WARNING- Asset Protection Is NOT Done Off-Shore

Posted on | March 16, 2009 | No Comments

My blog just got spammed by some company trying to get people to invest in a corporation based on some Caribbean island.  The spam came across as an advertisement for “asset protection.”  I deleted the comment and will not be posting it on this site!  The spammer was trying to comment to my post Asset Protection-  “It’s As Easy As 1 – 2 – 3!”

So, I need a Caribbean trust or corporation to protect my assets?

Hogwash!

Asset protection is the lawful use of entities, contracts, business practices and other legal structures that are recognized and permitted under existing law.  Everything you need to protect your personal and business assets can be found right in your home state.  You do not need to go off-shore to protect your assets.  In fact, going off-shore raises another type of risk to your assets and can, therefore, be self-defeating.

Asset protection is NOT trying to hide assets in a Caribbean-based trust or corporation.  Nor do you need a Delaware corporation or a Nevada corporation, unless you live or operate your business in those states.  Nor do you lawfully protect assets by trying to hide them, by committing crimes or by engaging into fraudulent transfers.

The law provides ways to protect your assets!  You’ve just got to understand what your risks are and what lawful means are available to address those risks.  It’s really not that difficult.  And there is no trickery involved.  Trickery usually leads to other problems.

Do you know what a “legal witch doctor” is?  It’s a term I coined years ago to describe people who talk about the law and who practice law without a license but with a particular financial motive impacting their advice.  If a legal witch doctor tells you that off-shore trusts are the key to asset protection, you can bet that off-shore trusts are being sold to you.

Buyer beware!  Avoid legal witch doctors.  Go see your lawyer.

LLC’s, Charging Orders & Judgment Liens

Posted on | February 17, 2009 | 2 Comments

Question from one of Matt’s readers-
“A residential rental property is owned by a single member LLC. The tenant files a frivolous lawsuit and wins. The amount of damage awarded to the tenant exceeds the amount covered by the liability insurance on the property. What are all the possible ramifications to the property, the single member LLC that owns the property in question or the natural person who is the single member of the LLC? Charging order, lose ownership of the property, lose ownership of other assets owned by the LLC, etc.?
Thanks Matt”

Matt’s Answer-

What a great question. There are several issues here. I’ll take them in chunks.

FRIVOLOUS LAWSUIT

I’m going to assume that your case was in a small claims court, even though you didn’t say that. Crazy things happen in Small Claims Courts. The level of “lawyering” and judging is often not as high as it is in superior and circuit courts. There are exceptions, of course. But, your case shows why we have appellate courts to fix what lower courts screwed up.
Appeal!
In Marion County, Indiana, appeals from the Small Claims Courts go to the Superior or Circuit Courts. In Marion County, you get a fresh start. . . a new trial. The Small Claims Court judgment is vacated. You start over and get a chance to get the case determination right. So, my first response is: Appeal! That’s an easy solution to all your problems.

INSURANCE

Secondly, ask your insurance agent why you’re not fully insured! Should you be suing your insurance agent for malpractice? Maybe the insurance agent’s Errors & Omissions coverage is your solution.
On a side note, I’d encourage you to learn how to communicate properly with insurance agents. There are specific things you should do in order to develop the right Insurance Plan for your business, and I can share those techniques with you in another article or during a consultation.

JUDGMENT LIENS

When a judgment is entered by a court of record in an Indiana county, a lien is automatically created against any real property owned in the same county. If the judgment-defendant has real property in other counties, those properties are not impacted. However, a judgment in “County A” can be “recorded” in “County B.” At that point, the judgment is a lien on real property owned by the judgment-defendant in both counties.
Importantly, judgment liens apply not only to the subject property but to ANY real property owned by the judgment-defendant.

