What is the Cost of Not Choosing the Best Protection?

dunce

Last weekend I spoke at an event where people, tired of tenants and toilets, were turning to hard money lending for a source of income related to real estate investing.  Without a doubt, I can tell you the banking training was incredible and some of the strategies I taught to put these deals together were truly exciting.  I will reveal more in the coming weeks on these strategies and the education itself but this post was prompted based upon a conversation with a person who was a client for 24 hours.

I am sure you are wondering how a person can be a client for such a limited period of time.  It happens.  I did not fire the person (I will refer to her as Karen henceforth) but quite the contrary; she declined to move forward with our engagement the following day after speaking with her Utah attorney/CPA.  This does not happen very often but when it does, I need to know the reason.  It turns out my recommendation to create a Nevada LLC to hold the cash Karen utilized for her lending activities was, according to the Utah Attorney, unnecessary because Nevada benefits are overhyped, oversold, do not work, and end up costing a person several hundred dollars more each year compared to creating a local entity i.e., a LLC registered in her domicile of Idaho.

I think someone should read my discussion of Nevada’s benefits over other jurisdictions when it comes to asset protection.  In fact, the purpose of this post is to point out another feather was recently added to Nevada’s asset protection cap.

In the recent case of In re Blixseth, 484 B.R. 360 (B.A.P. 9th Cir. Dec. 17, 2012) the state of Montana forced Mr. Blixseth into involuntary bankruptcy over unpaid taxes.  In its petition, the state of Montana asserted venue was proper in Nevada because Blixseth had assets in Nevada. (Mr. Blixseth, a resident of Washington State, held interests in Desert Ranch LLLP, a Nevada limited liability limited partnership, and in Desert Ranch Management LLC, a Nevada limited liability company.)  Mr. Blixseth did not want to defend this case in Nevada because of costs and instead moved to force the state of Montana to bring its action in Washington State where Mr. Blixseth was a resident.

Mr. Blixseth argued proper jurisdiction existed in Washington State because he resided in Washington since 2007, he conducted no business in Nevada, he had no place of business in Nevada, and he had no property in Nevada. Therefore, despite the entities being Nevada businesses, his ownership interest resided in Washington.

After examining the issues, the Appellate court noted the LLC and the LLLP were formed under Nevada law and thus, they are governed by Nevada law, including its rules on the rights of creditors. Under Nevada law the only remedy of a judgment creditor of an LLC member or LLLP partner is to apply to a Nevada court for a charging order. Further, because Mr. Blixseth’s interests in the LLC and LLLP were created in Nevada and Nevada State law limits a creditor’s remedies, Mr. Blixseth’s ownership interests are therefore located in Nevada.  Thus, Nevada is the proper venue for the case.

This case is illustrative of how owning a Nevada entity, even though you do not live in Nevada, offers protection from claims asserted by in state creditors.  Consider if Karen found herself in a lawsuit in Idaho and she owned a Nevada LLC.  Obviously, the creditors attorney will assert the Idaho court has jurisdiction over her Nevada LLC because Karen lives in Idaho, conducts business in Idaho (not through her LLC), and has no assets in Nevada other than her LLC.   Thankfully Blixseth, Weddel v. H20, Inc. and American Institutional Partners, LLC (“AIP”) v. Fairstar Resources LTD (“Fairstar”) will help Karen’s attorney refute this argument and keep her LLC and its assets safe from her personal creditors.  If Karen reads this post I truly hope she is never involved in a lawsuit where her Utah’s attorney advice will be put to the test.  My only comment to Karen when she informed me of her decision – “Is a fee hundred dollars a year too much for top tier protection and peace of mind?”  Only time will tell…

3 comments On What is the Cost of Not Choosing the Best Protection?

  • Aloha Clint,

    I find that many of my friends are also of Karen’s mind. Here we are, living in the beautiful State of Hawaii with very low registration and renewal fees and a business atmosphere that favors tenants rather than investors, and I instead chose Nevada for our business filings. They think I am a bit goofy to have Nevada entities (I have several to isolate risk) which cost more to renew, but the peace of mind is worth the expense. Also, having BOSS and Anderson (you guys merged!) as backup is like having gold in the vault.

    Knock on wood, but we have not been victims of a lawsuit yet, and thus not tested Nevada’s business statutes, but I know that what we are paying for is worth the higher price – for the “just in case.”

    Nevada’s protection is like having an invisible super hero in an unopened closet, or knowing you have bullet proof body armor in case you need it. Hopefully I never have to let the super hero out of the closet (lol) or use the body armor, but, it is good to know that I have them on my side.

    Mahalo, look forward to seeing you at the Hawaii Asset Protection class next month!!!

    Aunty Sarah

  • ultimatehealthfitness

    Hi Clint I have a question that I thought might be interesting for your blog. I live in Nevada and have a series LLC. I am purchasing property in other states so will register as a foreign LLC. Can I register just one series of my series LLC as a foreign LLC, or how does that work? Especially when many states do not recognize series LLC’s. Do you register the whole LLC and just report profits on the part that does business in their state?

    Thanks Cindi Anderson

    • If the state does not recognize series LLC then you will have to register the original LLC as a Foreign LLC. I would not recommend this given it could result in a loss of your series asset protection.

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