Investor · Minneapolis, MN · Member since 2011 · 14 posts · 7 votes
I have read several articles on BP that seem to indicate that one should create an LLC for rental properties. I own several rental properties, put my personal name on the title, and have significant equity in most of the properties. I have an umbrella policy that covers me up to 2.5 million. I'm curious if I should be moving these properties to several LLCs to protect my assets. Here are my questions:
Has anyone out there been sued that has their property in their personal name and didn’t have their insurance cover the attorney fees and/or any judgement?
Also, has anyone had an LLC that "saved" them from a judgment outside of their LLC? I'm trying to weigh the costs of moving to an LLC vs keeping this in my personal name.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
Here is a partial answer, with a case worth reading. It's concise at only 4 pages long. In this case an individual and his wife owned interest in some (5) LLCs, and presumably other property (like their house) that ultimately went under because a bank won a judgment against them.
A bank (the Plaintiff in this case) obtained a default judgment against Defendant and his wife. The bank then wanted to seise and sell the Defendant’s assets, including Defendant's membership interests in the 5 LLCs in a collection effort. Bottom of page 3, top of 4... the trial court concluded that the Plaintiff can not seise and sell the membership interest in ths LLCs, but rather the Plaintiff's "only remedy is to have those interests charged with payment of the judgment".
So the bank has a personal judgment, and some of the asset are membership interests in LLCs, but the bank must collect via a "charging order". Assets that are held by the Defendants in their personal names (like cars, houses, etc.) would not be protected by the charging order. The bank could have these assets seised by the Sheriff and sold.
In this case, the judgment was a personal judgment and the LLC "saved" the person from the bank liquidating the LLC interest. Holding via the LLC doesn't remove the judgment, but this asset holding method did change the collection method of a creditor. The Defendant may hold the LLC interest for a decade, but the bank can't liquidate it.
What is hard to find (if they even exist?) are case opinions for properly run LLCs that were sued, the LLC "lost", the judgment was for more than the value of the assets in the LLC, and the judgment applied to the LLC members. I have seen cases where the LLC was not property run, the Plaintiff "pierced the corporate veil", and the judgment applied to the members. These cases are not common in NC, but they happen. Google "Instrumentality Rule" for details and factors on what the Plaintiff must prove to pierce the corporate veil.
Personally, I have not experienced anything like the above cases.
I lent money to a rehabber once, title was in his personal family trust, a IRS lien attached and I had to foreclose to remove the lien. Had he put title in his LLC it most likely would not have attached. I worked with him on solutions to the problem and he agreed foreclosure was the best way to go. I was lucky to get my money back.