By: R. Duane Frizell, Attorney, Frizell Law Firm

In 2021, real estate has been hot. This article highlights a few of the related legal developments.

Landlord and Tenant. Landlords are undoubtedly pleased with the U.S. Supreme Court’s recent ruling that all residential evictions may now proceed. However, for evictions based on unpaid rent, notices must now include information relating to the availability of rental assistance programs and other statutory protections.

Mediations are no longer required for evictions not related to unpaid rent. Nevertheless, in nonpayment cases, they are still required, and tenants may further stay or even stop such cases with the affirmative defense that they have an application for rental assistance pending or that the landlord has been uncooperative in terms of such assistance. If raised, this defense stays an eviction until the assistance application has been determined. If assistance is granted, the case must be dismissed. A landlord facing foreclosure may avoid some stays, though.

A landlord may not sue for unpaid rent if rental assistance is received. In such a case, if eviction is sought, a landlord may face liability for civil penalties, damages, attorney fees, and costs. If a landlord has been uncooperative in terms of rental assistance, an eviction must be denied, and the landlord may have to pay damages. Most of these statutory provisions will expire on June 5, 2023.

Courts must now automatically seal all files for summary evictions granted during the ongoing COVID-19 emergency. There was an attempt to eliminate summary evictions altogether, but it was unsuccessful. For leases with rent paid monthly, a landlord may not charge a late fee until at least three days have passed since the rent was due. Landlords also must give more advance notice for rent increases.

Airbnb, Vrbo, and Similar Rentals. Clark County, Henderson, Las Vegas and North Las Vegas must now tax and regulate vacation rentals. They must also regulate any person, except for an owner, occupant, or manager, who arranges vacation rentals for a fee. Every person who makes such rentals available must have local government authorization as well as a state business license. Exempt from these regulations are residential units owned or operated by non-restricted gaming licensees and affiliates that are located on land not zoned exclusively residential.

“Tiny Houses.” Large counties and cities8 must now designate at least one zoning district for tiny houses to be classified as accessory dwelling units, one where they are classified as single-family residential units, and one for tiny house parks. Other counties and cities need only have one zoning district for one such classification. Each local government shall provide their own definition of “tiny house,” but units of 400 square feet or less should qualify.

HOAs. With respect to HOA super-priority liens, regardless of when assessments become due, an HOA may not require more than nine months’ worth for full satisfaction of its lien. Moreover, if the holder of the first deed of trust tenders the amount due prior to an HOA foreclosure sale, then that deed of trust is not extinguished, and the purchaser at the sale takes the property subject to it. There was an attempt to extinguish HOA non-judicial foreclosures, but it failed.

Article originally published in Nevada Business Magazine on October 1st, 2021

Legal Opinions 2021

Article originally published on February 1, 2008 By Nevada Business Magazine

Perfume seller Jacqueline Tran of San Jose discovered the hard way that trademarks can be the most valuable asset a company owns. Wanting to cash in on the popularity of online commerce back in the late 1990s, Tran set up several Web sites using versions of the words “perfume” and “bay” as domain names. When she applied for a trademark for Perfumebay with the United States Patent and Trademark Office (PTO), however, she quickly found out that the road to online riches could be filled with dangerous potholes. Online auctioneer, eBay, learned of her application and filed legal opposition stating that perfumebay.comwould infringe upon its company trademark. Founded in 1995 by Pierre Omidyar, eBay has become one of the most recognizable trademarks in the country. With business conducted exclusively on the Internet, the company depends upon customers using that trademark name to connect with its Web site, ebay.com. As a registered trademark of the business, the mark eBay has become a household word that specifically identifies Omidyar’s online business.

Late last year, the United States Court of Appeals for the Ninth Circuit upheld rulings in favor of eBay noting that Tran could not use the mark Perfumebay because it could confuse customers into thinking that it was part of eBay. In protecting its trademark all through litigation, eBay was doing the appropriate thing, according to attorneys who specialize in intellectual property rights. “The brand only exists in the mind of the consumer, but it can be a company’s most valuable asset,” said Lauri Thompson, a shareholder at the law firm of Greenberg Traurig in Las Vegas.

