Single Member Nevis LLCs Subject to Florida Foreclosure Law
By: Morris Law Group - June 17, 2015
There’s a new legal precedent in town, and it’s not good for owners of Nevis single-member limited liability companies (“LLCs”). The Florida federal court's decision in Wells Fargo v. Barber essentially held that Florida residents who own single-member Nevis LLCs can have their interests foreclosed.
That means that if you are sued or otherwise incur a liability, your single-member Nevis LLC can essentially be taken away from you, along with all the assets inside it. Clearly, that’s a result you'd rather avoid.
The main benefit of having an LLC in the first place is that assets placed inside the entity are no longer titled in your name and should, in theory, be protected from creditors. If foreclosure is an available remedy to creditors, however, that theory goes up in smoke. What you need to do is make sure that you have legal planning in place which limits creditors to only a charging order.
What is a charging order?
A charging order is a legal remedy that allows creditors to intercept payments made from an LLC to the LLC members. It's very much like a garnishment of wages. The difference is that nobody can force the LLC to make distributions, so creditors know they could be waiting around for a very long time with no access to the LLC assets whatsoever, which puts them at a strategic disadvantage when it comes to settling potential lawsuits.
Why doesn’t a Nevis LLC already have charging order protection? Until very recently, a lot of commentators highlighted the fact that statutes in Nevis, a small island in the Caribbean West Indies, limited creditors of Nevis LLC members to a charging order as the sole and exclusive remedy available to them.
Unfortunately, Florida law is a little different from the Nevis statute. In Florida, creditors can foreclose on a single-member LLC, while they are limited to only a charging order for multi-member LLCs. The court in Wells Fargo v. Barber essentially held that the law of Florida and not Nevis applies where the member of an LLC resides in Florida. Since the Nevis LLC at issue in Wells Fargo v. Barber was a single-member LLC, the court allowed the creditors of the member to completely foreclose on the LLC interest and take complete ownership of it.
How can you get charging order protection for a Nevis LLC?
There are a few ways to accomplish this.The easiest and most straightforward is simply to add a member to an existing single-member LLC. Even in Florida, multi-member LLCs are afforded charging order protection.
An alternative way to diminish the effect of the Wells Fargo decision is to ensure that any single-member LLC is owned by a passive entity that conducts no business for which it could be sued or otherwise incur liabilities. For example, if an LLC is wholly owned by a validly existing limited partnership that only conducts business through its subsidiary companies and never provides loan guarantees or otherwise conducts business, then there would never be an opportunity for a creditor to foreclose on the LLC interest. The reason is that only creditors of a member can foreclose on an LLC interest. If a parent limited partnership is the sole member of an LLC and has no creditors and no possibility of ever incurring liabilities, then the courts should not allow a foreclosure to occur. Moreover, it is firmly established in Florida that a charging order is the sole and exclusive remedy available to creditors of a partner in a limited partnership, so the effect of this strategy is to superimpose charging order protection over an entity that could otherwise be foreclosed.
Similarly, having an LLC that is wholly-owned by a trust can be an effective strategy for circumventing the Wells Fargo case. With this strategy, the only way that an LLC could be foreclosed would be if the fiduciaries of the trust were sued or otherwise incurred liabilities in their capacity as fiduciaries.
Again, the easiest and surest way to gain charging order protection is to simply make sure that all LLCs owned by Florida residents are multi-member. The downside to this form of ownership is that the LLC cannot be disregarded for tax purposes, but the cost of an additional tax return is far outweighed by the fact that the LLC itself and the assets within it are safe from foreclosure. Please contact our office to discuss the planning opportunities available to you.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.