Why
"Privacy" Does Not Protect
Your Assets in a Nevada Corporation
Many people
form corporations in Nevada because of the ability to maintain a level
of privacy in so doing. Pursuant to Nevada Revised Statutes (NRS) 78.030,
in order to establish a corporation one must file articles of incorporation
with the secretary of state, and file a certificate of acceptance of
appointment executed by the corporation's resident agent. Under NRS
78.035, there are few required provisions which the articles must contain.
These are: the name of the corporation; the name and address of the
corporation's resident agent; the number of shares the corporation is
authorized to issue; the names and addresses of the first board of directors;
and the names and addresses, of the incorporators executing the articles
of incorporation. With this limited information, an outsider will not
be able to determine if a particular indi-vidual owns all or part of
a Nevada corporation.
Because
of the nature of Nevada corporations, one might be tempted to form such
an entity in order to hide assets from a creditor or a potential creditor
(if litigation is pending or under way). While this might be a tempting
proposition, the privacy afforded to those incorporating in Nevada simply
will not protect one from creditors.
Pursuant
to NRS 21.080, all real and personal property of a judgment debtor (not
otherwise exempt by law) is liable to execution, including "shares
and interests in any corporation or company." Thus, if a creditor
obtains a judgment against a debtor, the debtor's interest in a Nevada
corporation is subject to execution in order to satisfy the debt. (Cf.
NRS 21.090, which lists property exempt from execution.) See In re Simtek,
61 Nev. 431, 132 P.2d 605 (1942)(creditor attached 456,572 shares of
debtor's stock; upon obtaining a judgment, execution of the stock issued
and the sheriff sold the stock which the creditor purchased; the creditor
obtained all right, title, and interest which the debtor had in the
property on the day of execution).
The above
rule applies to all stock of any Nevada corporation. All shares issued
by a corporation are "securities" under Nevada law. NRS 104.8103.
(NRS chapter 104 is Nevada's version of the Uniform Commercial Code
(UCC). Article 8 of the UCC applies to 'investment securities.")
All securities must be in either "registered" or "bearer"
form. NRS 104.8102(1) (o)(1). "Registered" form means that
"[t]he security certificate specifies a person entitled to the
security[.]" NRS 104.8102(1)(m)(1). "Bearer" form "means
a form in which the security is payable to the bearer of the security
certificate according to its terms but not by reason of an endorsement."
NRS 104.8102(1)(b). (The "endorsement" language prevents a
"security" from falling under the provisions of UCC Article
3, which covers "negotiable instruments" such as checks.)
This is
the extent of the mythical "bearer stock," by which one could
theoretically hand their stock to another, claim with a straight face
under oath that they own no stock in a Nevada corporation (thus frustrating
a creditor), then recover their stock. This will not work. First, if
one delivered such stock certificates to another coupled with the intent
to divest themselves of ownership, then a gift transaction has been
completed under the law, and the recipient can keep the stock. Secondly,
the transaction would constitute a fraudulent conveyance and would not
stand. (See infra.) Thus, one should never assume that the notion of
"bearer stock" allows one to evade creditors. Rather, it is
merely a form of certificate which allows the security to fall within
the strictures of UCC Article 8.
Some people
might have the idea that a creditor cannot execute against stock in
a Nevada corporation if they do not know about it. Thus, the privacy
implicit in Nevada corporations can still be of service in frustrating
creditors. The law in several areas does not support this contention.
Chapter
21, NRS, is entitled "Enforcement of Judgments." A subpart
of this chapter, codified at NRS 21.270 to 21.340, is entitled "Proceedings
Supplementary to Execution." Under these statutes, a judgment creditor
can, at any time after the judgment is entered, obtain a court order
requiring the debtor to appear and answer upon oath concerning his property.
NRS 21.070. If an execution against property has been entered, and the
debtor refuses to apply his property to the satisfaction of the judgment,
the creditor can receive a court order requiring the debtor to appear
and answer concerning his property. NRS 21.280. All witnesses under
Chapter 21 can be compelled to appear and testify. NRS 21.310. NRS 21.320
gives judges a tremendous power over debtors:
The judge
or master may order any property of the judgment debtor not exempt from
execution, in the hands of such debtor or any other person, or due to
the judgment debtor, to be applied toward the satisfaction of the judgment.
(Emphasis added.)
Any disobedience
of any order is punishable as a contempt of court. NRS 21.340.
Using these
statutes, a creditor is likely to recover what is due from a debtor
who owns shares in a Nevada corporation. This is so for many reasons.
First, while the corporation is operational, there is undoubtedly going
to be a paper trail, the most obvious of which is tax returns. These
proved valuable to the creditor in McNair v. Eighth Judicial District
Court, 110 Nev. 1285, 885 P.2d 576 (1994). Here, the creditors obtained
a judgment against a debtor and his business in the amount of $435,066.82.
The trial court issued a writ of execution, which the debtor did not
satisfy. The judge then issued an order pursuant to NRS 21.280, supra,
requiring the debtor to appear and answer con-cerning his property.
He never appeared. The creditors then got the judge to order the debtor's
accountant to appear and testify regarding the debtor's assets, pursuant
to NRS 21.310, supra. The accountant refused to answer certain questions
while under oath, citing the accountant-client privilege. See NRS 49.185
(confidential communications between a client and his accountant, made
for the purpose of facilitating the rendition of professional accounting
services, are privileged). When the accountant refused the judge's order
to answer the questions, she was held in contempt. The supreme court
affirmed.