What is a Trademark?

A trademark is a word, symbol or phrase used to identify a specific seller’s or manufacturer’s products from another. It makes it easier for a consumer to discern the origin of a producer and to have confidence in the results of its purchase. For example, an apple on a computer is a pretty good indication that the machine is manufactured by Apple Computer, Inc. and not by Dell Computer. Trademarks can be arbitrary, suggestive, descriptive or generic, but must be distinctive in their capacity to distinguish the product they are associated with. Arbitrary marks, such as Exxon, Kodak or the Nike swoosh, bear no logical relationship to their products but still serve to specifically identify them. Suggestive marks, such as Coppertone, hint at the product without actually naming it. Descriptive trademarks describe a characteristic of the product, such as All Bran or Holiday Inn. Generic marks describe the general category of the product, such as computer or stereo. Any trademark can become generic over time if it becomes the synonymous identifier of a particular type of product, such as Xerox (copiers) or Kleenex (facial tissue). While the first three categories of marks are protected in varying degrees by trademark laws, generic marks are not, because they are colloquial terms that are in general used to describe a type of product.

Trademarks were originally protected by state common law, but in the late 1800s the federal government stepped in with legislation that has steadily expanded over the years. Probably the most comprehensive body of law is the Trademark Act of 1946, also known as the Lanham Act, which defines rights to use marks, outlines the process for registering them, and enumerates the penalties for infringing upon them. “Trademark law exists to avoid confusion among consumers,” said West Allen, partner at Lewis and Roca LLP. “It arises out of the need for consumers to use recognized marks and symbols, such as an indication of source, quality and protection against false endorsement,” he added. Even though the law has been modified a number of times since its inception, more legislation is needed to reflect modern business practices, especially since the advent of the Internet. “Laws are always trailing behind technology,” explained Michael Stein, a partner at Snell & Wilmer law firm in Las Vegas.

Considering how valuable a trademark is to a business, it’s critical that the company do whatever it can to protect it, according to Susan Pitz, an associate with Hale Lane law firm in Las Vegas. Pitz reached a client that, after five years in business, experienced infringement of its trademark when another, competing business appeared with a very similar name. The second business was able to poach customers from Pitz’s client through the confusion that resulted from the similar names and services. “They [the second business] clearly went about using a similar name to trick consumers,” she said. Luckily for her client, Pitz was able to prevent further damage through a cease-and-desist letter, and thus, avoid expensive litigation.

When litigation does occur in cases of infringement (although attorneys admit that it’s rare), the primary standard is to determine whether confusion as to the source of the goods or services has resulted on the part of the consumer. Courts will consider the following:

• Strength and similarity of the marks;• Proximity of the goods;

• Similarity of marketing;

• Evidence of confusion;

• Defendant’s intent.

Although these factors are valuable tools for making a determination, intellectual property cases, such as trademark infringement, can be complex and unique. “It’s a mental challenge because cases hinge on such subtleties,” said Stein.

Aside from infringement, trademark owners can also sue for dilution because of blurring or tarnishment of their mark. A trademark can be blurred if it is used to identify a dissimilar product such as Polaroid shoes or Ralph Lauren cigarettes.

It can be tarnished if it is used in association with an inferior or objectionable product, such as a Bellagio brothel. “Where we have the most risk is because of our privileged gaming licenses referring to other gaming uses or objectionable content online,” Thompson said.

