Business Management

What a Litigation Nightmare Looks Like (And How to Stay Out of One)

Expertise: Landlording & Rental Properties, Business Management, Personal Finance, Real Estate News & Commentary, Real Estate Investing Basics
102 Articles Written

What does a litigation nightmare mean, and how does the fight go down? While some of you might wish it were just attorneys strangling each other, unfortunately, it’s a situation much more likely to impact you as an investor. It means having to risk thousands and thousands of dollars with the mere hope of being able to get something out of the other party. This is the nightmare that causes the attorneys looking to sue you to lose sleep at night.

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Think about all the commercials you see on TV for personal injury law firms. These guys advertise to get clients for these specific type of lawsuit because they know they can win them.

Now ask yourself this: As an investor and as a business person, do you go to Las Vegas rolling dice hoping that you’ll recover (money, assets, etc.)?

Probably not, and neither will an attorney.


Related: Fires, Floods & Earthquakes: How to Protect Your Real Estate from Mother Nature

Litigation: Making Your Suit as Ugly as a Used Car Salesman’s

Suing people is usually a gamble for attorneys because they tend to get paid from the settlement. However, in order to get a settlement, they have to win.

No attorney is going to try and sue you if they think there’s not a good chance of winning. They can’t make money if they don’t win. Attorneys are in the business of only taking cases that are guaranteed wins. They won’t take a case they can’t win and they won’t dare try to sue you—at least not when a qualified asset protection attorney has your back. You wouldn’t believe how powerful asset protection is. But more on that later.

Beyond just winning, let’s talk WHY careful planning and the implementation of an effective asset protective plan uses the incentives of the business of lawsuits (read: the reasons people get tied up in litigation nightmares) against those who wish to sue you.

Asset Protection: How Costly Litigation Actually Helps Protect You

Attorneys don’t like to lose, and when you gamble, there’s always a chance you might lose. What I do for a living is make it a gamble for attorneys to come after your assets.

I’m not that special. It’s really more just a law of legal nature: Most attorneys aren’t willing to put in the time and effort to sue you when they know there’s plenty of other people they could easily win lawsuits against.

Anyone can make their assets untouchable and intimidating to pursue in court/litigation. You could own a company generating over six figures, or even millions, in revenue yearly and nobody would know except you‚—and your lawyer, of course, but we kind of took an oath to keep our mouths shut.

But let’s say someone were to win a lawsuit against you. It’s unlikely, but it could happen. What an effective asset protection plan does is limit their ability to come after your assets down to next to nothing. The axiom about getting blood from a stone mentioned above is absolutely true in this scenario. If the plaintiff wins, they’re not going to get much—and they’re only going to be able to touch assets directly related to the suit. That means everything you own personally and all of your other investments are absolutely safe.

Asset protection involves the use of LLCs, series LLCs, anonymous trusts, and several other legal structures. These legal structures are proven to work, legal, and cost-effective. Quality asset protection depends not just on the legal structures or entities, but also upon your anonymity being rock solid. Through a simple, but not obvious, series of maneuvers involving a variety of legal tools, you can own a lot of property without looking like you do. Protecting your anonymity starts from the second you form your entity.

Related: Tips & Tricks From an Attorney: Here’s How I’d Protect My Real Estate Assets

It’s Simple, But It’s Not Free. Here’s Why It’s Still Worth It.

There are upfront costs, and they aren't always cheap. Sometimes, setting up a series LLC (one of our favorite asset protection tools for investors) can cost $1,000. But that $1,000 gets you an entity that saves you in terms of taxes, isolates your assets, protects your anonymity, and allows you to grow your business into a straight-up empire at no additional costs.

We’re using this example because it’s one of our all-time favorite tools for asset protection. But it’s one of many: anonymous trusts, land trusts, many other types of entities, and many more details far too academic to trot out here will work together to form a cast iron safe around everything you own. The other result is that you look like you have nothing to come after personally. See above: No attorney will come for you if you don’t have any cash-money to line their pockets.


Bottom Line: Spend Now or Pay Later

A relatively small investment could keep you from losing everything—and, done correctly, keep you out of the stressful situation of being sued in the first place.

And now I’m tossing the ball to you. Have you ever been caught up in a litigation nightmare? What about narrowly avoiding one? Do you have an asset protection plan already? If not, why not? If so, has it helped you? I’m always interested in hearing about the experiences BiggerPockets readers have with these matters. And please don’t hesitate to leave any questions you may have for me in the comments section below. Thanks for reading, and I hope this helps you stay out of court and learn how to protect your assets more effectively.

What have your experiences been?

Comment below!

