These gems are gained from 23 years of experience in representing business and property owners on the front lines of hard ball commercial litigation practice.
1. Do not place the title of all personal and business assets in your name, or in the name of one entity
Why? A judgment against you can attach to multiple assets, thereby causing substantial financial harm. Therefore, set up different legal entities to protect your assets prior to incurring a legal claim. The law allows you to limit your liability by forming separate entities. Some transfers or formation structures may require consent of your mortgage creditors.
2. Set up asset protection plans before you are sued
Why? If you set up an asset protection plan after you are sued, it can be unwound as a fraudulent transfer scheme. You and your transferee can be sued for fraud. A fraudulent transfer is also a criminal act in some states.
3. Do not transfer assets to other entities or family members if and when you get sued
Why? The transfer can be unwound as a fraudulent transfer.
4. Revocable trusts do not protect the trustor from claims by a trustor’s creditors
Why? The collection laws treats a trust in virtually the same manner as the trustor/settler who incurred the debt. The trust asset could be attached.
5. Obtain insurance with high policy limits for your business, home, and car
Why? In general, under insurance policies, the insurance company has a legal duty to defend and indemnify you for a covered loss. The insurance company must pay for your defense and settlement if you are sued up to the amount of insurance policy limits. Purchase an additional umbrella policy to protect personal assets. Insurance is an important asset protection product.
6. Setting up a corporation or limited liability company to conduct your business is not a bullet proof asset protection strategy
Why? You can still be sued personally if you are an “insider” (i.e. an officer, shareholder, director, or manager). In certain situations, creditors can sue an insider based on an “alter ego theory” if the entity is not properly capitalized and corporate formalities are not observed (i.e. you don’t hold regular corporate meetings or issue stock).
7. Set up a special lawsuit defense fund in case you get sued
Why? If you get sued, you don’t want to put all of your financial dependency and reliance on an insurance company because the company may only defend the claim up to a certain level, and then you are on your own to pay the costs of defense. The insurance company could deny coverage. Also, certain policies have high deductibles which must be paid by the insured. The insurance company could also deny coverage for the claim leaving you with no coverage.
8. Don’t trust employees with access to your bank accounts
Why? There have been many legal cases of bookkeepers, secretaries, and clerks who have embezzled money, and have tried to cover up the crime. Banks are often so large and inefficient that banks cannot detect, catch, or prevent the fraud.
9. Don’t trust employees who are family members with your bank accounts
Why? There have been many legal cases of family members who were so desperate for money, that they have embezzled money. Frequently this happens when family members with the same last name write fraudulent checks “payable to cash” and bank tellers believe that the family members have authority to receive the cash, and the bank tellers cash and pay the instrument.
10. Place business and real estate agreements into a written form with simple terms, and have all parties who have proper legal authority sign all pages
Why? If business agreements are in written form, and the terms are in plain English and simple to read, it will be easier for the parties to understand the business relationship, and it will be easier for a court or jury to interpret the terms. If the terms are oral, or implied, then the parties have less control over the ultimate interpretation and legal outcome, conflicting oral testimony may confuse the judge or jury, and parties may lie in court to force an interpretation that works to their advantage.
11. Place business partnership agreements into a written form
Why? Partnership agreements that start with a mere handshake usually end with a fistfight and a dissolution lawsuit in Superior Court. It is worth the money on the frontend to have an attorney draft a well written agreement in plain English.
12. Obtain your credit reports from Experian, Equifax, and Transunion to discover and fix errors in your credit file, and find out your FICO score
Why? Your ability to obtain credit at a favorable rate depends in part on your FICO score. The FICO score is a number that creditors use to evaluate your creditworthiness. The number is generated by blending different factors such as outstanding credit, payment history, number of accounts, and derogatory marks on your credit history. If there are mistakes or inaccuracies, you can send letters to the credit reporting agencies to “bullseye” (delete) the errors.
13. If employees drive a vehicle during work hours, purchase auto insurance naming you and your company as an insured
Why? If the employee is driving during work hours, and the employee gets into an auto accident, the employer can be liable under the doctrine of “respondeat superior.” According to Black’s Law Dictionary, respondeat superior is a Latin phrase that means “let the master answer.” That means, let the employer pay! If your employees get into an auto accident, you or your company can get sued under theory of vicarious liability. Therefore, you want to be protected by insurance from a well rated insurer.
14. Be very careful in participating in international export transactions
Why? Crooks and thieves prey on local business owners and they like the global environment of international transactions because the parties are apart geographically so they think the victims will not pursue them legally in a foreign country. Crooks and thieves can use letters of credit transactions and forged documents to orchestrate a fraudulent payment scheme. A bank issuing a letter of credit or bill of lading documents will not protect your interests. Also, it is easy for sellers to sell counterfeit goods, damaged goods, or not ship the proper quantity of goods.
15. Don’t loan money at unfair, usurious terms
Why? There have been cases where a debtor has filed a countersuit against the lender based on the state usury laws. To avoid getting sued on this type of claim, keep the interest rate at 10% or less if you are not in the credit card business.
