Chapter 6 - § 6.5 • CREDITOR RIGHTS IN OTHER STATES

• Jurisdiction: Colorado

§ 6.5 • CREDITOR RIGHTS IN OTHER STATES

§ 6.5.1—Delaware, Kansas, Wyoming, and Nevada

Other states have paid greater attention to a perceived need to protect owners of LLCs and corporations from their creditors. As noted above, Delaware and Kansas have provided that the charging order is the exclusive remedy available to a judgment creditor of a member of an LLC but do not expressly prohibit the court from issuing orders.¹²⁸ Wyoming and Nevada have gone farther. In 2010, the Wyoming legislature adopted a pure asset protection amendment to its limited liability company act.¹²⁹ This amendment provides that, even in the case of a single-member LLC, only a charging order is available to creditors of the single member.¹³⁰ As applicable, the Wyoming LLC Act now provides:

This section [17-29-503] provides the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judgment debtor who may be the sole member, dissociated member or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor's transferable interest[¹³¹ ] or from the assets of the limited liability company. Other remedies, including foreclosure on the judgment debtor's limited liability interest and a court order for directions, accounts and inquiries that the judgment debtor might have made are not available to the judgment creditor attempting to satisfy a judgment out of the judgment debtor's interest in the limited liability company and may not be ordered by the court.¹³²

Wyoming statutes do not provide a similar limitation for Wyoming partnerships and, in fact, specifically contemplate the right of a creditor to foreclose on a partner's transferable interest in a Wyoming partnership.¹³³ A "transferable interest" in a Wyoming partnership is defined as "the partner's interest in distributions."¹³⁴

In 2011, the Nevada legislature took the Wyoming LLC limitation even further in SB 405. This bill (entitled "An Act Relating to Business Entities") amended Nevada law relating to corporations, partnerships, and limited liability companies. The summary of SB 405 includes the following description of its purposes: "[R]evising provisions governing the rights of a judgment creditor to satisfy a judgment out of the debtor's ownership interest in certain business entities."

There are three relevant sections in Nevada SB 405 that implement the stated purpose of the bill:

• Section 52 amended Nev. Rev. Stat. § 78.746 to provide that, on application to a court of competent jurisdiction by any judgment creditor of a stockholder of a Nevada corporation, the court may charge the stockholder's stock with payment of the unsatisfied amount of the judgment with interest. This amendment does not apply to —

◦ A corporation that has 100 or more stockholders;
◦ A corporation that is publicly traded or that is a subsidiary of a publicly traded corporation; or
◦ A professional corporation as defined in Nev. Rev. Stat. § 89.020.

• Section 69 amended Nev. Rev. Stat. § 86.401 similarly for a member's interest in an LLC formed under Nevada law.
• Section 75 amended Nev. Rev. Stat. § 87A.480 similarly for a Nevada partnership interest.

The amendments to Nevada's LLC and partnership statutes do not contain the limitations in the amendment to Nevada's corporate statute.

In all cases, Nevada statutes now provide that the creditor so charging has only the rights of an assignee, and go on to say: "No other remedy, including, without limitation, foreclosure on the stockholder's stock [member's interest or partnership interest] or a court order for directions, accounts and inquiries that the debtor or stockholder [, member, or partner] might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor's interest in the corporation [, LLC, or partnership], and no other remedy may be ordered by a court."¹³⁵ The term "rights of an assignee" is defined in each of the sections to be "the rights to receive the share of the distributions or dividends paid by the corporation [, LLC, or partnership] to which the judgment debtor would otherwise be entitled. The term does not include the rights to participate in the management of the business or affairs of the corporation [, LLC, or partnership] or to become a director of the corporation."¹³⁶

The Nevada limited liability company act amendment¹³⁷ states specifically that the application of this amendment applies to a single-member LLC the same as to a multi-member LLC.

Arguably, the remedies of piercing the veil and fraudulent conveyances are still available for LLCs in Wyoming¹³⁸ and corporations and LLCs in Nevada, but the Wyoming and Nevada laws are draconian changes to the detriment of any contract, tort, or other creditor of an owner of a single- or multi-member Wyoming LLC or Nevada corporation or LLC. At least contract creditors have the opportunity to protect themselves up front.

In responding to a certified question from a United States Bankruptcy Court, the Nevada Supreme Court issued an interesting opinion that examines the interplay between Nevada's exemption statute for stock in close corporations and the Nevada charging order statutes.¹³⁹ The court held that a debtor may exempt the debtor's non-economic interest in a close corporation, but a creditor may obtain a charging order against the debtor's economic interest.

§ 6.5.2—Must Colorado Apply Another State's Charging Order Statute?

Whether a court in Colorado must recognize these limitations on a...