Tell me about a time when your LLC saved you...

30 Replies

Problem is its hard to prove a negative--the LLC is designed to be a discouragement to lawsuits by limiting the amount someone can go after. How do you measure what doesn't happen?

I do know of one owner whose multifamily LLC was sued in a personal injury/fire case, but whose other LLCs and personal assets were not affected...despite an aggressive attempt to do so.

In 20 years plus never had one and never needed one. Of course I always utilize solid risk management and risk mitigation practices e.g., top shelf PM, tenant selection and personal lifestyle choices. 

Always been more than adequate.

Originally posted by @Jonathan R McLaughlin :

Problem is its hard to prove a negative--the LLC is designed to be a discouragement to lawsuits by limiting the amount someone can go after. How do you measure what doesn't happen?

I do know of one owner whose multifamily LLC was sued in a personal injury/fire case, but whose other LLCs and personal assets were not affected...despite an aggressive attempt to do so.

I hear ya. 

I've seen posts on here about insurance. 

I've seen posts about settling. 

I'v never seen someone say...man- thank goodness I had my LLC because I got sued and it protected my other assets.

I'm just wondering how often it really happens. 

Tax wise- close to none of the books I see are totally clean. So I feel like tons of LLC's could have the corporate veil pierced fairly easily.

I have no direct experience with it, and I suspect that single partner LLC's are pretty often in breach. Once you get to the partnership level do you find that things are a little more operational a solid? With operating agreements better bookkeeping etc.?

Originally posted by @Jonathan R McLaughlin :

I have no direct experience with it, and I suspect that single partner LLC's are pretty often in breach. Once you get to the partnership level do you find that things are a little more operational a solid? With operating agreements better bookkeeping etc.?

Hit or miss. 

Even at a partnership level I'd say 75% of the time I find personal expenses in the books. 

@Natalie Kolodij - Not exactly an answer to your question, but close...related threads of possible interest:

A thread on a scenario one would be better to have the asset protection in place before this happens: 561300-urgent-help-potential-tenant-with-pitball

509923-when-has-an-llc-actually-saved-your-assets

553185-rental-properties-and-law-suits

560036-asset-protection-success-stories-are-there-any

607544-been-sued-please-share

443411-do-i-need-an-llc-to-invest-in-real-estate

@Natalie Kolodij

This doesn't have to do with a real estate holding LLC. But here's a classic example that I dealt with during my private practice days.

There's a business in the area that's been around for several decades. Has about 50 something employees and otherwise doing good in business. When they formed the business, LLCs were not an option. They didn't want to deal with corporate formalities of a traditional corporation when they began. So they just kind of started a business as a general partnership. 

Many, many years later, one of the partners makes a serious mistake/commits a tort. Potential damages in the eight-figure range. Unfortunately, the conduct was done as an employee/partner of the business. Because it is a general partnership, every partner now faces the possibility of being held jointly and severally liable despite them not having anything to do with the tort. 

Had they just converted it to an LLC later, the other partners would've been in a great position. But they didn't and hence in a very difficult spot.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

I've never understood the people that fear getting sued to the extent of needing LLC but completely ignore or could care less about the potential of triggering due on sale clause when transferring personal loans to an LLC.

Not to mention the fact that this action itself sets you up for failure from the start as there's no good reason one buys on personal name to start with.... While the intention was always to be an LLC.

Originally posted by @Natalie Kolodij :
Originally posted by @Jonathan R McLaughlin:

Problem is its hard to prove a negative--the LLC is designed to be a discouragement to lawsuits by limiting the amount someone can go after. How do you measure what doesn't happen?

I do know of one owner whose multifamily LLC was sued in a personal injury/fire case, but whose other LLCs and personal assets were not affected...despite an aggressive attempt to do so.

I hear ya. 

I've seen posts on here about insurance. 

I've seen posts about settling. 

I'v never seen someone say...man- thank goodness I had my LLC because I got sued and it protected my other assets.

I'm just wondering how often it really happens. 

Tax wise- close to none of the books I see are totally clean. So I feel like tons of LLC's could have the corporate veil pierced fairly easily.

I was sued twice, once in 2007 and then someone "joined" the case in 2008 regarding pre-foreclosure purchase transactions from 2001 and 2002 -

An LLC would have had Absolutely NO Effect and I hadn't done anything wrong.

