The Creditor's Remedy Against A Debtor's Interest In An LLC Or Partnership
2015 - Nevada - Becker
Becker v. Becker, 2015 WL 6550931 (Nev., 2015).
Supreme Court of Nevada.
Ernest A. BECKER, IV, Individually; Ernest A. Becker, IV, and Kathleen Becker, As Trustees of the Ernest A. Becker, IV, and Kathleen C. Becker Family Trust; EB Family Holdings, LLC; Kimberly Riggs; Sallie Becker; Brian Becker; and William A. Leonard, Trustee, Appellants,
Ernest August BECKER, V, Respondent.
No. 65335. | Oct. 29, 2015.
Certified question under NRAP 5 concerning the extent to which stocks in a closely held corporation are exempt property in bankruptcy proceedings under NRS 21.090(1)(bb) and NRS 78.746. United States Bankruptcy Court, District of Nevada; Bruce T. Beesley, Bankruptcy Court Judge.
Attorneys and Law Firms
Nitz Walton & Heaton, Ltd., and James H. Walton, Las Vegas, for Appellants Ernest A. Becker, IV, individually; Ernest A. Becker, IV, and Kathleen Becker, as Trustees of the Ernest A. Becker, IV, and Kathleen C. Becker Family Trust; EB Family Holdings, LLC; Kimberly Riggs; Sallie Becker; and Brian Becker.
Schwartzer & McPherson Law Firm and Jason A. Imes and Lenard E. Schwartzer, Las Vegas, for Appellant William A. Leonard.
Mark Segal, Chartered, and Mark Bruce Segal, Las Vegas; The Law Office of Monica T. Centeno, a Professional Corporation, and Monica T. Centeno for Respondent.
BEFORE THE COURT EN BANC.
By the Court, GIBBONS, J.:
*1 In response to a certified question submitted by the United States Bankruptcy Court for the District of Nevada, we consider whether NRS 21.090(1)(bb) allows a debtor to exempt his entire interest in a closely held corporation, or whether the exemption is limited to the debtor's noneconomic interest in the corporation. We conclude that under NRS 21.090(1)(bb), a debtor can exempt his stock in the corporations described in NRS 78.746(2), but his economic interest in that stock can still be subject to the charging order remedy in NRS 78.746(1).
FACTUAL AND PROCEDURAL BACKGROUND
Appellant Ernest A. Becker (debtor) filed a voluntary Chapter 7 bankruptcy petition. On his personal property schedule, debtor listed "Ensworth Corporate Stock" with a value of $1,362,000, and "Eagle Rock Gaming, Inc.," stock with a value of $219,000. On his claimed exemption schedule, debtor asserted that, pursuant to NRS 21 .090(1)(bb), his entire interest in both corporations' stock was exempt from the bankruptcy estate.
Several creditors, interested parties, and the bankruptcy trustee (collectively, the objecting parties) filed objections. The objecting parties argued that under NRS 21.090(1)(bb), debtor can only exempt his noneconomic interest in the corporate stock and that debtor's economic interests, including all distributions and dividends, are part of the bankruptcy estate. The bankruptcy court held a hearing on the matter and decided to certify a question to this court.
In its certified question, the bankruptcy court asks whether NRS 21.090(1)(bb) allows a debtor to exempt his entire interest in a closely held corporation1 or whether the exemption is limited to the debtor's noneconomic interest in the corporation.
"Under NRAP 5(a), this court may answer questions of law certified to it by federal courts when the 'answers may "be determinative" of part of the federal case, there is no controlling [Nevada] precedent, and the answer will help settle important questions of law.' " Savage v. Pierson, 123 Nev. 86, 89, 157 P.3d 697, 699 (2007) (quoting Volvo Cars of N. Am. v. Ricci, 122 Nev. 746, 751, 137 P.3d 1161, 1164 (2006)). In the present case, (1) answering the question presented by the bankruptcy court will determine part of an ongoing bankruptcy case, (2) it appears that there is no Nevada precedent on the question presented in this case, and (3) the answer will settle an important question of law regarding the scope of NRS 21.090(1)(bb). Accordingly, we will address the question presented to this court.
