In a recent decision by the United States District Court, District of Nevada, in the case of In re Cleveland, that Court affirmed its position that a trustee in a Chapter 7 bankruptcy succeeds to all of a debtor’s rights in such debtor’s single-member LLC. 2014 WL 4809924 (D. Nev. Sept. 29, 2014). These rights include the power to control the LLC and to sell the assets of the LLC.
Under Nevada state law, a judgment creditor of an LLC member is entitled only to a charging order to enforce its judgment. NRS § 86.401. The charging order is the exclusive remedy, and this is the case no matter if the LLC has only a single-member or not. With a charging order, the judgment creditor can only claim distributions that would have been made to the member. In other words, each time the LLC is to make a distribution to a member subject to a charging order, the creditor that obtained the charging order can direct the LLC to make the distribution to it instead of to the member. The judgment creditor cannot, however, reach the LLC’s assets with a charging order.
The In re Cleveland decision, although decided by the United States District Court for the District of Nevada, does not limit the trustee in a Chapter 7 bankruptcy to only a charging order when it comes to single-member LLCs. Instead, in a bankruptcy situation, which is governed by federal law and which preempts state law, the trustee is permitted to control and otherwise sell the assets of a single-member LLC – something that cannot be done with a charging order. This distinction between state and federal law is important and should be considered when forming an LLC and certainly when a member of a single-member LLC is contemplating bankruptcy.