It's just that enough time had passed and with the improvements to the properties and price value increases, the properties were now worth substantially more. The complainants said I had "taken advantage of them" 6 years previously. This was in Seattle and the law was changed as a result of this lawsuit to now make it criminal to even approach someone in pre-foreclosure in Washington state. (so don't do that) Obviously the statute of limitations is 3 years so the question is why did the complaint survive the challenge on the SOL? Because this was in Seattle. Rule of Law doesn't matter. Two judges threw the case out. On appeal it was reinstated.

The lawsuits were for $2,000,000. However, I don't run, I don't settle, I fight. After a lengthy court battle Until 2011, which I won in state court and again in the U.S. Ninth District, and again on appeal. Ultimately I won both cases.

It became clear to me that the only value of an LLC is the "perceived" construct that it discourages a lawsuit against you.
The reality is that a decent attorney knows the LLC is normally not properly maintained anyway, can be pierced and doesn't stop them from filing the suit if you have substantial assets.

Although I didn't use an LLC at the time, the lawsuit was against me, my wife, my former associates, Santa Clause, Rudolph the red nosed reindeer, and the seven dwarfs (they include anybody and everybody and your LLC and anyone that you may know, have met or done business with). The list took two pages to get everybody they thought might have money.

The Foolish buy properties in Seattle and think they have outwitted those who wish to take it from them. An LLC there or anywhere else is "maybe, possibly, kind of" protection IF they maintain their LLC to state law requirements and according to the Operating Agreement (I can't imagine California, New York, Illinois etc are any different) - but, we're investors, who has time for that crazy nonsense?

P.S. Don't think you are immune to stupid sellers and hungry lawyers - if you are a (successful) investor, you Will be sued, it's just a matter of when.

Have a nice day. ;-)

Originally posted by @Matt K. :

I've never understood the people that fear getting sued to the extent of needing LLC but completely ignore or could care less about the potential of triggering due on sale clause when transferring personal loans to an LLC.

Not to mention the fact that this action itself sets you up for failure from the start as there's no good reason one buys on personal name to start with.... While the intention was always to be an LLC.

The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).

If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;

If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)

However, the more important question might be regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.

Most people don't maintain them properly, I personally do my best to keep everything separate. It's kind of like insurance, you don't need it until you do...

I agree with Account Closed, once you do enough sensitive deals, lawsuits or complaints will pop up. You can do everything the right way and it still happens. The road to hell is paved with good intentions

Originally posted by @Matthew McNeil :
Originally posted by @Matt K.:

I've never understood the people that fear getting sued to the extent of needing LLC but completely ignore or could care less about the potential of triggering due on sale clause when transferring personal loans to an LLC.

Not to mention the fact that this action itself sets you up for failure from the start as there's no good reason one buys on personal name to start with.... While the intention was always to be an LLC.

The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).

If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;

If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)

However, the more important question might be regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.

Nice info, but isn't the point of the llc generally speaking to reduce risk? Wouldn't you be increasing the risk by the transfer (even though extremely unlikely)? Plus buying in own name wouldn't that create an issue with separation, how would you explain why you didn't just buy in LLC name from the start ?

Originally posted by @Account Closed :
Originally posted by @Natalie Kolodij:
Originally posted by @Jonathan R McLaughlin:

Problem is its hard to prove a negative--the LLC is designed to be a discouragement to lawsuits by limiting the amount someone can go after. How do you measure what doesn't happen?

I do know of one owner whose multifamily LLC was sued in a personal injury/fire case, but whose other LLCs and personal assets were not affected...despite an aggressive attempt to do so.

I hear ya. 

I've seen posts on here about insurance. 

I've seen posts about settling. 

I'v never seen someone say...man- thank goodness I had my LLC because I got sued and it protected my other assets.

I'm just wondering how often it really happens. 

Tax wise- close to none of the books I see are totally clean. So I feel like tons of LLC's could have the corporate veil pierced fairly easily.

I was sued twice, once in 2007 and then someone "joined" the case in 2008 regarding pre-foreclosure purchase transactions from 2001 and 2002 -

An LLC would have had Absolutely NO Effect and I hadn't done anything wrong.

It's just that enough time had passed and with the improvements to the properties and price value increases, the properties were now worth substantially more. The complainants said I had "taken advantage of them" 6 years previously. This was in Seattle and the law was changed as a result of this lawsuit to now make it criminal to even approach someone in pre-foreclosure in Washington state. (so don't do that) Obviously the statute of limitations is 3 years so the question is why did the complaint survive the challenge on the SOL? Because this was in Seattle. Rule of Law doesn't matter. Two judges threw the case out. On appeal it was reinstated.

The lawsuits were for $2,000,000. However, I don't run, I don't settle, I fight. After a lengthy court battle Until 2011, which I won in state court and again in the U.S. Ninth District, and again on appeal. Ultimately I won both cases.

