Apartment owners need to consider the possibility of a lawsuit, with the ultimate goal of ensuring your personal and business assets are shielded from seizure to satisfy a judgment. The first step to shielding assets is understanding how lawsuits work. Fortunately, proceedings of a lawsuit can be broken into six simple steps.
1. Injury or Loss
The beginning of a lawsuit is an injury or loss of some kind. Owning an apartment is a high liability business. You can be sued for any injury that occurs on your property (premise liability). You can be sued for housing discrimination or mold-related health issues. If you have employees, you can be sued for wrongful termination, gender bias, racial bias, sexual orientation bias, sexual harassment, etc. You can also be sued as the result of a vehicle accident or a violation of the Americans with Disabilities Act.
2. Find a Defendant Who Can Pay
Most lawsuits are done on a contingency basis, so one of the first steps an attorney takes before accepting a case is performing an asset search to see if the defendant (the person being sued) would be worth pursuing. If there is a potential lawsuit against an apartment owner, the attorney will do a search to discover seizable assets. All too often, people are named as defendants in a lawsuit because of their ability to pay—not because of fault or error.
3. Construct a Theory of Liability
If the person immediately responsible for the loss or injury does not have the ability to pay, the attorney will likely search for a deep-pocketed defendant and a theory of liability that can be developed against him or her, showing why that defendant should be held responsible. The success of the trial attorney is dependent on this. Trial attorneys are a major lobbying group and have created laws to increase the level of vicarious liability. Vicarious liability means you can be held responsible for the actions of others. Trial attorneys have worked hard to ensure that whoever has the money can be held responsible for negative outcomes through vicarious liability, even if they committed no wrong.
Premise liability is a good example. This law states that the owner of a property is responsible for any injury or loss that occurs on that property. This is why you see lawsuits where a homeowner is held responsible when a thief is injured while robbing a home. The homeowner did nothing wrong. The robber was trespassing and stealing, but, by law, the homeowner is still responsible if the robber is hurt while on his or her property.
A case involving premise liability occurred to an apartment owner who was held liable for the wrongful death of a person. The individual was shot while on the apartment owner’s property, so an attorney filed a lawsuit against the apartment owner using the law of premise liability. The person who shot the man had no assets, so the trial attorney had no interest in filing a lawsuit against them. The apartment owner had nothing to do with the shooting, but he was held liable because the death happened on his property.
Every day we see trial attorneys winning cases that appear to be irrational, absurd and without merit. Many attorneys will even pursue a bad case if they can find a defendant with the ability to pay. They hope they can obtain a settlement or convince the jury to award cash to the plaintiff (person filing the lawsuit) from the comparatively wealthy defendant. Jurors have admitted that they have overlooked whether the defendant was at fault if they felt sorry for the plaintiff.
If the plaintiff wins the trial and the defendant is found responsible for the injury or loss, the court renders a judgment to compensate the plaintiff for their injury and/or loss. Judgments can be in the millions of dollars.
6. Collect on Judgment
The court provides the judgment, but the judgment is of no value if there is no way to collect.
Any time during the lawsuit process, you can come to a settlement to end the lawsuit. If a lawsuit falls under items covered by your insurance company, they will cover the cost of your defense. The insurance company will often settle to avoid the high cost of going to trial. If your business or personal assets are protected from being seized to satisfy a judgment, the person suing is also more likely to settle with the insurance company than go for a large judgment that could exceed your insurance coverage because there are no assets to seize to satisfy a judgment in excess of your insurance coverage.
While we recommend you have reasonable insurance coverage, it is impossible to have insurance that covers all potential lawsuits and judgments. Insurance companies are good at drafting exclusions in their policies to minimize their risk. If you are sued for something that is not covered by your insurance—such as sexual harassment, discrimination, violations of Americans with Disabilities Act, etc.—you will have to defend yourself. Also, your business and/or personal assets could be seized to satisfy a judgment in excess of your insurance coverage if they are not held in properly drafted LLCs.
Attorneys know that even if you win a lawsuit filed against you, you still lose in the sense that it costs thousands of dollars in legal fees to defend yourself. Your privacy and reputation can be damaged, and the uncertainty of the outcome can result in a high degree of stress and anxiety.
Attorneys exploit all these factors when they sue. Attorneys know you may be willing to settle the case—even if the case holds little or no merit—just to have it behind you. If you have available and reachable assets, the attorneys know they have leverage to get you to settle.
Lawsuit Prevention and Asset Protection
If you are personally named in a lawsuit, all assets held in your name or in joint ownership can be seized to satisfy the judgment. If your business is sued, all assets held by the business can be seized to satisfy the judgment. To solve this problem, you want to hold your business and personal assets in carefully constructed and properly worded LLCs.
Notice that LLCs is plural. If your LLC is sued, then all assets held by the LLC that is sued can be seized. The key to asset protection is to place safe and unsafe assets into separate LLCs.
A safe asset is an asset that will not trigger a lawsuit, such as artwork, gold, stocks, jewelry and savings accounts. An unsafe asset is an asset that can cause a lawsuit, such as an apartment, business, or vehicle. It is important to keep your unsafe assets in legal entities isolated from your other assets so that if an unsafe asset creates a lawsuit, it will be limited to that asset and will not affect your other assets.
For example, a person who owns multiple properties may want to hold the properties in separate LLCs. If there is a lawsuit against one property, your other properties and other assets would be unreachable because they are in separate legal entities.
All your safe assets (cash, gold, art, jewelry, etc.) can be put into one uniquely drafted legal entity, such as an LLC, and they are 100% protected. Since safe assets do not trigger lawsuits, you can put millions of safe assets into the same legal entity. If a lawsuit is filed against your business or against you, your safe assets are unreachable because they are in a separate legal entity.
The best way to defend against a lawsuit is to take away the financial incentive of attorneys. This will prevent the lawsuit from ever happening. If you have no reachable and seizable assets, the trial attorney’s strategies of legal extortion will not be effective against you. When the attorney performs an asset search, they will find no assets that can be taken through a lawsuit. With proper asset protection in place, attorneys will not want to pursue a lawsuit against you.
Larry Oxenham is one of the Nation’s top business succession and estate planning advisors with over three decades of experience. He is the author of numerous articles and books and is a nationally recognized speaker who has trained thousands of professionals at hundreds of conventions, conferences, and meetings across the country, having worked for decades as a merger and acquisitions consultant for mid-size businesses there is no one better to teach you how to maximize the value of your business and create a successful business succession plan.