The Nevada Supreme Court recently issued a ruling in the court case Weddell v. H20, Inc. The case addressed the rights of LLC members where a creditor has obtained a charging order against a member of the LLC. A charging order is a remedy for creditors which directs the LLC to make any distributions to the judgment creditor rather than to the debtor LLC member. The charging order gives the creditor some recourse against a personal debtor who owns an interest in an LLC.
In Weddell v. H20, Inc, Rolland Weddell and his business partner Michael Stewart each owned percentages of two LLCs. An unrelated creditor obtained a personal judgment against Weddell for over $6 million. The creditor obtained a charging order against Weddell’s interest in the LLCs. The issue that the Nevada Supreme Court addressed was whether the creditor had rights under the charging order to participate in the management of the LLCs or to solely receive any distributions the LLC made to Weddell.
In reversing the District Court, the Court ruled that the charging order only allowed the creditor to obtain distributions made from the LLC to Weddell and did not affect Weddell’s managerial rights nor did it give the creditor an interest in the LLC’s assets.
This case is important as it protects the other members of the LLC. If one member of an LLC has personal judgments against him, the creditors will not be able to step in to the management of the LLC which could affect the other members of the LLC. The case also reaffirms that LLC’s are an effective asset protection planning tool as the courts will respect the charging order limitations. If you have any questions about asset protection laws in Nevada, feel free to contact our office for a consultation.