News & Events: Bankruptcy and Asset Protection Found in LLCs
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Bankruptcy and Asset Protection Found in LLCs
By: Kenneth A. Woloson, Esq. and Ogonna M. Atamoh, Esq.
Asset protection is often considered in terms of personal asset protection, but such a myopic view loses sight of asset protection mechanisms such as limited liability companies (“LLC”). In Nevada, Chapter 86 of the Nevada Revised Statutes governs the formation, management and maintenance of limited liability companies. NRS 86.081 defines a “member” as the owner of a member’s interest in a limited-liability company, while NRS 86.091 defines a “member’s interest” as a member’s share of the economic interests in a limited-liability company, including profits, losses and distributions of assets.
The key to asset protection through the formation of an LLC is the limitation of personal liability embodied in Nevada's statutory scheme. Nevada law expressly provides, as the default rule under NRS 86.371, that no member or manager of any Nevada LLC is individually liable for the debts or liabilities of the LLC. This remains true absent a provision in the LLC’s articles of organization or an agreement signed by a member or manager of the LLC. Asset protection is designed for the purpose of allowing individuals to reduce future personal liability by transferring assets into an LLC. However, while such transfers are permissible under Nevada law, any such transfers made to avoid known creditors or to hinder, delay or defraud creditors may be perceived by a bankruptcy court or by applicable Nevada law as a fraudulent transfer.
While midstream planning can be effective, pre-formation asset protection planning is far more efficient. For instance, if you are contemplating entering into a risky business, in order to minimize or avoid future personal liability with respect to such business, it may be wise to form an LLC prior to engaging in such business. Such LLC would then purchase assets for the business enterprise, enter into leases with respect to business equipment or commercial office space and generally conduct itself separate and apart from the individual members or managers of the business enterprise.
Notwithstanding an individual’s ability to have the LLC itself serve as the "risk-taking" party, rather than the individual owners or managers of the business, the individual members of an LLC are not entirely judgment proof. For instance, if a creditor obtains a judgment against a member of the LLC, the creditor is not without remedy under NRS 86.401, which allows a creditor to charge the member’s interest with payment of the unsatisfied amount of the judgment with interest. However, one of the built-in protections of an LLC is that a creditor has only the rights of an assignee of the member’s interest, and therefore cannot participate in the management of the limited liability company in which the judgment debtor is a member.
The formation of an LLC is a creature of state statute, namely Chapter 86 of the Nevada Revised Statute. The benefits to individuals of shifting the risk of personal liability to an LLC is not without responsibility, and one may not escape this responsibility by seeking bankruptcy protection for the LLC. Furthermore, fraudulent transfers can be alleged by a creditor in a state court action under Chapter 112 of the Nevada Revised Statutes, which embodies the Uniform Fraudulent Transfer Act, for purposes of setting aside transfers deemed fraudulent to such creditor.
However, Nevada’s statutory scheme governing fraudulent transfers, namely NRS 112.180, is expressly recognized by the United States Bankruptcy Code (the “Code”), and supplements the Code’s separate and distinct fraudulent transfer provision. Under state law, a member of an LLC must protect such member from collateral attack relating to fraudulent transfers by ensuring that transfers to the LLC, or obligations subsequently incurred by the LLC, were not made with intent to defraud, or made without receiving reasonably equivalent value.
The appropriate analysis under state law involves many considerations in order to determine whether actual intent to hinder, delay or default exists. These factors include, but are not limited to, transfer to an insider, member’s retention of possession or control of the property transferred, concealing the transfer, transfer after the member was threatened with litigation, a member’s transfer of substantially all of such member's assets to the LLC, the member absconded, removed or concealed assets, or the transfer resulted in insolvency or was made within close proximity of a member incurring substantial debt. Any efforts toward asset protection should be discussed and planned with a knowledgeable attorney in order to maintain the asset protection characteristics otherwise available through establishment of an LLC, and to avoid potential liability for a fraudulent transfer in a state or bankruptcy court.
BIOGRAPHIES
Kenneth A. Woloson is an AV Martindale-Hubbell Peer Review Rated shareholder of the firm with over 29 years of legal experience. He is well-versed in the preparation of wills, living trusts, irrevocable gift and insurance trusts, family limited partnerships and a variety of other probate avoidance and/or tax advantageous business entities. Mr. Woloson received his B.A. from the University of Nevada, Las Vegas in 1976, his J.D. from Columbia University Law School in 1980 and his Master of Laws (Taxation) from the University of San Diego School of Law in 1983. He was admitted to practice in Nevada in 1980.
Ogonna Atamoh is a shareholder with the firm focusing her practice on bankruptcy reorganization, creditor/debtor litigation, secured party representation, and commercial litigation. Ms. Atamoh is a 2001 graduate of the William S. Boyd School of Law at University of Nevada Las Vegas, and a 1998 graduate of the University of Nevada Las Vegas. Ms. Atamoh was admitted to practice in Nevada in 2001.