Nevada Extends Charging Order Protection to Single Member LLCs: An Interview with Steven J. Oshins, Esq.
July 27, 2011
Steve Oshins is a nationally acclaimed estate planning and asset protection attorney at Oshins & Associates, LLC (www.oshins.com). He is renowned for his efforts at providing innovative solutions for the asset protection concerns of clients. He has played a unique role in designing legislation that has made Nevada a leading trust and asset protection jurisdiction. According to Forbes Magazine, Nevada has the most favorable asset protection trust laws of any state in the country. Recently, Mr. Oshins was instrumental in the drafting of the part of Senate Bill 405, signed into law on June 16, 2011, that specifies charging order protection as the exclusive remedy for creditors of a debtor who is the sole member of a single member limited liability company (SMLLC).
The SMLLC is useful for many non-asset protection purposes. The problem that has cast doubt on its use has been the unsettled question of exposure of the debtor’s ownership membership interest in the SMLLC to an unsecured creditor’s claims. Decisions such as Olmstead and Albright have raised considerable concerns about the asset protection efficacy of an SMLLC. Olmstead, an advisory opinion of the Florida Supreme Court in response to an inquiry of the U.S. Court of Appeals for the Eleventh Circuit, makes clear that, unless the SMLLC statute clearly indicates that a charging order is the exclusive remedy available to the creditor, a court may allow the creditor to reach the debtor’s membership interest. Albright and other bankruptcy cases appear to hold that an SMLLC is not entitled to the same protection of creditors as a multi-member LLC because the purpose of such protection—noninterference with the interests of other members—is not a concern in the case of an SMLLC.
The new Nevada law seeks to address the concerns raised by the cases referenced above. As a result, Nevada now may well afford the most significant prospects of any state for reliable asset protection through use of the SMLLC.
Of course, beyond the concept, there are many details that need to be addressed properly. Mr. Oshins has kindly agreed to flesh out some of the more sophisticated issues that may arise in conjunction with reliance on the new law.*
Why the need for new legislation addressing SMLLCs?
After reading the Olmstead case in early 2010 and seeing where the trend in the law was heading, I felt that it was time to clarify Nevada’s charging order laws to continue to enhance them and keep Nevada ahead of the rest of the pack. So I contacted Attorneys Rob Kim and Mark Smallhouse, both part of the Business Law Section of the State Bar of Nevada, and worked with them on the new language. This is the third time I have authored or co-authored the Nevada charging order laws. I also wrote them in 2001 and 2003. This change in Nevada law makes Nevada and Wyoming the only two states to statutorily legislate that a single member LLC gets the same protection as a multi-member LLC.
The Nevada statute provides that a charging order is the “exclusive remedy.” Are you confident that the prohibition against any other remedy being imposed by a court prevents the imposition of equitable remedies such as a constructive trust or resulting trust?
Yes. In addition to the single member LLC changes, I added in language specifying that no equitable remedies can apply. Equitable remedies are remedies that the court will sometimes use where the legal remedies are insufficient for the judge to get to the desired result. I felt that South Dakota law had the best equitable remedy language, so I used that language.
Is there a provision in the enacting legislation, if not in the statute itself, assuring that the new law applies to pre-existing SMLLCs?
There’s no specific language. It is clear that it applies to pre-existing SMLLCs.
In Olmstead, the Florida Supreme Court pointed to an entirely independent statute that allowed creditors to foreclose on assets of the debtor. Is there any other provision in Nevada law that could be relied upon, as was the case in Olmstead?
There is no foreclosure language in the Nevada charging order statute. So this is not an issue under Nevada law.
Would utilization of a multi-member LLC still be a safer course, notwithstanding the new law?
Yes, it’s a good idea just in case a plaintiff’s attorney convinces an out of state judge to handle the issue outside of Nevada.
If so, how much of an interest is necessary for there to be a legitimate second member?
There’s no specific guidance on this. Technically, any second member interest should be fine, but since a court could conclude that the second member’s interest in too de minimus, at a minimum I would suggest at least a 1% interest.
Will a spouse’s community property interest suffice to make the LLC a multi-member LLC?
It should, but there’s no guidance on this, so it’s better to give each spouse a separate property interest to make sure it’s clear that there are multiple members.
If you are working with an SMLLC and an asset protection trust, why is Nevada law superior to the law of other states, such as Delaware or Alaska?
Since Nevada is the leading asset protection trust jurisdiction, there is no reason ever to use any other state. Nevada law only requires a two-year waiting period for asset protection for its asset protection trust. Delaware and Alaska require a four-year waiting period. Given that you can pick any state, it is shocking that an adviser would set up an asset protection trust under the laws of Delaware, Alaska or any other state that requires more than two years to be protected. What happens if the person is sued in the third or fourth year? How do you justify not using the leading state?
You have proposed in the past the possibility of using two LLCs for enhanced asset protection. How does this structure work?
I find this to be the best overall structure. I have the client own 1% of the first LLC and the Nevada Asset Protection Trust owns the other 99%. I have the client own 99% of the second LLC and the first LLC owns the other 1% of the second LLC. This structure puts up multiple walls of defense to frustrate a potential plaintiff. It is highly unlikely that a creditor would even want to attempt to break through this structure.
Does the alter ego theory apply if there is the same manager of both a parent and a sub-SMLLC?
This is where Nevada has a huge advantage over most other states. This new legislative bill makes it clear that no equitable remedies, even alter ego, can apply. This ties the judge’s hands and protects our client’s LLC assets.
Does the new statute take care of the risk of reverse veil piercing?
Yes, reverse veil piercing is another equitable remedy prohibited by the new statutes.
* Steve Oshins was interviewed by Neil Schoenblum, Senior Trust Officer at Provident Trust Group. Mr. Schoenblum specializes in asset protection and trust law, particularly the advantages offered by Nevada. He can be contacted at (888) 855-9856 or by e-mailing firstname.lastname@example.org.