SB 405 went into effect on October 1, 2011. It strengthens the asset protections available to Nevada-based entities. The updated charging order language affects Nevada Limited Liability Companies (LLCs), Corporations and Limited Partnerships (LPs). The law changed as follows: the new language in the statute makes the charging order the exclusive remedy of a judgment creditor- including single member LLC’s and single shareholder corporations. A charging order is a remedy issued by the court giving the creditor a lien over the debtor’s interest in the entity. As such, this new language solves the problem brought forth in case law (specifically single-member LLC cases). Using the generous provisions provided by Nevada statute, many opportunities for asset protection and estate planning can be designed to maximize protection and take advantage of the charging order as the exclusive remedy, discouraging litigation and encouraging settlement.
Main Advantages of Forming Entities Post SB 405: No Equitable Remedies Allowed
Most significantly, SB 405 adds key language to the entity statues specifically stating that no other remedies may be applied. Equitable remedies have served to allow a court to evade the “charging order as the exclusive remedy” language in the past. Equitable remedies are court-granted remedies that require a party to act or refrain from performing a particular act. Under the doctrine of limited liability, a corporate entity is liable for the acts of a separate, related entity (or individual) only under extraordinary circumstances, commonly referred to as piercing the corporate veil. Federal common law typically involves a two pronged test for piercing the corporate veil: the party sought to be charged must have used its alter ego to perpetrate a fraud or have so dominated and disregarded its alter ego’s corporate form that the alter ego was actually carrying on the controlling party’s business instead of its own. In the Ninth Circuit, cases suggest (at least in California cases), that fraudulent intent in incorporation need not be shown to pierce the veil, as long as it can be shown that the separate identity of the corporation has not been respected and that respecting the corporate form would work an injustice on the litigants. The test for alter ego liability is almost identical to the veil-piercing test. Alter ego has been defined as a lack of attention to corporate formalities, commingling of assets and intertwining of operations. Alter ego requires demonstrating that the two corporations (or individual and corporation/company) functioned as a single entity. Applying this notion, the court could set aside the protection afforded by the corporation or company by ordering that the company or corporation is the owner’s “alter ego” then piercing the corporate veil by stating that the company and the individual are one in the same (and going after the other’s assets in satisfaction of the judgment). Of course, veil piercing and alter ego concepts are separate and distinct. Piercing the corporate veil allows the court to find A vicariously liable for B’s debts. By contrast, a contention that A is B’s alter ego asserts that A and B are the same entity. Liability then is not vicarious but direct. Most other forums do not specifically disallow the court from applying equitable remedies and, as such, the court would have discretion to seek piercing the corporate veil under theories such as reverse veil piercing, alter ego, constructive trust and the like. Of note is that one exception to SB 405 was made. Courts are allowed to apply the “alter ego” theory as the only equitable remedy as to corporations (not limited partnerships or LLCs). As such, Nevada LLCs and LPs continue to be a favored structure for ease of management and asset prot