Standard of review
 This case raises issues of statutory interpretation that this court reviews de novo. MGM Mirage v. Nev. Ins. Guar. Ass'n, 125 Nev. 223, 226–27, 209 P.3d 766, 768 (2009). "This court has established that when it is presented with an issue of statutory interpretation, it should give effect to the statute's plain meaning ." Id. at 228, 209 P.3d at 769. "Thus, when the language of a statute is plain and unambiguous, such that it is capable of only one meaning, this court should not construe that statute otherwise." Id. at 228–29, 209 P.3d at 769. NRS 21.090(1)(bb) does not provide for a complete exemption of corporate stock.
*2  "When a debtor files a Chapter 7 bankruptcy petition, all of the debtor's assets become property of the bankruptcy estate ... subject to the debtor's right to reclaim certain property as 'exempt .' " Schwab v. Reilly, 560 U.S. 770, 774, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). Under 11 U.S.C. sec. 522(b), debtors may choose the exemptions afforded by state law. Thus, bankruptcy debtors in Nevada may claim the exemptions listed in NRS Chapter 21.
In the present case, debtor seeks to exempt his stock in two closely held corporations pursuant to NRS 21.090(1)(bb). Debtor argues that NRS 21.090(1)(bb) allows him to exempt both his economic and noneconomic interests in the closely held corporations. In contrast, the objecting parties argue that NRS 21.090(1)(bb) only allows debtor to exempt his noneconomic interests in the closely held corporations.
NRS 21.090(1)(bb) states:
1. The following property is exempt from execution, except as otherwise specifically provided in this section or required by federal law:
(bb) Stock of a corporation described in subsection 2 of NRS 78.746 except as set forth in that section.
(Emphasis added.) Thus, understanding what NRS 21.090(1)(bb) exempts requires examining NRS 78.746.
Background and effect of NRS 78.746
NRS 78.746 allows creditors to obtain charging orders against a debtor's interest in small, nonpublic corporations. NRS 78.746(1). NRS 78.746 states:
1. On application to a court of competent jurisdiction by any judgment creditor of a stockholder, the court may charge the stockholder's stock with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the stockholder's stock.
2. Subject to the provisions of NRS 78.747, this section:
(a) Provides the exclusive remedy by which a judgment creditor of a stockholder or an assignee of a stockholder may satisfy a judgment out of the stock of the judgment debtor. No other remedy, including, without limitation, foreclosure on the stockholder's stock or a court order for directions, accounts and inquiries that the debtor or stockholder might have made, is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor's interest in the corporation, and no other remedy may be ordered by a court.
(b) Does not deprive any stockholder of the benefit of any exemption applicable to the stockholder's stock.
(c) Applies only to a corporation that:
(1) Has fewer than 100 stockholders of record at any time.
(2) Is not a publicly traded corporation or a subsidiary of a publicly traded corporation, either in whole or in part.
(3) Is not a professional corporation as defined in NRS 89.020.
(d) Does not apply to any liability of a stockholder that exists as the result of an action filed before July 1, 2007.
(e) Does not supersede any written agreement between a stockholder and a creditor if the written agreement does not conflict with the corporation's articles of incorporation, by laws or any shareholder agreement to which the stockholder is a party.
*3 3. As used in this section, "rights of an assignee" means the rights to receive the share of the distributions or dividends paid by the corporation 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 or to become a director of the corporation.
 A charging order is "[a] statutory procedure whereby an individual [shareholder's] creditor can satisfy its claim from the [shareholder's] interest in the [corporation]. Black's Law Dictionary 283 (10th ed.2014). NRS 78.746 limits the creditor's attachment, however, to the debtor's economic interest in the corporations. NRS 78.746(1), (3). In other words, a creditor can get a charging order to attach a debtor's stream of income from the corporation, such as distributions and dividends, but the creditor cannot foreclose on the shares or take over management of the corporation. Id. NRS 78.746 prohibits creditors from attaching debtors' noneconomic interests in small corporations because "most ... closely-held corporations are family-owned and they would ... be disrupted" if creditors could take over management. Hearing on S.B. 317 Before the Assembly Comm. on Judiciary, 74th Leg. (Nev., May 7, 2007). Accordingly, NRS 78.746 strikes a balance by allowing creditors to satisfy their judgments from the debtor's economic interest in the corporation, without disturbing the corporation's management. See id.
