Market Law: Asset Protection – NH v Delaware

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A major advantage of the New Hampshire LLC Act over the New Hampshire Business Corporation Act is that the former act provides a unique type of asset protection provisions called “billing order” protections. This last act does not.

Section 126 of the New Hampshire LLC Act generally provides that if a creditor obtains final judgment in court against a debtor who is a member of a New Hampshire LLC, the only remedy available to the creditor with respect to the The debtor’s membership in the LLC will be a court order (referred to as a “billing order”) providing that the LLC must pay the creditor any distribution of the LLC’s profits that would otherwise accrue to the member. Under Section 126, a creditor cannot obtain a judicial transfer to the creditor of the member’s membership and thus, effectively, a transfer of the assets of the member’s LLC. No such rule protects New Hampshire shareholders.

In other words, Section 126 provides a major means of asset protection to New Hampshire LLC members that is not available to shareholders of New Hampshire corporations. Indeed, due to the availability of this remedy, many corporate shareholders in New Hampshire should consider converting their corporations to LLCs.

However, while Section 126 provides that a creditor cannot obtain a court order transferring to the creditor the membership in the LLC of a member of a multi-member LLC, it does not provide this for members Single Member LLC. Rather, the section provides that creditors of members of single member LLCs may acquire the LLC memberships of members of the single member LLC if they can prove in court that the distributions of profits from the LLC to such creditors will not repay the debts concerned within a reasonable time.

However, the indictment protections of the Delaware LLC law are quite different: these provisions provide that while creditors of members of Delaware LLCs can obtain indictments against Members of multi-member or single-member LLCs cannot obtain court orders transferring memberships of either type of LLC to creditors.

This raises interesting questions for New Hampshire business owners who want to not only hold their assets in a single-member LLC rather than a multi-member LLC, but also maximize the protection of those assets.

1. Should these business owners form their LLCs as a Delaware LLC rather than a New Hampshire LLC? or

1. If they already own single-person New Hampshire LLCs, should they “domesticate” (i.e. convert) them to single-person Delaware LLCs, as permitted by New Hampshire and Delaware laws?

The problem with these options is not obvious but important – namely that while in a Delaware court these New Hampshire business owners will certainly win any arraignment case, in a New Hampshire court they will not may not be able to. Indeed, even if the question is unclear, a New Hampshire court may very well declare that under New Hampshire public policy, Delaware’s charging order law is not valid.

So what should these NH business owners do? They have two options.

1. The first is that if they can possibly find a person who will be an acceptable co-member, they should admit that person as a second member of their LLC. This way, as long as the new member holds a bona fide membership, those owners will get full New Hampshire billing order protection.

2. The second is to hold their assets in a sole proprietorship in Delaware and, if sued in New Hampshire, hope for the best.

If they choose the second option, they will at least have the comfort of knowing that any suit brought by a creditor against them in a New Hampshire court will be complex; that the prosecution will therefore cost the creditor substantial legal costs; and therefore, that pursuing the creditor may not be worth the financial risk.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or [email protected] His website is llc199a.com. To access all of his Law in the Marketplace columns, visit concordmonitor.com.

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