Counterfeiting and Piracy

Some of the largest and most egregious cases of trademark crime involve the overseas manufacture of such products as cigarettes, clothing, jewelry and watches which are branded with well-known trademarks, such as Coach, Rolex or Marlboro, and are then sold abroad or in this country as legitimate goods. “This is becoming more and more of a problem,” according to David Merrill, a partner who specializes in counterfeiting and piracy at Las Vegas-based Bailey Kennedy law firm. “Terrorist groups are using counterfeiting of trademarks to finance terrorist activities,” he said. When consumers buy knock-off goods at a fraction of the expected price, they support the proliferation of this type of crime. “You’re basically stealing from the trademark owner,” Merrill said. If a deal seems too good to be true, it probably is. “The everyday person just thinks that it’s a good deal but there’s a further reaching impact of this,” Merrill cautioned. Trademark counterfeiting and piracy have become ever more sophisticated in recent years, accounting for billions of dollars of revenue worldwide. Aside from eager buyers searching for bargains, the illegal enterprises are emboldened by insufficient law enforcement and the deficit of cases prosecuted under anti-counterfeiting laws. By contrast, the war on drugs is given much more oversight, according to Merrill.

Merrill recalled a typical case of his in which his client was a legitimate cigarette manufacturer whose trademark was being used on counterfeit cigarettes. Although he said that tracking down the people involved is often a difficult undertaking. “I accompanied the U.S. marshal to seize the goods,” he said. Counterfeit goods are often found at swap meets and, in the case of tobacco products, at small cigarette retail establishments. Although Merrill was able to get civil relief for his client without litigation, it represents just one case of many. This type of crime is likely to continue because the profits are large and the penalties almost nonexistent.

Cybersquatting and the Internet

With the proliferation of commerce on the Internet, the bar was raised on both the level of sophistication and the physical reach of trademark infringement. “Nobody realized the extent to which the Internet was going to change business,” Pitz said. “You didn’t think about protecting your rights back then.”

The Internet has expanded the world of trademark law by exposing marks to worldwide marketing channels and consumers in a manner that was previously impossible, according to Allen. The simplest form of infringement is cybersquatting, which is registering, selling or using a domain name in order to profit from somebody else’s trademark. Selling the domain name to the owner of the trademark at a large profit was considered a savvy business move in some circles years ago. The Anti-Cybersquatting Consumer Protection Act of 1999, however, clearly defines this as an illegal activity. As more and more businesses become aware of the value of domain names, this type of infringement is expected to decrease.

More insidious and sophisticated than cybersquatting is the practice of burying trademark names within the meta tags found in the HTML code of Web sites. Invisible to the Web page viewer, the tags contain information that is used by search engines to describe or index a page so that Internet users will be directed there based upon the information included in its description. Although designed to provide such necessary and innocuous information such as who created the page, how often it is updated and which key words represent the content, meta tags have also been used to misdirect Internet users to the wrong sites. If Pepsi were to bury “CocaCola” in the meta tags for its Web site, for example, users of some search engines could be directed to Pepsi when they were intending to go to CocaCola. “It’s no different than changing a sign on the freeway to misdirect people,” said Duane Frizell, as associate with Callister & Reynolds law firm in Las Vegas.

Trademark Protection

Because the risks of trademark infringement and dilution are very real to many businesses, attorneys emphasize the importance of protecting marks because they are a vital company asset. Ideally a business should first consult a trademark attorney before undertaking the investigative process of adopting a trademark. By doing an extensive search, the attorney can assure the client that the potential mark will not infringe on any others that are already in use. Once a mark is found to be suitable, it should be used in commerce and then registered with the PTO. Initial registrations are issued for 10 years, but in order to avoid cancellation after five years, the business must file an affidavit saying that the trademark is still in use. From then on, attorneys recommend businesses take the following steps to ensure the proper care and feeding of a trademark:

• Give public notice of your trademark rights by using the registered symbols recommended by the PTO.

• Use the mark as an adjective such as Kleenex facial tissue.

• Create a distinct style for the mark through bolding, underlining and capitalization to distinguish it from surrounding text.

• Affix the mark to the products and physical materials related to the business.

Trademark owners need to take responsibility for maintaining their marks by being vigilant against any potential cases of infringement. This is most easily accomplished through a watch service that will regularly check for improper uses online and also monitor new registrations. Business owners should make the effort to educate themselves about their Web pages, rather than leaving all the decisions to their Web masters. To discourage the proliferation of infringement, mark owners should also be willing to enforce violations, even if it means litigation.