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real estate investors and entrepreneurs in all 50 states protect more than $1.2 billion in assets. Since 2014, he has published over 1,000 posts and articles on BiggerPockets and has appeared on hundreds of podcasts.
    Gary Muse Investor from Everett, Washington
    Replied about 3 years ago
    Why would I employee an attorney to establish an LLC?
    Replied about 3 years ago
    For a simple LLC where you are the member, you don’t. An LLc doesn’t protect you from lawsuits, which cost money to win or lose. For asset protection, you definitely need counsel and structured protection. Similarly, you can dig a hole with a shovel. You need heavy equipment to build a moat.
    Replied about 3 years ago
    For a simple LLC where you are the member, you don’t. An LLc doesn’t protect you from lawsuits, which cost money to win or lose. For asset protection, you definitely need counsel and structured protection. Similarly, you can dig a hole with a shovel. You need heavy equipment to build a moat.
    Barry H. Investor from Scottsdale, AZ
    Replied about 3 years ago
    Scott – this is an excellent 101 intro to asset protection. Thank you for sharing this. Having been a litigation Mgr prior to entering the world of real estate investing full-time, I can echo everything you have stated. I moved from Buy/Hold investing to hard money lending. Tough I lend through my LLCs which makes me feel even more insulated from liability, I am now in a situation where a careless Borrower is facing multiple foreclosures and likes to throw around threats of a lawsuit(s). I frankly never anticipated being in this situation and I would be curious to know if you have input as to additional protections for a hard money lender?
    Christopher Smith Investor from brentwood, california
    Replied about 3 years ago
    Risk mitigation is certainly appropriate especially if you are conducting inherently high risk activities and insurance protection is prohibitively expensive or simply unattainable. However, frankly I see a lot of LLC formation advocacy promotion and marketing as often simply exploiting and pandering to people’s fears, ignorance and vanity. For most modest low risk activities (e.g., ownership of a few passive rental real estate properties), there are much more efficient and effective measures available to achieving satisfactory risk mitigation than establishing a raft of complex legal entities. I own several rental properties in various top shelf middle to upper middle income neighborhoods. They are all professionally managed, each has adequate landlord insurance and overall umbrella coverage. Having researched this topic rather extensively, I have concluded that this is much more than adequate risk mitigation for me, is much less expensive (initial and ongoing costs) when considering legal entity formation/management/reporting and much simpler in terms of my own time administration.
    Costin I. Rental Property Investor from Round Rock, TX
    Replied about 3 years ago
    FYI, Insurance will not cover and defend you in all the cases. You can get sued for fraud – the fraud can be based on anything you say or do which lead someone to act or fail to act thereby causing them damages (ever advertised your remodels with “everything new” or “better than new”, or “new plumbing” ?). Since we can’t drill into the head of a defendant to find out if they really intended to deceive the Plaintiff, a jury is used to examine the circumstances and make the determination. It does not matter whether in your mind you really intended to state a falsehood or not, merely that what you said turned out to be incorrect is sufficient. If the other party is damaged and it appears you did the wrongdoing, do you believe a jury is going to appropriately ponder the legal nuance between negligence and intentional fraud? Insurance companies don’t cover “gross negligence” or “fraud,” and when the claim is large they will find a way to deny it, if possible. Gross negligence and fraud are completely subjective – denial of your claim results in you suing your insurance company (expensive!) with pockets much deeper than yours. Insurance is also not covering mold related litigation.
    Brian Grant Rental Property Investor from Lake Arrowhead, CA
    Replied about 3 years ago
    Scott, great article thank you for this.
    Rob Cook from Powell, WY
    Replied about 3 years ago
    Making yourself a hard target is always a good idea, in theory. I remember, 25 years ago, asking my real estate attorney if I should hold properties under entities, instead of personally. He said no reason to. Insurance coverage handles it. In over 35 years of owning rentals, I have never had a single scare or heard of anyone who has, that was not covered by insurance. And therefore DEFENDED by insurance. That is what deters frivolous lawsuits, knowing there is an Insurance company as a defendant, who does NOT play and hires a lawyer to defend immediately. Not saying there is no value to asset protection planning and devices, but simply running a good landlord business, always maintaining adequate insurance and umbrella coverage, and avoiding picking fights works for me. I have a law degree, by the way, although do not claim to have any expertise in asset protection. Just a lot of experience indicating I never needed any structuring myself.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied about 3 years ago
