Worst Case Scenario FAQS
- If you set up the structure AFTER a lawsuit had been initiated against you, then a Judge may unravel the structure.
- If you have an incomplete Operating Agreement with clear business purpose and separate reason for the capitalization and several other requirements than the Judge may very well refute the structure.
- If you’ve filed a lien that is incorrectly worded and/or is not in full compliance with your specific state lending laws, a judge could dismantle the structure
- If you do not make the payments to your LLC, as structured in the promissory note, then a judge could consider the structure false and a mere front to transfer assets.
It is important to know that the plaintiff, now creditor cannot just take away any of your assets that have been stripped or transferred. The best he/she can do is tie them up until he/she can prove to the court that you placed these assets out of their reach AFTER the lawsuit was filed for the sole purpose of not paying the judgment.
The judge will have to see your conduct in real life such as:
- When, how and with what motivation these liens were recorded.
- If you had an intent to defraud the plaintiff/creditor by such transfer (very hard to prove especially if you were trying to reason with the plaintiff and settle amicably)
- If there are business reasons for such transfers (creation of liens to the LLC are made for over a dozen business reasons spelled out in the Operating Agreement)
- Whether you have been negligible in your affairs or not (most likely you can easily show that you are a professional and conduct your business prudently)
- If you have obtained and maintained enough insurance. (easy to prove especially for real estate holdings since each property requires a liability insurance)
- In fraudulent transfer cases, the court has especially broad discretion to do the “right thing” so despite the clear statute its practical application is not always predictable.
There are mainly three types of remedies when a plaintiff gets a judgment order to his/her favor against an owner/member of an LLC: A Charging order and/or a foreclosure. This is in only a handful of states like California. (Washington, South Carolina, etc.
Look here: http://www.nolo.com/legal-encyclopedia/limited- liability-protection-llcs-a-50-state-guide.html
- A Charging order only (as the sole remedy) in all the other states. And the best according to legislature is Wyoming.
- Order the LLC to be dissolved (Very rare)
To see how each state deals with the issue of personal creditors’ rights and LLCs, follow the link below: http://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html
When it comes to LLCs, a foreclosure is a bad thing and a charging order is a good thing. In a state where the “foreclosure” of an LLC member’s interest is allowed, if a plaintiff gets a judgment against you (the owner/ member) for $50,000 and you do not pay it, the plaintiff can attack the LLC and foreclose on your financial interest portion in it. So, if your interest is valued at $200,000 and you owe the plaintiff $50,000, he/ she can foreclose and keep the entire $200,000. But if your interest is valued at only $25,000, then the plaintiff will foreclose and get that amount but you will still owe him/her the difference.
In a “charging order” state, the sole remedy is the charging order and there is no foreclosure. That means if your financial interest in the LLC is valued at $200,000, the plaintiff cannot get to keep it all.
If and when you make a distribution however, then the plaintiff can get some money. We write the Operating Agreement in a way that makes it legal for you NOT to make any distribution, (only salaries and other expenses etc.), hence you the plaintiff gets nothing except a tax bill for phantom income as explained in our videos and presentations. In conclusion in a Foreclosure LLC state, the plaintiff can get financial rights over your interest in the LLC. In a charging order LLC state the plaintiff could end up with nothing if the LLCF is drafted properly especially if it is set up in Wyoming.
Please send us any questions you may have regarding Asset Protection and we will do our best to answer them in this section as we update it as often as we can. Email us at Info@kmagb.com or call us at (407) 608-5448.