 Thus, creditors can obtain a charging order to charge a debtor shareholder's interest in a corporation, but creditors only have the rights of an assignee, NRS 78.746(1), who only has a right to the shareholder's economic interest in the corporation. NRS 78.746(3). And, the charging order remedy in NRS 78.746(1) only applies to small, nonpublic corporations. NRS 78.746(2)(c); see also NRS 86.401; Weddell v. H20, Inc., 128 Nev., Adv. Op. 9, 271 P.3d 743 (2012) (limiting a charging order to a debtor's economic interest in a limited liability company); but see NRS 87.280; Tupper v. Kroc, 88 Nev. 146, 494 P.2d 1275 (1972) (permitting foreclosure of a charging order against a partnership interest). Stock that is exempt under NRS 21.090(1)(bb) can still be subject to a charging order pursuant to NRS 78.746(1)
Although NRS 78.746 permits a creditor to charge a debtor's stock, debtor argues that NRS 21.090(1)(bb)'s language exempting "[s]tock of a corporation described in subsection 2 of NRS 78.746 except as set forth in that section " (emphasis added) means that he gets a complete exemption of his corporate stock—both his economic and noneconomic interests—as long as his corporations meet the criteria for closely held corporations in NRS 78.746(2)(c). Debtor contends that the only reason NRS 78.746 is referenced in NRS 21.090(1)(bb) is to explain what type of stock is completely exempt—i.e,, stock in closely held corporations.
*4 In contrast, the objecting parties argue that NRS 21.090(1)(bb)'s language permits debtors to exempt stock in corporations—as described in NRS 78.746(2)—but only to the extent allowed by the rest of NRS 78.746. In other words, a debtor may exempt his noneconomic interest in small corporations, but creditors may still obtain a charging order against his economic interests pursuant to NRS 78.746(1).
  We hold that NRS 21.090(1)(bb) does not provide for a complete exemption of stock in small corporations. We conclude that use of the word "section" in "except as set forth in that section" in NRS 21.090(1)(bb) shows that the exemption is limited by all of NRS 78.746, including NRS 78.746(1)'s charging order remedy. See Perry v. First Nat'l Bank, 459 F.3d 816, 820 (7th Cir.2006) ("[T]he phrase 'this section' [in a statute] unambiguously refers to [the] section ... as a whole."). Thus, based on a plain reading of NRS 21.090(1)(bb), debtors can exempt stock in corporations that meet the criteria in NRS 78.746(2), but the stock can still be subject to a charging order pursuant to NRS 78.746(1). If a charging order is issued, the creditors charge the debtor's economic interest in the corporation, but the debtor retains his noneconomic interest in the corporation. NRS 78.746(3).
NRS 78.746(2)(b) does not prohibit charging orders on shares of stock
Debtor argues, however, that NRS 78.746(2)(b)'s provision that "this section[ d]oes not deprive any stockholder of the benefit of any exemption applicable to the stockholder's stock" means that his corporate stock exemption cannot be limited in any way, such as limiting it to his noneconomic interest in the stock. We disagree.
  We conclude that NRS 78.746(2)(b) simply clarifies that NRS 78.746(1)'s charging order remedy does not prohibit debtors from claiming other exemptions that apply to their economic interest in the corporation. For example, NRS 21.090(1)(z)—the so-called wildcard exemption—allows a debtor to exempt up to $1,000 in any personal property, including stock. Thus, NRS 78.746(2)(b) simply clarifies that even though a creditor can charge a debtor's economic interest in a corporation, the debtor can still apply the wildcard exemption to retain up to $1,000 in distributions from the corporation.2 See In re Foos, 405 B.R. 604, 609 (Bankr.N.D.Ohio 2009) (concluding that a statute similar to NRS 78.746(2)(b) simply clarifies that although creditors can attach a debtor's economic interest in a partnership, the debtor can still claim other exemptions that apply to his economic interest).
Further, debtor's interpretation of NRS 21.090(1)(bb) and NRS 78.746(2)(b)—that they provide for a complete exemption of stock in small corporations—would render NRS 78.746(1) meaningless. See CarsonTahoe Hosp. v. Bldg. & Constr. Trades Council of N. Nev., 122 Nev. 218, 220, 128 P.3d 1065, 1067 (2006) (stating that "[n]o part of a statute should be rendered meaningless"). NRS 78.746(1) allows for charging orders so that judgment creditors can attach shareholders' economic interest in small corporations. If NRS 21.090(1)(bb) and NRS 78.746(2)(b) then allowed for a complete exemption of stock, judgment creditors could never get the charging order remedy in NRS 78.746(1). Such an interpretation is impermissible.