Initially,
the court held that the accountant-client privilege should be narrowly
construed. 110 Nev. at 1288. The court then rejected the argument that
the identity of stockholders and the sale of assets was in-formation
obtained from privileged communications, and therefore should have been
disclosed. Id. at 1289. Lastly, the court held that tax returns are
not themselves privileged. And, since the information contained therein
was relevant to the issue of identifying assets and collecting the judgment,
the tax returns should be turned over to the creditors. Id. at 1289-90.
As this
case shows, a paper trail left behind by a Nevada corporation may well
lead a creditor to property owned by a debtor and, under NRS 21.310,
a third party with knowledge of the debtor's property can be compelled
to testify on the issue. This is so, even in the face of a statutory
privilege like the one at issue in McNair.
A second
way that Chapter 21, NRS, is likely to lead to a creditor recovering
from a debtor who owns shares in a Nevada corporation concerns the issue
of perjury. Judgment debtors can be compelled to answer, under oath,
questions regarding their property. See NRS 21.270; 21.280; McNair,
supra. If the debtor takes the oath in such a judicial proceeding, and
"[s]wears or affirms willfully and falsely in a matter material
to the issue or point in question," NRS 199.120(2), that person
is guilty of perjury, which is a category D felony. A category D felony
is punishable by a minimum of 1 year and a maximum of 4 years in prison,
and a maximum fine of $5,000. 193.130(2)(d).
Thus, once
a creditor has obtained a judgment against a debtor, he can force the
debtor into a Hobson's Choice: ignore the court order to testify regarding
his property (or refuse to answer questions after appearing) and face
imprisonment for contempt of court, or commit perjury by falsely swearing
as to the extent of his assets and receive a felony conviction with
serious consequences. The third option is the best: the debtor, if he
has sufficient assets, should pay the judgment creditor the amount he
is entitled.
The third,
and last, way that Nevada law will lead to a creditor recovering from
a debtor who owns a Nevada corporation concerns the issue of fraudulent
transfers.
NRS Chapter
112 is Nevada's Uniform Fraudulent Transfer Act. A few definitions are
key under this Act. A "claim" means" a right to payment,
whether or not the right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured or unsecured." NRS 112.150(3). A "creditor"
is "a person who has a claim," NRS 112.150(4), while a "debtor"
is "a person who is liable on a claim." NRS 112.150(6). "Property"
is "anything that may be the subject of ownership." NRS 112.150(10).
Lastly, a "transfer" is "every mode, direct or indirect,
absolute or conditional, voluntary or involuntary, of disposing of or
parting with an asset or an interest in an asset, and includes payment
of money, release, lease and creation of a lien or other encumbrance."
NRS 112.150(12). As can be seen, these definitions are quite broad,
in order to cover as many situations as possible wherein a debtor attempts
to avoid paying a creditor.
The following statute is the heart of the Ant. NRS 112.180 reads, in
pertinent part:
1. A transfer
made or obligation incurred by a debtor is fraudulent as to a creditor,
whether the creditor's claim arose before or after the transfer was
made or the obligation was incurred, if the debtor made the transfer
or incurred the obligation:
(a) With
actual intent to hinder, delay or defraud any creditor of the debtor[.]
2. In determining
actual intent under paragraph (a) of subsection 1, consideration may
be given, among other factors, to whether:
(b) The
debtor retained possession or control of the property transferred after
the transfer;
(c) The
transfer or obligation was disclosed or concealed;
(d) Before
the transfer was made or obligation was incurred, the debtor had been
sued or threatened with suit;
(e) The
transfer was of substantially all the debtor's assets:
(f) The
debtor absconded;
(g) The
debtor removed or concealed assets;
(h) The
value of the consideration received by the debtor was reasonably equivalent
to the value of the asset transferred or the amount of the obligation
incurred;
(i) The
debtor was insolvent or became insolvent shortly after the transfer
was made or the obligation was incurred; and
(j) The
transfer occurred shortly before or shortly after a substantial debt
was incurred. (Emphasis added)
As this
statute makes clear, one who is facing even potential creditor liability
who forms a Nevada corporation in an attempt to conceal assets; is guilty
of a fraudulent transfer. This is so, since that person would still
control the property transferred, and would receive consideration (the
shares of the corporation) reasonably equivalent to the value of the
assets transferred to the corporation. NRS 112.180 simply will not allow
for a hasty creation of a Nevada corporation whose raison d'etre is
the concealment of assets from a creditor. The fact that Nevada provides
privacy for those who incorporate does not change this fact.
Not only
is a fraudulent transfer a fraud upon a creditor (who has 4 years to
void the transfer, NRS 112.230(1)), it is also a crime in this state.
All parties to any fraudulent transfer in Nevada are guilty of a gross
misdemeanor. NRS 205.330. Such a crime is punishable by up to 1 year
in the county jail and a fine of up to $2,000. NRS 193.140.
In conclusion,
Nevada corporate law (at the state level only) allows a great deal of
privacy for those incorporating here. However, this privacy will not
help one to use a Nevada corporation for the purpose of hiding assets
from creditors or potential creditors. An attempt to do so is a minefield
of severe civil and criminal penalties. Further, the laws of the state
are geared toward discovering such improper uses of Nevada corporate
law. In addition, there are many levels that one will lose privacy.
The bottom line is that there are many benefits to incorpora-ting in
Nevada; hiding assets from a creditor is not one of them.
You
are welcome to call our office directly for a FREE consultation at (888)
466-7566.
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