship rights, in a pledged membership interest. Even so, the Court’s decision ultimately hinged on the determina- tion that the statutory language did not limit the charging order as the exclusive remedy for a judgment creditor against an LLCmembership interest; therefore, it did not trump the more general credi- tor’s remedy of levy and execution. The Olmstead case was a win for creditors and caused the Florida Leg- islature to eventually adopt patch leg- islation to add clarity to the LLC laws of the state. 3 The patch amended the Florida Limited Liability Company Act to provide the charging order as the sole and exclusive remedy for a judg- ment creditor of a debtor’s membership interest in an LLC, except in the case of a single-member LLC. 4 In the case of a single-member LLC, the patch stated if the charging order remedy will not satisfy a creditor’s judgment within a reasonable time, the court may order the foreclosure sale of debtor’s entire sole-membership interest. 5&6 Unfortunately, in Nebraska, the prospect of similar protection being af- forded a creditor holding the sole-mem- bership interest in a single-member LLC appears unlikely. First and foremost, the Nebraska charging order statute does not provide for varying applica- tion in dealing with a single-member LLC’s versus a multi-member LLC’s membership interest. In addition, the foreclosure provision of the charging order statute expressly limits a court- ordered foreclosure to the “transferable interest” of the debtor’s membership interest. 7 Finally, the statute unequivo- cally provides the charging order as the exclusive remedy by which a judgment creditor may seek to enforce a judgment against an LLC membership interest. 8  COUNSELOR’S CORNER — continued on page 13