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  Nevada's New Corporate Laws

Nevada’s New Corporate laws – Too Little Too Late?

19 September 2007

In prior articles, I’ve written about the havoc wreaked on Nevada’s corporate reputation by the Asset Protection Group (APG) and its principals, disbarred lawyer Bill Reed and his right-hand man, convicted felon Rick Neiswonger.  (See my articles on “What About Nevada” and “The Asset Protection Scams Never End,” also on this website). Before it finally melted down in a barrage of federal lawsuits brought by the FTC and the IRS, APG took in nearly $20 million from “representatives” the company solicited through talk radio and other advertisements, who would pay almost $10,000 each for the privilege of selling Reed’s “bulletproof asset protection” program.  That program, such as it was, consisted of a combination of Nevada “bearer share” corporations, offshore companies, nominee officers (usually Reed and cohorts), “friendly liens,” and a host of other shady dealings.  

Things got so bad in Nevada that USA Today ran an article in which it confirmed that Nevada, along with Wyoming, was one of the states engaged in a “race to the bottom,” vying to set minimal corporate information requirements that enabled companies to hide the identities of their owners and thus make it difficult for law enforcement agencies to track suspected tax evasion, money laundering and other crimes.    http://www.usatoday.com/money/companies/regulation/2007-02-23-tax-havens-usat_x.htm).  This confirmed earlier reports from both the IRS (http://hsgac.senate.gov/_files/STMTBurgessIRS.pdf ) and the multi-agency Money Laundering Task Force (http://www.ustreas.gov/offices/enforcement/pdf/mlta.pdf) that Nevada was among the worst offenders when it came to being a haven for scammers, money launderers and tax evaders.

In its last session, the Nevada legislature decided to do as the late W.C. Fields once advised, and “take the bull by the tail and face the situation.”  In legislation designed to ease some of the pressure on Nevada’s bad reputation, new laws were passed that outlawed “bearer shares,” required that corporate owners keep more detailed records, and mandated corporate cooperation with criminal investigations regarding Nevada corporations.

So far, so good – or so it may seem.  Finally, it appeared, Nevada could start to build a good name for itself in the corporate arena.  No longer would Nevada be touted as “different.”  No more would Nevada be seen as outside the mainstream.  But, as things go, things were not quite so simple as they appeared.  The Nevada “corporate industry,” which had made its money hawking the advantages of Nevada corporations over every other state’s companies, appeared to be in crisis mode.  After all, if Nevada couldn’t be sold as a privacy haven through “bearer shares” and other minimal disclosure requirements, how could these promoters make a living?  Customers would abandon Nevada and start using their own states to incorporate in.  The answer came in a flash of light – the “corporate industry” pushed through a change to Nevada’s corporate laws to allow charging order protection to Nevada corporations, something that no other state in the nation allows – and which the uniform corporate codes do not provide.

In order to understand what this means, it’s important to have a basic knowledge of exactly what types of rights a creditor has with regard to different business entities.  If a creditor gets a judgment against an owner of corporate stock, the creditor can seize that stock – thus stepping into the shoes of the debtor – and can force a sale of the corporate assets or otherwise vote those shares to the creditor’s advantage.  On the other hand, if a creditor gets a judgment against a limited partner in a limited partnership or a member of a limited liability company, the creditor doesn’t have the right to seize the ownership interest in that business entity.  The best the creditor can do is to get a “charging order” – a piece of paper that entitles the creditor to distributions from the limited partnership or limited liability company.  Of course, if the limited partnership or limited liability company decides never to make a distribution, the creditor is stuck waiting for a long time – perhaps forever – without satisfaction of the judgment.  (See my article on “The Charging Order,” also on this website).

Now, in theory, by the Nevada legislature’s allowance of charging order protection to be applied to certain types of corporations in Nevada, a creditor of a Nevada corporation would appear to be just as stuck in trying to get satisfaction from a Nevada corporation as the creditor would be in trying to get satisfaction from a limited partnership or a limited liability company.  “Aha,” cried the Nevada corporate promoters, “we can still offer something in Nevada that no one else can match!  We can offer corporate charging order protection nationwide, which nobody else can do.  Our ‘industry’ is saved!”

Or was it?  There’s a problem that arises from this new law – a problem that the Nevada “corporate industry” either didn’t think through or simply didn’t care about.  It’s a pretty big problem, actually – a problem that arises from the application of the United States Constitution’s “full faith and credit clause” within the context of conflicting state policies. 

Let’s suppose that a California creditor gets a judgment in California against a California debtor who happens to be a shareholder in a Nevada corporation.  Doesn’t the fact that the corporation is registered in Nevada mandate that Nevada’s “charging order protection” should apply?  Actually, no.  The full faith and credit clause doesn’t mean that each state is a sovereign nation that can legislate away the public policy of each other state (for example, forcing California to abandon its own corporate law in favor of conflicting Nevada law).  To the contrary, it generally provides that each state may enforce its own public policy unless there is a compelling reason not to.  (There’s a huge and complex body of law called “conflict of laws” that gives law students headaches and lawyers full employment – I don’t have time or space to treat it in detail here – suffice it to say that it consists of the courts of one state trying to figure out and apply the laws and public policy of other states within the context of individual cases).  In the situation that I described above, it is most likely that a California court would hold that the public policy of the state of California would mandate that the California corporate laws should apply between two California residents and that the California creditor could seize the California debtor’s corporate shares, regardless of what the law of Nevada may say about “charging order protection.”  Nevada’s “charging order protection” statute wouldn’t supercede California’s public policy. 

Of course, as to a beef between a Nevada creditor and a Nevada debtor suing in a Nevada court for shares of a Nevada corporation, the outcome may well be different, since the public policy of the state of Nevada should arguably be applied to that situation.  But that’s not what the Nevada “corporate industry” is apparently pushing with Nevada’s new corporate charging order protection law.  It’s still out there selling the idea that ownership of a Nevada corporation will give you some kind of special protection that you can’t get anywhere else – that Nevada is somehow still at the forefront of “asset protection states.”  And, unfortunately, as far as I can see, it doesn’t necessarily appear to be true. Now, I must say here that because this law is so new, there is no case law or other guidance that we can look to in order to know exactly what the limits and the contours of this statute are.  Until then, it appears that Nevada’s new corporate statutes are in a state of limbo that makes it harder, not easier, to determine just what it means to be a shareholder in a Nevada corporation, and what types of protection a Nevada shareholder can rely on.

So, where does that leave Nevada?  On the one hand, the prohibition against “bearer shares” and the stricter disclosure measures are a small step in the direction of respectability.  On the other hand, the “corporate charging order protection” statutes appear to cause more problems than they resolve – at least until there is some significant case law on the books construing just how far that protection extends and to whom.

The conclusion of the continuing saga of Nevada’s corporate laws and reputation has by no means been written yet.  Nonetheless, it appears that for every two steps forward, there’s at least one step back … or maybe sideways.  In the meantime, I suggest that anyone considering a Nevada business entity take a hard look at whether it is the best structure for them and consult with competent counsel and other advisers as to whether Nevada’s for them.

Randall K. Edwards practices law in Nevada, Utah, California and Arizona, with his primary office located in Salt Lake City.

 

 

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