Last week, the Nevada Supreme Court analyzed the rights of a judgment creditor of a member/manager of a limited liability company.  In Weddell v. H2O, Inc., 2012 Nev. LEXIS 26 (March 1, 2012), the court reviewed the development of Nevada's LLC legislation and provided a historical overview of the charging order remedy, citing my book, Bishop & Zucker on Nevada Corporations & Limited Liability Companies.

NRS 86.401 allows a judgment creditor to apply to a court of competent jurisdiction for an order charging the member's interest with payment of the unsatisfied amount of the creditor's judgment with interest.  The statute further provides that "[t]o the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest."   The court in Weddell held that a charging order only divests a member/manager of his economic opportunity to obtain profits and distributions from the LLC.  In other words, the member's membership interest, but not managerial rights, are charged.  The court reasoned that prohibiting the creditor from exercising the member's management rights reflects the principle that LLC members should be able to choose those members with whom they associate. 

In 2011, the legislature amended NRS 86.401 by adding the following underlined language to subsection 2(a):

Provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor [.] , whether the limited-liability company has one member or more than one member.  No other remedy, including, without limitation, foreclosure on the member’s interest or a court order for directions, accounts and inquiries that the debtor or member might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited-liability company, and no other remedy may be ordered by a court.

 The legislature also added a new subsection (4) which provides that NRS 86.401 "[d]oes not supersede any written agreement between a member and a creditor if the written agreement does not conflict with the limited-liability company’s articles of organization or operating agreement."  2011 Nev. Stat., ch. 455, § 69, 2800-01.

Mark Smallhouse, representing Executive Committee of the Business Law Section, State Bar of Nevada, gave the following explanation to the Assembly Committee on Judiciary:

The next provision deals with charging orders in sections 52, 69, 75, and 82.  The intent is to update Nevada's charging order protection laws that affect corporations, limited liabilities, and limited partnerships to make our laws as good as other states' laws including South Dakota, Wyoming, and Delaware, which have recent significant changes and clarifications as to when a charging order applies and ensuring the charging order is the exclusive remedy that is available to creditors.  This aids estate planners and wealth preservation planners who will often select Nevada as a state in which to organize a corporation, limited liability, or limited partnership based upon our charging order statutes.  Again, the change does not affect the relationship between consensual creditors or financial institutions that have direct dealings with a corporation.

Minutes of the Assembly Committee on Judiciary (May 12, 2011) at 5.