16. If you are a landlord, don’t rent to tenants based on a verbal rental agreement and without a thorough employment and credit check
Why? There are smart, opportunistic residential tenants out there who will try to take advantage of landlords, and will stop paying rent. Many tenants with poor credit histories and prior evictions try to intentionally arrange a squatting environment. Tenants will try to sublet the unit to their friends for a profit. Have the tenant sign a formal rental agreement with all terms set forth in writing, including the names of authorized occupants. Also, without a written agreement signed by the tenant you cannot recover your attorney’s fees if you win an eviction case.
17. Limit liability exposure for certain types of lawsuits by using reasonably well drafted “liquidated damages” clauses
Why? You can force a plaintiff to drop a suit or settle on favorable terms if the plaintiff knows they can only recover a small, fixed amount of money after a trial. Litigating about the legality and enforceability of such clauses can cause a plaintiff to get sidetracked from the merits of a legal case, will buy time, and the court may enforce the clause.
18. Limit liability exposure for certain types of lawsuits by using mandatory arbitration clauses
Why? Arbitration is a process whereby the legal dispute is decided by a “rent a judge” outside of court. In certain fact situations you can force a party into binding arbitration, and block a plaintiff’s potential for achieving runaway jury verdicts. Arbitration can be expensive for a plaintiff to afford, and the plaintiff may not pursue the claim. Arbitration can also be used to limit rights to appeal a decision.
19. Shift your attorney’s fees and costs in litigation to your opponent by contract clause and state statute
Why? The ability to shift attorney’s fees and costs to a party who loses a case on the merits drastically increases the risk of litigation, and may cause a party opponent to settle a case on favorable terms. If you win a lawsuit and have a well drafted attorney’s fees clause, you can shift all costs and attorney’s fees to your losing opponent. However, there is one caveat. If you lose the case, the winning opponent can shift costs and attorney’s fees to you.
20. Don’t backdate stock options
Why? Corporate officers have been criminally indicted for doing this process. It is simply not worth the risk.
21. Be wary of scams to set up Nevada Corporations and to obtain “corporate credit”
Why? It is a myth that setting up a Nevada corporation can insulate corporate officers, directors, and shareholders and insiders from liability for lawsuits in California. A Nevada corporation that does business in California can be sued as easily as a California corporation. If you set up a Nevada entity to obtain credit, and you don’t pay back your creditors, you could get sued.
22. Be wary of internet e-mail scams that ask for personal financial information
Why? Internet pirates, thieves, and crooks send ‘fishing” e-mails to unsuspecting persons and business owners, and illegally copy and use phony trademark logos from major banking institutions to request personal financial information, i.e. social security number and banking records, in order to steal money. Don’t respond to this scam. Contact your bank and forward the email to your bank’s fraud department.
23. Find a respected and well qualified certified public accountant who understands local, state, and federal tax laws and regulations
Why? If your financial records are ever audited by a tax agency or subpoenaed, you want to be organized and represented in the audit. In addition, you want to understand the tax consequences of your personal and business affairs so that you can minimize your taxes and prevent a taxable event.
24. When you hire an attorney or accountant request personal references and proof of professional liability insurance
Why? Even if you receive a referral by a friend to a professional you need to do your due diligence before you hire the professional. It is advisable to request personal references from clients who have worked on similar cases. Contact the state licensing board to check if the professional has ever been subject to professional reprimand or discipline and check for proof of current professional liability insurance with a declarations page.
25. Record a homestead exemption declaration on the title to your property
Why? A recorded homestead declaration can protect certain equity in your home from the claims of certain types of creditors. Creditors cannot attach a portion of your equity, generally $100,000 for a family and $175,000 for a senior citizen. There is no reason why you should not take advantage of these legal benefits that the law allows. Please remember that a homestead declaration does not shield your equity from a mortgage creditor’s foreclosure sale.
26. Join a legal service plan such as GROUP LEGAL BENEFITS- which is offered by the LA Real Estate Law Group
Why? You can receive meaningful discounts on attorney’s fees and other legal benefits if you join a legal service plan. You can save 25-30% on hourly rates. Call (818) 383-5759 for more information.
Copyright 2017 Nate Bernstein, Attorney at Law. LA Real Estate Law Group. All Rights Reserved.
The author of this article, Nate Bernstein, Esq., is the Managing Counsel of LA Real Estate Law Group, and a member of the State Bar of California and his practice concentrates in the areas of complex real estate litigation, commercial litigation, employment law, and bankruptcy matters. The contact number is (818) 383-5759, and email is [email protected]. Nate Bernstein is a 22 year veteran Los Angeles real estate and business attorney and trial lawyer. Mr. Bernstein also has expertise on bankruptcy law, the federal bankruptcy court system, creditor’s rights and debtor’s bankruptcy options. He previously served as Vice President and In House trial counsel at Fidelity Title Insurance Company, a Fortune 500 company, and in house counsel at Denley Investment Management Company. Nate Bernstein created www.laquiettitleattorney.com, a leading educational resource on quiet title real estate litigation. Nate Bernstein is a local expert on real estate law and economic trends in the real estate and leasing market, business law, and bankruptcy law. Nate has personally litigated more than 40 major real estate trials, and has settled more than 200 complex real estate and business cases.
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