PERSONAL LIABILITY

If I understand your facts, there is no judgment against the LLC owner, just the LLC. In that case, there should be no collection efforts against the LLC owner. A plaintiff cannot collect a judgment issued against an LLC from the assets of the LLC’s owner. So, the owner (you) should not be concerned about a charging order. Actually, charging orders are a good thing, in a sense (read on).
Some of you might be asking: “What’s a charging order?”
A charging order only applies to LLC’s, not corporations. A charging order is an order that requires the LLC to pay to the plaintiff any monies that would be distributed from the LLC to the owner. There must be a judgment against the owner, before a charging order could be issued. Charging orders are the only remedy a plaintiff would have to collect from the ownership interests a judgment-defendant would have in an LLC. So, in other words, a plaintiff cannot acquire an owner’s ownership interests in an LLC. By contrast, a plaintiff can acquire a judgment-defendant’s stock in a corporation.
Why do the courts distinguish between corporations and LLC’s in this area of the law?
The rationale is that LLC’s are partnerships and that a plaintiff should not be permitted to become someone’s partner. So, if A and B are partners in an LLC, and C gets a judgment against B, C should not be able to enforce the judgment to become A’s partner. A has the right to chose his partners. He picked B, not C, to form a partnership. C could get a charging order against the LLC and collect any monies that would be distributed from the LLC to B. If A and B owned a corporation together, then C could acquire B’s stock and become a co-owner with B.
Back to your situation. . . the law concerning charging orders is irrelevant to your situation for the reasons I described above. What you have at risk is your equity in the LLC. You cannot do much about the equity you have in the LLC at this point, now that the judgment was entered. Any transfers of equity you were to make now could be considered “fraudulent transfers.” And that is an entirely separate topic for another article.

THE LESSON(S) HERE-

Call your attorney. You lost a lawsuit, and probably did not have a good attorney with you in court! You saved the cost of having an attorney in court, but at what greater cost? Was it worth it?
Appeal bad decisions.
Learn how to communicate with your insurance agent to develop the right Insurance Plan.
Plan. Planning is an activity that occurs in advance. I’m not sure from your short question what your Asset Protection Plan includes. Clearly, planning is important, as your situation reveals.

How Do I Resolve A Dispute?

Posted on | February 16, 2009 | No Comments

The best way to resolve a dispute is to AVOID disputes in the first place!  Seriously.  Think about it.

Lawyers spend as much or more time resolving disputes than they do preventing them.  The cynic in me thinks that lawyers prefer lawsuits, because lawsuits are time consuming and generate more fees for lawyers.  When a client gets sued, the client has few options- settle on unfavorable terms, bankruptcy or fight the lawsuit.  There are costs associated with each of these three options.

There is a better way. . . well drafted and implemented contracts and legal forms.

Sadly, many clients do not want to pay a lawyer for the time it actually takes to create a good contract.  Yet, a good contract is like insurance, in that sense that you can pass on liabilities and risks to another person through contracts.  Actually, insurance is a contract between you and the insurer.  A good B2B or B2C contract transfers risks from your business to another business or your customer, much like insurance.

Best of all, contracts set expectations.  Everyone signing a good contract knows what the result of a lawsuit will likely be, resulting in fewer reasons to file lawsuits.  Think about this- Why would you defend a lawsuit, if you knew you were going to lose in court?  If your contract tells you that you’re going to lose, then settle and write a better contract next time.

The difficult lawsuits are those where (1) there is a bad contract in place or (2) the facts are uncertain.  Those are the cases that should go to court.

However, before you run to the courthouse, consider four other ways to resolve a dispute:

1.  Try it again.     Reformulate the relationship by drafting a new contract to replace the one you signed.  Presumably, you and your “opponent” wanted to do business together when you signed the first contract.  If the contract form you signed was poorly written, consider efforts to save the relationship and sign the contract you wanted from the beginning.  If all trust is lost, then this option won’t work.

2.  Try talking.   Try settlement negotiations with or without your lawyers present.  It is amazing how easy it is to resolve disputes over a cup or coffee or a beer.  Try it.

3.  Mediation.  This is a process available before or after a lawsuit is filed.  A mediator is hired to assist you in negotiating a settlement.  The process depends on the willingness of the parties to settle.  Note that the rules governing mediation differ depending on whether mediation is done before or after a lawsuit is filed.

4.  Arbitration.  Essentially, you hire a private judge.  The advantage of arbitration is that it is faster and cheaper than going to court.