For business startups, it makes sense to consult intellectual property specialists as part of the initial business planning process. New enterprises have the advantage of doing things properly by following the rules that will protect their assets and keep them out of court. Having the foresight to plan ahead is critical, according to Pitz. “We try to do things on the front end so you don’t end up in litigation,” she explained.

Article Originally published April 1, 2016 By Nevada Business Mag

Most industries have experienced an energetic pick up in business as the economy has recovered. Nevada law offices are enjoying an improved economy but are still facing their share of challenges. While clients continue to practice caution after the recession, numbers are showing improvement for lawyers in the Silver State. Top attorneys recently met at the Las Vegas office of City National Bank to discuss factors affecting their practice today, from industry professionalism to the new Court of Appeals.

Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.

How is the economy affecting business?

WILLIAM URGA: We’re still a fragile economy. All the numbers are looking better, but they have to look better. We couldn’t have gotten much worse. People are starting to get more comfortable in using their disposable income. Businesses made it through this tough period and now they’re hanging on. I just don’t feel that the confidence is quite there yet.

JEFF SILVESTRI: You see an increase in some of the business deals and some of the transactions. In litigation, you can sense that people are still pretty cautious about pulling the trigger on filing lawsuits because it’s expensive and they want to work it out any way they can before they start spending the kind of money it costs now to litigate a case.

SAMUEL SCHWARTZ: Bankruptcy filings went from a peak of 2.2 million to just under 900,000 last year. You’re talking about a drop of 60 percent. Looking at the bigger scale Alon, [a hotel-casino project] is stalled now because the credit markets aren’t where they need them to be. Genting, [developer of Resorts World] is struggling on more of a national frame. They’re slowly starting to work, but the Great Wall they’re doing across from the Wynn isn’t moving like it was going to. Fontainebleau is on the market. I see some good redevelopment going on in a lot of the hotels on The Strip. The numbers are going up, but I’m curious to see how well it will go up with those projects stalling again. To me, it’s a sign that we’re still going to go sideways for a while here.

MANDY SHAVINSKY: I’m a real estate lawyer and one of the bread-and-butter components of my practice is leasing work. Now people are taking leasing work and taking the lowest bid, maybe shipping it overseas to have people in other countries do it. It’s a commodity. On the litigation side, things like document review and different things that you learned when you’re a younger lawyer are being shipped out too to the lowest bidders. While that is pretty disconcerting and is a big blow to our business model, if you are a creative problem solver for your clients you can provide some value and solve the problems that they have every day. Those are the kinds of things that will never be commoditized.

JOHN MOWBRAY: The consumer liquidity index is improving, the confidence level is growing, the net worth is growing and is on the upswing, disposable income in Southern Nevada is growing, inflation is low. Oil prices are low, which is good for the traffic coming in. North Dakota leads the nation in growth in the last period report. Colorado is number two and Nevada is number three. We’re right at the top there. Seventy-two percent of the non-farm employment in Nevada is improving. That’s with the tourism and gaming industry. The Las Vegas Convention and Visitors Authority

has projected a 2 million visitor increase in tourism this year over last year. That’s a healthy sign for our economy.

NILE LEATHAM: What we’ve seen in the bankruptcy world is, after the beginning of the recession, there was a lot of activity and a lot of work. That has dropped off significantly in the last couple of years. When the economy was strong, and this is counter-intuitive, Chapter 11 was also very strong. There were people that were venturing capital. They were taking risk. They were doing things to look for opportunities in the economy. I have not seen that as I have in the past.

MICHAEL FEDER: From a litigation side, it seems pretty stable. I’m starting to see different types of cases starting to come out again. We went from all the foreclosure actions, now the number one case you’ll see out there are quiet title actions. The court systems are inundated with those cases.

DAN WAITE: I’m very encouraged. It seems like, from a lender standpoint, money is flowing again. At least it’s loosening up. I’m not a real estate attorney, but our real estate and business attorneys are doing deals again, which for quite a while they were all but shut down. We used to see something a few years ago that you never saw – plaintiffs suing their clients for unpaid fees. An indication to me that things are getting better is you now rarely see that. We have other things to occupy our time.

