Charging Orders Do Not Give Creditors an Interest in a Company’s Assets

by Bruce Givner on March 23, 2012

A judgment creditor cannot divest a member and manager of a limited-liability company of his managerial duties.  Furthermore, a judgment creditor is only entitled to the debtor’s economic interests in, and not the assets of, a limited-liability company.  Weddell v. H2O, Inc., 128 Nev.Adv.Op. #9 (Nev., Mar. 1, 2012).

Michael Stewart and Rolland Weddell formed a limited liability company called Granite Investment Group.  In 2005, Stewart and Weddell revised Granite’s operating agreement giving Stewart 1.5 votes and Weddell 1 vote.  The revision also only allowed a manager to be removed by a unanimous vote of all the members.

In 2007, Stewart used his majority power to remove Weddell as a manager of Granite.  In 2008, in an unrelated matter, a district court granted a charging order against Weddell for over $6 million.  The charging order assigned all of Weddell’s disbursements and distributions, including interest, from his business interests, to the judgment creditor.  Nevada Revised Statutes (NRS) 86.401.  After the charging order, Stewart purchased Weddell's remaining interest in Granite for $100.

The District Court held that Stewart and Weddell’s business activities were “simply strategic” and not meant to defraud the creditor (who was not a party to this litigation).  Furthermore, the Court held the charging order gave the judgment creditor an economic interest in the profits, losses, and assets distributed.  It did not give the creditor any right to the assets of Granite, or management right over Granite.

The Supreme Court agreed.  However, the case was remanded back to the District Court to ensure Stewart properly bought out Weddell’s interest under the terms of the operating agreement.

If you need to Defend Your Assets Against Creditors, call Givner & Kaye at (310) 207-8008.

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