In a future blog, I’ll talk about these four options in more detail.  There is an article on arbitration clauses in contracts on my law firm’s website-  www.indiana-attorneys.com.

What is the corporate veil or shield?

Posted on | January 23, 2009 | 1 Comment

Question: ”What is the corporate veil or shield?

Matt’s Answer: The corporate veil is a legal fiction by which the owners of a business cannot be held personally liable for the bad acts of the business, if the business is a limited liability entity (”LLE”).  LLE’s include limited liability companies (LLC’s), limited partnerships, corporations, and other business forms that vary from state to state.  However, there are rules limiting the protection provided by an LLE.

 In most states, the following factors describe the standard by which a corporate veil could be pierced or ignored, allowing the owners to be sued personally.  In deciding whether a plaintiff has met the burden to pierce the corporate veil, courts consider whether the plaintiff has presented evidence showing:  (1) undercapitalization,  (2) absence of corporate records,  (3) fraudulent representation by corporate shareholders or directors,  (4) use of the corporation to promote fraud, injustice, or illegal activities, (5) payment by the corporation of individual obligations,  (6) commingling of assets and affairs,  (7) failure to observe required corporate formalities, or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.

 As a lawyer, I think that list is enormous.  There are many, many “Do’s” and “Do Not’s” in this list of eight factors, far too many to discuss in this post alone (Stay tuned to the blog for details!).  Unfortunately, very few lawyers take the time to educate their clients on how to operate a corporation or LLC.  Few lawyers list or describe the eight factors that could cause a corporation or LLC to be ignored.  Most lawyers simply file Articles with the Secretary of State to form the corporation, LLC or other entity, and create By-Laws or an Operating Agreement, and maybe a few minutes of an organizational meeting.  And that’s about it.  No training.  No education.  No practical guidance or explanation.  The clients who receive these services and nothing more are often left with a false sense of protection by their new corporation or LLC, and that is a shame.

 If you are operating a business, including a real estate-related business, you need to operate that business in a limited liability entity of some sort.  You also need documents and training, as follows:

1. A complete record book with proper Articles; By-Laws or an Operating Agreement; minutes of meetings; notices or waivers of notices of those meetings; resolutions; stock certificates; buy-sell and related agreements among owners; certificates of assumed business names; and more.
2. A plan to maintain the corporate record book.
3. A registered agent that can easily receive notices and service of process for your entity.
4. A business plan.
5. An insurance plan to integrate with your business plan.
6. The use of other asset protection techniques.
7. A tax plan integrated with your business plan.
8. Education on how to operate the entity and its finances-  practical lessons like how to complete and sign contracts.
9. Adequate funding of the business.
10. A plan to pick the correct entity form and structure.
11. A strategy for maintaining the entity after it is formed.
12. The correct tax documents and an EIN.
13. An education on fraud, use of contractors and employees, risks of personal liability, isolating risks as to co-owners or spouses, risk assessment, etc.
14. Avoid off-shore trusts, Nevada corporations, land trusts disguised as living trusts, and other tricks.  Stick with time-tested, lawful entities, insurance and good business practices.
15. Avoid using an entity as a means of committing fraud or fraudulent transfers.
16. and much more. . .

It typically takes me an hour and one-half at a minimum to teach clients how to structure and operate a simple LLE business.  If all you have done is filed the one-page form on the Secretary of State’s website and paid your $90 to $150 filing fee, then you have not yet satisfied the requirements of limited liability.  I wish you good luck, because luck is all that is protecting you.

If your lawyer does not spend at least an hour talking to you about these concepts, find a better lawyer.  Client-training and education are the most important things I do for my clients. 

Do not make the mistake of buying corporate or LLC forms on-line or through an unlicensed, non-lawyer (like a real estate speaker).  Do not make the mistake of having your accountant do your legal work.  Go see a lawyer who knows Indiana law, real estate and how to assist and educate you in the creation, organization and operation of your limited liability entity.  There are great lawyers who can form an LLE in perfect form, but who can’t teach these concepts.  Your lawyer needs to be a good teacher, as well as legal writer.  The point cannot be overstated.  It’s that important.