New Concerns With Limited Liability Company Asset Protection– Posted by Andrew R. Goodrich
Limited liability companies have become ubiquitous in the United States and in many locations abroad, and are the preferred entity type for many individuals creating businesses or business partnerships. Among the most appealing characteristics of the traditional LLC is the ability to limit liability by separating personal assets from those of the business or partnership. In most cases, as long as LLC formalities are properly completed, the LLC can effectively limit personal liability for its owners. It is less clear, however, that the LLC form can be used to effectively shield or protect assets held by LLCs incorporated in foreign—either state or country—jurisdictions.
In Wells Fargo Bank v. Barber, 2015 WL 470589 (M.D. Fla. 2015), the defendant made a number of financial transfers in order to avoid a significant deficiency judgement obtained by Wells Fargo. The bank sought to foreclose on the defendant’s membership interest in an LLC created under the laws of the country of Nevis. A previous Florida state court decision held that stock in a foreign corporation could not be reached by the court where the creditor and debtor were both subject to Florida jurisdiction. In that case, the court held that they were only able to exercise jurisdiction over property of a debtor located within the court’s territory. In Wells Fargo, however, the Federal district court held that LLC interests, unlike corporate stock, were considered intangible personal property and thus “accompany[y] the person of the owner.” Consequently, even though the LLC was a Nevis LLC, because the sole member of the LLC resided in Florida, the court had jurisdiction over the membership interests. Further, the court held that the situs of the property controls the choice of law used. Once again, because the property followed the owner, Florida law was used.
This case is particularly notable because it highlights the starkly different results between ownership interests in an LLC and a corporation. It is possible that the result could have been avoided had the debtor simply certificated the LLC membership interests and kept those certificates in the original LLC jurisdiction. That process creates certificates much like stock certificates, and consequently the outcome of the case would have been the same as the earlier case involving corporations. If you are utilizing an LLC in a foreign jurisdiction—state or country—for purposes of asset protection, the holding in Wells Fargo suggests that you would be wise to certificate the LLC interests. While it might cause additional administrative expense and hassle, it will be well worth the costs to obtain additional protections.
It is also possible, however, that certification would not have changed the result, and that there is something fundamental about the LLC entity form that prevents membership interests from being treated as tangible rather than intangible personal property. In that case, there is nothing to be done to ensure that a foreign LLC stays foreign.
Either way, while this is a Florida decision, other courts could make similar rulings at any time. While LLCs may work well to limit liability, it’s important to think carefully about what you hope to accomplish before selecting a corporate form. Proper planning and knowledge of business law/regulations is essential for any business formation. Please feel free to contact me at email@example.com if you have any questions about this or other business questions.