How has professionalism in your industry changed in the last few years?

SCHWARTZ: The acrimony among the lawyers [is one change], we see it in the Supreme Court, we see that coming through the legal community. There’s just a healthy amount of divide. I hear clients saying, “You’re being too nice.” They’re mistaking professionalism for being nice, and it’s not the same thing. We’re winning, we’re just being professional about it. It’s frustrating.

URGA: I pride myself in being professional. I’ll fight you tooth and nail in the courtroom, but if we can’t have a beer afterwards, something’s wrong. In today’s world, I don’t think it’s quite that way anymore. We’re seeing less professionalism among the attorneys and with the courts, even. That doesn’t help the profession. If the judges would start sanctioning attorneys for some of the things they do, that may make a difference.

SILVESTRI: I’ve seen some of the more effective judges starting to do that. In the state and federal court, they’re admonishing people. It’s also a bigger group. There’s more lawyers. There’s probably less control over how they’re trained and there’s more lawyers who come in from out-of-state. You can sit in court and almost identify, as you’re watching people argue, which lawyer is from Nevada and has been here a long time and which lawyer is here on a one-time case from some other state.

DUANE FRIZELL: I noticed that the judges that are more willing to hold the counsels to be respectful get a better result. It would be great if the judges could continue to set the example, not only in terms of the rules and applying them, but in the courtroom when they make their rulings, the way they treat counsel, the way they treat the witnesses. That sets a tone in the courtroom.

JOHN STEFFEN: I think we’re all aware how people view our reputation. National polls show that lawyers are some of the most despised people on Earth. I think that we all try to do a better job to make sure when we counsel clients that we’re not overselling, that we’re realistic in what the outcome will be and what it will cost. All of us here much prefer when we see that we’re dealing with an opposing counsel that’s experienced versus a young litigator that’s just trying to make a name for himself. It comes down to training and having more integrity in how we teach and help inspire young lawyers.

FEDER: I talk to young lawyers all the time and a comment I make to them is, “All you have is your reputation.” At times, you might have a client that is pushing you. They have to understand that you practice here everyday and you have to maintain that [reputation]. Some of the younger attorneys have a privileged perspective; they think because they went to law school, they know it all. You have to bring them down to reality.

How have generational issues factored in?

SHAVINSKY: There is an increasing number of people who, for whatever reason, may not want to put the amount of work in [traditionally expected of lawyers]. I’ve noticed that doesn’t mean they’re not smart. It doesn’t mean that they don’t want to work hard and put out a good work product. They just don’t want the lifestyle that they perceive a lot of the partners having. Part of what’s resulted for all of us is we have to come up with more flexible ways to accommodate someone who is a good lawyer, great with people, can do good work, but doesn’t want to have to put in the time over seven to 10 years to generate the kind of business to become a partner in a firm.

FEDER: Not everyone wants to be a partner or shareholder member of the firms. People just want to continue working, so they know that expectation from the get go. Some people don’t have the gift of gab. They can’t just go out and take control of a room, but they can garner business by their work product, for the stuff they put together and how well they do. They can start garnering business off of that.

ANTHONY MARTIN: You have to have some form of professional development and inclusion program that allows you to be adaptive and flexible in how you manage the expectations of your attorneys. You don’t have to be stuck to your desk with a library that doesn’t really exist anymore, except for in the cloud, to be able to do your job as an attorney effectively, especially when your clients expect you to be plugged 24 hours a day, seven days a week. You have to have that flexibility. We just hired an of counsel, and there is a business plan before they walk in the door that says this is what we expect of you. Be very proactive, but also be inclusive and communicative so they meet your expectations. It’s not as easy as you need to bill 2,000 hours a year and we’re just going to let you get there. It’s giving them the tools to a professional development program. Also, recruiting people from atypical places so you have a much more diverse workforce when it comes to demographics. That’s part of the problem with law firms. They keep going to the same well instead of expanding that pool.