*5 We conclude that based on a plain reading, NRS 21.090(1)(bb)'s language exempting "[s]tock of a corporation described in subsection 2 of NRS 78.746 except as set forth in that section " (emphasis added) means that a debtor can exempt stock in the corporations described in NRS 78.746(2), but his economic interest in that stock can still be subject to the charging order remedy in NRS 78.746(1).3
We concur: HARDESTY, C.J., and DOUGLAS, SAITTA, PARRAGUIRRE, CHERRY, PICKERING, JJ.
--- P.3d ----, 2015 WL 6550931, 131 Nev. Adv. Op. 85
Although the bankruptcy court described the corporations as "closely held" corporations, it did not specify how many persons are stockholders of record of the corporations, whether the corporations are publicly traded, or whether the corporations were incorporated under NRS Chapter 78 (private corporations) or 78A (close corporations) or another NRS chapter. The parties have not addressed these questions or raised them as issues and thus, for purposes of this opinion, we assume that the corporations are not publicly traded and interpret "closely held" to mean that the corporations have less than 100 shareholders. See NRS 78.746(2)(c)(1)-(2). Because NRS 78.746 is applicable to close corporations under NRS 78A.010, we also assume that the corporations are incorporated under either NRS Chapter 78 or 78A.
There are several other exemptions that could possibly apply to a debtor's economic interest in a closely held corporation, for example, if the debtor received the stock as payment for criminal restitution, NRS 21.090(1)(x), or as compensation for a personal injury, NRS 21.090(1)(u).
We have considered the parties' remaining arguments and conclude that they are without merit.
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More Articles On Charging Orders click here
LAW REVIEW ARTICLES
by Jay Adkisson
For more on the historical background of Charging Orders and contemporary issues involving the same, see Jay Adkisson's article, Charging Orders: The Peculiar Mechanism, 61 South Dakota Law Review 440 (2016). Available at SSRN: https://ssrn.com/abstract=2928487
Analysis of Uniform Limited Liability Company Act Sections re Charging Orders
The Uniform Acts re Charging Orders and Transferable Interests (without Jay's comments):
Effect of Bankruptcy On The Debtor-Member's LLC Interest here
Collected Court Opinions On Charging Orders here and below
NATURE OF REMEDY
Distributions/Economic Rights - Creditors rights to distributional interests/economic rights
Prejudgment Relief - Freezing the interest and distributions pending judgment
Entities - The types of legal entities amenable to charging orders, or not
Procedure - The procedure for obtaining a charging order and ancillary provisions
Unknown Interest - Where the debtor's interest, if any, has not been ascertained
Order Form Generally - Most issues to the form of the charging order
Order Form Future Interests - How the charging order affects subsequently-acquired interests
Exemptions - Available state and federal protections that may apply to charging orders
Abstention - Collateral attacks on charging orders in federal court
Conflicts-Of-Law - Determining which state's laws apply to a charging order dispute
Jurisdiction - Issues relating to the court's authority over out-of-state debtors and LLCs
Foreign Entities - Charging orders against out-of-state entities
Creditor Rights Restrictions - Limitations on creditors' management and informational rights
Information Rights - Creditors' ability to access information about the LLC
Management & Voting Rights - Rights of creditor after charging order issued
LIEN EFFECT AND PRIORITY
Lien - The lien effect of a charging order and priority issues
Compliance - Issues for the LLC and non-debtor members in complying with a charging order
Receiver - The role of the receiver in charging order proceedings
SINGLE MEMBER LLC
Single-Member LLCs - Enforcing the judgment against an LLC with a sole member
Foreclosure - Liquidation by judicial sale of the debtor's right to distributions
REPURCHASE AND REDEMPTION RIGHTS
Repurchase/Redemption Rights - Third-parties' ability to purchase the charged interest
Appeal - Issues relating to the appeal of a charging order
RELATION TO OTHER REMEDIES
Exclusivity - The charging order as the sole remedy available to creditors and exceptions
Voidable Transactions/Fraudulent Transfers - Issues relating to avoidable transfers of interests
Abstention - Attempts to collaterally attack the charging order in federal court
Bankruptcy - Treatment of the debtor/member's interest in bankruptcy
Intra-Member Disputes - Where one member obtains a charging order against another
Taxes - Tax issues relating to charging orders for all involved parties
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Additional Court Opinions About charging orders (unsorted)
THE CHARGING ORDERS PRACTICE GUIDE
The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association, click here for more
Available for purchase directly from the ABA at https://goo.gl/faZzY6
Also available from Amazon at https://www.amazon.com/Charging-Orders-Practice-Guide-Understanding/dp/1641052643
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