    Scott, Just like your other articles I am again throwing the bullshit flag. All this is, is a glorified add to come hire me. If this stuff works even a fraction like you say why don’t you post how to do it? These articles are grossly misleading and leave out tons of important information. I asked you several questions in your last article that you failed to answer. First how is an “anonymous trust” any different than an ordinary trust with a bland name? What law creates anonymous trusts? How can you run an LLC personally, be the guy who signs the closing documents and writes the checks, and stay anonymous? Series LLCs are great, but not allowed in every state, in fact they are very much in the minority. I keep waiting to here they have been given full faith and credit by other states when they register as foreign entities has that happened yet? Even in one state? Hopefully so, but I have not seen a case yet upholding them through reciprocity. I still don’t get why you don’t explain how to do it if it really works. Why not just explain the process? I have yet to see any of these things work. A few interrogatories and a deposition or two and you are suddenly discovered. Why not give a legitimate post like how to really avoid lawsuits? Like run your LLC correctly, keep good corporate minutes, have good insurance, manage your properties well. That advice is worth a lot more than the secret sauce you are selling. Put up or shut up. Tell us exactly how this works.
    Scott Smith Attorney from Austin, TX
    Replied about 3 years ago
    Thanks Jerry. To fully flush out how this all works and the answers to many of your questions I am currently writing a book on the subject matter. You may find through your research that there are many other similar attorneys using the same strategies I’m advocating. I believe everyone should look into these options and decide if it is right for them.
    Rob Cook from Powell, WY
    Replied about 3 years ago
    Well said Jerry W. I am not in as strong a legal position as you, to refute the article so strongly, but I FELT exactly the same way. An infomercial. Thanks for your comments and setting the picture straight. Another thing I can say. The most interesting course/class I had in Law School, was insurance law. What an eye-opener. Most people THINK they have insurance coverage because they have a policy and pay premiums on it. And of course, most people never test their insurance coverage, so remain unaware. Once a large loss or liability occurs, and the insurance defense circles their wagons, it is not usually difficult for insurance companies to avoid liability for the loss. And if they succeed, their only liability is to refund your years or decades of premiums paid! Sad but true. One last thought, after my initial response to this article. I reflected back on my business life, and it is clear how many “can’t do” people accomplish nothing in life because they are paralyzed by paralysis, or “chicken little” syndrome. Even with horse ownership. If you buy the 692 page book, Horse Owner’s Veterinary Handbook, you will have a “sick and dying? horse, every day going forward. Because the book will suggest thousands of maladies which you can find some “symtoms” supporting in each of your healthy animals. I have had 5 horses, for 11 years, and basically NEVER had a sick one beyond a sand cholic case and injuries from hurting themselves on objects. And I am not anywhere near the experienced cowboy you are! Scare tactics. The point is, yes, shit happens, but most of it is unavoidable and survivable if you take precautions. Same with any business including real estate rentals.
    Bryan Drury Investor from Owensboro, Kentucky
    Replied about 3 years ago
    Jerry, that’s exactly how the article appears to me also.A subtle ad for services to render, that lacks substance.
    Gabe Livingston Rental Property Investor from West Monroe, LA
    Replied about 3 years ago
    I spoke with my real estate attorney about all this after the anonymous trust article, here was his response: “I don’t know if there is any real benefit here but I don’t know that there is any harm either. An anonymous trust may be hard to do in Louisiana because if you are buying/selling/mortgaging real estate an excerpt of the trust will have to be of public record authorizing you or a third party to act as Trustee to sign deeds and mortgages.” Sounds good in theory, but not in practice.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied about 3 years ago
    Thank you for another yawner of fluff and sell, scare and sell. Woo-hoo!
    Kennith Osborne from Spring Hill, Tennessee
    Replied about 3 years ago
    I like the idea of having business and personal assets separate and protected but how do you do this with a bank that wants everything in your name?
    Jerry W. Investor from Thermopolis, Wyoming
    Replied about 3 years ago
    Kennith, If you have an LLC or some form of a corporation set up you need to keep those entities separate from your personal assets. You need separate bank accounts, separate books, separate minutes, etc. Your bank should be willing to accept your personal guarantee on every loan your entity has with them. You are still just as liable for the debt as if it were in your own name. The separation of entity and personal is huge in limiting your liability. You can never shake your liability for an act you do personally. If you drive drunk and hit someone no amount of LLCs or blind trusts will save you from suit and losing. Now if you have a property manager and they hire a licensed plumber and they screw up the furnace and kill some with carbon monoxide poisoning your LLC will protect you from liability if you have run it correctly.
    John Murray from Portland, Oregon
    Replied about 3 years ago
    This is what is really wrong with America. We used to be a country of brave soldiers, pioneers, inventors and entrepreneurs. Now we behave like scared little girls with the boogy man always in the closet or under our beds. Personal responsibility, integrity and accountability has been antiquated. We have replaced it with litigation, greed and to many lawyers. I think the Minute Men would be ashamed at the state of our Union.