URGA: I understand that the younger people want to have more time out doing other things, but we’re professionals. You’re supposed to do the best you can for your client. If that takes more than eight hours, you better do it. Otherwise, you’re not doing what you’ve taken an oath to do. The oath is to represent your client to the best of your ability, and your ability doesn’t always run nine to five.

SILVESTRI: The challenge is, where I was a young lawyer, we sat at our desks. You got there at seven in the morning and you stayed there because there was no other way to get your work done. Now we have to work with younger lawyers and acknowledge that they can sit at home on their laptop from eight in the morning until noon, come in and work maybe from noon to six, then go home, have dinner with their families, pick up their laptop and work again. As long as the work’s done and the client’s happy, that’s okay.

How do you manage client expectations?

MARTIN: Technology allows you to be plugged wherever you are in the world. In the new normal, it’s instant gratification. It’s training, not only the new generation to meet that expectation, but training us as leaders for succession planning. To understand that, we have to allow flexibility to occur because not every client works nine to five. You have to be available all the time, effectively.

SHAVINSKY: The challenge with getting back to your clients immediately, you start typing out a response that you think is well-versed and incorporates the answers that they want, and you go back and read it and say, “You know, I need to think about this.” If I don’t go back and redo this email or at least try to flush these issues out, I’m going to give them bad advice and that’s a bigger disservice than not getting back to them in half an hour. They need an immediate response, but they also don’t need the wrong information. It’s a very difficult judgment call to figure out when to do that and when not to do that. I know we’ve all sent emails we wish we could take back because it wasn’t exactly what we meant to say in the spur of the moment to try and get back to somebody.

FRIZELL: Managing expectations is a big part of our practice in terms of having an open conversation [with clients]. From the very beginning, I like to sit down with my clients and say, “We want to provide you the best service. I know that you want immediate responses, but you have to understand that sometimes I’m going to be in court or in deposition, meaning I’m not going to be able to meet with you right then. I am going to take your email, your text message, your voicemail and I’m going to get back to you as soon as I can, but I want to have a very good conversation when we do.” Helping to manage expectations helps them feel that, yes, they are being validated that they’re important, but at the same time understanding that you have limitations.

How have your fee structures changed?

SILVESTRI: You can get clients to agree to a flat fee structure, or you can find some alternative fee structure that they understand what the cost is going to be and we don’t have to itemize everything we do, but those are pretty hard to put together.

URGA: One of the frustrating things is, if I’m talking to one of my partners or an associate, you can only bill for one attorney. It makes it artificial because you’re still going to talk to that attorney because that attorney is the one who’s done the research or has had a case similar to that. It’s becoming much more difficult for my practice to keep track of all the costs. Plus, you’ve got in-house counsel for all these companies that look at everything. I mean everything. So you’re dealing with a different world. Lawyers now, with format billing, are having to spell out everything.

MARTIN: We have a pricing committee that forms these types of AFAs (alternative fee structures) for companies that we work with, but we still are required to itemize everything we do for purposes of justifying the bill if we seek a fee award, or something of that nature, in court. We wish it was as simple as the flat rate. We could just go ahead and say it’s $3,000 for a statement of position. That’s a standard flat fee commoditization of a particular task, but not every task can be commoditized. Some things do require hourly thinking and hourly analysis.

WAITE: There’s been a lot of discussion over recent years about alternative billing tools and mechanisms and the death of the billable hour. Maybe the commoditization of routine, repetitive work, you might be able to structure a flat fee that’s a win-win situation, but many of us here are litigators. I don’t know what your experience is, but mine is that it’s extremely difficult to be predictive of what’s going to happen in litigation. What you do when a client is asking for some sort of a fee is you have to estimate on the high side. Then you risk pricing yourself out of the market. It just doesn’t work.

How has the Court of Appeals affected the industry?

STEFFAN: Our appellate partner said that it’s a game changer. What used to take two or three years with the Supreme Court, he just got his first decision back in six months from the time he filed his opening briefs. Clients are now a lot more apt to use that vehicle, file appeals and take that risk, when they know that it’s timely.