It became clear to me that the only value of an LLC is the "perceived" construct that it discourages a lawsuit against you.
The reality is that a decent attorney knows the LLC is normally not properly maintained anyway, can be pierced and doesn't stop them from filing the suit if you have substantial assets.

Although I didn't use an LLC at the time, the lawsuit was against me, my wife, my former associates, Santa Clause, Rudolph the red nosed reindeer, and the seven dwarfs (they include anybody and everybody and your LLC and anyone that you may know, have met or done business with). The list took two pages to get everybody they thought might have money.

The Foolish buy properties in Seattle and think they have outwitted those who wish to take it from them. An LLC there or anywhere else is "maybe, possibly, kind of" protection IF they maintain their LLC to state law requirements and according to the Operating Agreement (I can't imagine California, New York, Illinois etc are any different) - but, we're investors, who has time for that crazy nonsense?

P.S. Don't think you are immune to stupid sellers and hungry lawyers - if you are a (successful) investor, you Will be sued, it's just a matter of when.

Have a nice day. ;-)

 Excellent story! Thank you for sharing this. 

Originally posted by @Account Closed :

The lawsuits were for $2,000,000. However, I don't run, I don't settle, I fight. After a lengthy court battle Until 2011, which I won in state court and again in the U.S. Ninth District, and again on appeal. Ultimately I won both cases. 

How much did it cost you?

for most people on this site that set up single member LLC or Hubby wife.. they offer ZERO protection.. if your going to be sued you will be sued personally.. been there done that and i have never seen a judge rule that the plantiff could only go after the LLC etc.. however if you have unrelated parties in a true business set up.. the members that are not out there doing the business can be insulated but if your the manager and leading the charge your going to get named personally. Bottom line

Originally posted by @Matt K. :
Originally posted by @Matthew McNeil:
Originally posted by @Matt K.:

I've never understood the people that fear getting sued to the extent of needing LLC but completely ignore or could care less about the potential of triggering due on sale clause when transferring personal loans to an LLC.

Not to mention the fact that this action itself sets you up for failure from the start as there's no good reason one buys on personal name to start with.... While the intention was always to be an LLC.

The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).

If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;

If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)

However, the more important question might be regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.

Nice info, but isn't the point of the llc generally speaking to reduce risk? Wouldn't you be increasing the risk by the transfer (even though extremely unlikely)? Plus buying in own name wouldn't that create an issue with separation, how would you explain why you didn't just buy in LLC name from the start ?

How would that increase the risk? I think you're equating "risk" to the possibility of the lender calling the note if they see a transfer. However, as I wrote above, the control of the asset remains with you if the members of the LLC are the same as the members on the note.

Regarding buying the asset in the name of the LLC. Some investors do, but many don't and they just transfer it to the LLC after buying it. It's also important to note that Quitclaiming an asset to an LLC doesn't transfer the mortgage. That stays with you. The loan is still in your name.

Originally posted by @Matthew McNeil :
Originally posted by @Matt K.:
Originally posted by @Matthew McNeil:
Originally posted by @Matt K.:

I've never understood the people that fear getting sued to the extent of needing LLC but completely ignore or could care less about the potential of triggering due on sale clause when transferring personal loans to an LLC.

Not to mention the fact that this action itself sets you up for failure from the start as there's no good reason one buys on personal name to start with.... While the intention was always to be an LLC.

The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).

If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;

If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B2-2-01, General Borrower Eligibility Requirements for additional details.)

However, the more important question might be regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.

Nice info, but isn't the point of the llc generally speaking to reduce risk? Wouldn't you be increasing the risk by the transfer (even though extremely unlikely)? Plus buying in own name wouldn't that create an issue with separation, how would you explain why you didn't just buy in LLC name from the start ?

How would that increase the risk? I think you're equating "risk" to the possibility of the lender calling the note if they see a transfer. However, as I wrote above, the control of the asset remains with you if the members of the LLC are the same as the members on the note.

Regarding buying the asset in the name of the LLC. Some investors do, but many don't and they just transfer it to the LLC after buying it. It's also important to note that Quitclaiming an asset to an LLC doesn't transfer the mortgage. That stays with you. The loan is still in your name.

Risk as in losing property if you could need figure out a way to repay loan or if it stays in your control then the lack of separation would peirce the veil of the LLC and really not offer you the protection you likely were seeking to begining with.

So then you did all this work for what exactly? Wouldn't the key part of maintaining separation of the LLC be not buying stuff in your personal name with the intent to transfer later on and just put it in the LLC from start ?