MOWBRAY: I’ve got this report for the latter six months of last year. It’s a push down model. You still file like the old way, then the [Supreme Court] decides what is going to go down to the Court of Appeals. They were assigned 500 cases and disposed 304, which is a disposition rate of 61 percent. That’s pretty good. With only being operational for six months, the number of pending appeals with the court, as a whole, went from 1,985 down to 1,739, a decrease of more than 12 percent.

SILVESTRI: It’s helping the Supreme Court get its backlog down and it’s getting cases adjudicated through the Supreme Court more quickly as well.

URGA: They started with the Appellate Court having a very limited number of things they could really hear. I have a feeling after about a year they’re going to start pushing more of them down.

WAITE: One of my partners said the Supreme Court is still very much crushed, but what this has demonstrated is that a panel of three judges can very effectively handle 500 to 600 cases a year. The next step is if a panel of three can handle 500 to 600 cases a year, a panel of six can handle twice as much. That’s probably what’s coming next.

Article Originally published on NevadaBusiness.com

Lately, more and more clients ask what they can do to protect their small businesses. Most understand that corporations and limited liability companies (LLCs) may shield them from personal liability for the debts and other obligations of the business; however, they seem to be unclear as to how the law works in the opposition direction. How can an owner protect their small business from claims for their own personal liabilities?

Owners should start the legal planning for their businesses and asset transfers before they even form a company. Nevada law limits a person’s ability to transfer assets to businesses they own in an effort to avoid their personal creditor’s claims.1 A creditor may disgorge assets from a person’s business if the person transferred those assets “[w]ith actual intent to hinder, delay or defraud [the] creditor” or “[w]ithout receiving a reasonably equivalent value in exchange for the transfer.” 2 Creditors routinely file lawsuits against businesses that receive such transfers, although, as discussed below, certain types of trusts may impede creditors’ efforts.

Business owners must not operate their businesses as their own “alter egos.” An owner’s personal creditor may reach the business’s assets when an alter-ego situation, such as the following, exists: “(1) commingling of funds; (2) undercapitalization; (3) unauthorized diversion of funds; (4) treatment of [business] assets as the individual’s own; and (5) failure to observe corporate formalities.” 3

In Nevada, barring fraudulent transfer or alter ego, a small business owner’s creditor generally may not touch the assets of the owner’s business, if it is an LLC or corporation. With respect to LLCs, the creditor is usually limited to a charging order—obtained after a judgment—which only allows for collection on distributions actually made.4 “A judgment creditor . . . is only entitled to the judgment debtor’s share of the profit and distributions, takes no interest in the LLC’s assets, and is not entitled to participate in the management or administration of the business.” 5 The result is the same for most small corporations; the creditor may generally only execute on the owner’s stock (ownership interest) if the corporation is publicly traded or has 100 or more shareholders.6 Although LLC and corporate assets are similarly protected, LLCs are often preferred for small businesses because corporations require various formalities, such as annual meetings, and the annual fees for Nevada corporate business licenses have recently increased to be $300 more than for other entities.

Nevada residents (and even non-residents) may also protect their businesses by transferring ownership to a Nevada Asset Protection Trust (NAPT).7 NAPTs allow a trust’s creator to be the beneficiary.8 The creator may manage and invest the NAPT’s assets, including business entities transferred to the NAPT, so long as a Nevada resident trustee has the unfettered discretion to approve trust distributions to the creator (as a beneficiary).9 An NAPT may also cut short the time that a creditor has to bring an action for alleged fraudulent transfers, and such a trust may prevent the creator’s creditor from obtaining any trust distributions.10 Assets transferred to the NAPT should be located in Nevada. Nevada law protects NAPT property and assets located in Nevada, including real estate, from judgment collection.11 These protections do not extend to any property or businesses located in another state.

While it has become easier to form a business without the assistance of an attorney, taking advantage of the laws protecting a business (from formation on) have never been more complex. Business owners should always consult an attorney to take full advantage of these laws.

By R. Duane Frizell, partner and Jonathan C. Callister, partner, Callister & Frizell