This is out of my realm and I'm by no means an expert so maybe I'm missing something obvious.

Also in terms of lending my limited knowledge is that it's easier and more affordable to get loan as a person vs an LLC which is why most people don't use the LLC from the start.

Originally posted by @Michael Plaks :
Originally posted by @Mike M.:

The lawsuits were for $2,000,000. However, I don't run, I don't settle, I fight. After a lengthy court battle Until 2011, which I won in state court and again in the U.S. Ninth District, and again on appeal. Ultimately I won both cases. 

How much did it cost you?

 Cost? Hmmm, in Money?, Time?, Aggravation?, Lost Opportunity?, Legal Fees?, Wasted Resources? Focus?

It's very convoluted. I was trying to sell both properties in late 2006 early 2007 believing we were at the top of the market. It was at this time that the lawsuits were filed. Since the opposing side placed a Lis Pendens on the properties, I couldn't sell the properties. As a technique to pressure the other side I stopped making payments on those two properties. (All of my other properties were still intact.) This worried the other side but they were also unwilling to make the payments. As a result the properties went to foreclosure sale wiping out any obligation I had on the loans. (Tedious legal & IRS tax discussions omitted for clarity and brevity).

As far as legal fees; I had specialists for real estate, tax & appeals and probably was into it for $125,000 in legal fees. The bigger issue is that with a law suit pending it is risky to buy properties and add to your assets.

Some of the things I learned are important for investors to realize:

1. You can be sued even if you didn't do anything wrong

2. A lawyer will rarely take a case unless there are substantial assets and he believes he can find a way to get to those assets. An LLC most often doesn't help you in this. It is most probable you lack the knowledge and discipline to run an LLC properly. Yes, there is a proper way and simply having a Nevada LLC or Arizona LLC etc isn't sufficient. Besides, you and your LLC will both be sued and the court will then try to sort out who if anyone is liable. They will scrutinize your LLC records the way the IRS will do an audit. If you don't follow proper procedures they will pierce the veil.

3. Law is not "fair". It isn't intended to be "fair". It is intended to settle disputes instead of having people shooting each other. The lawyers & judges drink beer with each other at the end of the day. You are Not part of the "in group", they are. Oftentimes the lawyers and judges went to the same law school and give "professional courtesy" to each other that doesn't benefit you.

4. Most cases (95%) are settled before they reach trial.

5. Don't do what I do unless you have the stomach for it. You have to direct your attorney, know a good bit about the law, know why your case has a chance of prevailing and what the weaknesses of the other side are. Your attorney can't possibly know the details that make a difference if you aren't able to articulate specific and relevant material. Just having an LLC doesn't help you with this part of a lawsuit.

 6. You make more money buying and selling houses than you do if you're fighting lawsuits (unless you're the attorney) Most lawsuits make sense to settle and move on with life. When the amount gets into the $2,000,000 range and you didn't do anything wrong it's worth fighting.

I think @Jay Hinrichs hit the most important aspect. If you look at its history, LLCs were made to combine the benefits of general partnerships (easier to set up and maintain) with the benefits of a traditional corporation (not being several/jointly liable for a partner's actions). So you don't really get it's "full benefit" until you have multi-member LLCs. 

Now this is not to say single-member LLCs are always useless. But it's not some get out of jail free card when it comes to liability. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Originally posted by @Chris K. :

I think @Jay Hinrichs hit the most important aspect. If you look at its history, LLCs were made to combine the benefits of general partnerships (easier to set up and maintain) with the benefits of a traditional corporation (not being several/jointly liable for a partner's actions). So you don't really get it's "full benefit" until you have multi-member LLCs. 

Now this is not to say single-member LLCs are always useless. But it's not some get out of jail free card when it comes to liability. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

the main benefits to me are that you can have uneven distributions between the members which sets up a lot of flexibility and you have one level of legal protection but its really not going to be there for single member or hubby and wife.. the LLC is not signing the docs the members are signing..

Well...

LLCs are a funny thing. In most states, if you sue the LLC, you get the LLC's assets, but if you sue the person you can get the person's assets, which includes their interest in the LLC. In some states, like Maryland, the protection goes both ways. So they can sue YOU and get whatever income you get from the LLC, but not the actual interest in the LLC because in that state it's treated like a partnership and you can't get someone interest in a partnership. So, if you had an LLC in one of those states and were sued individually, and lost they would be entitled to the income from the LLC. You, as the managing member of the LLC who decides what is payed out and what is reinvested in the LLC forevermore (or paid out as salaries, hint hint) are in an extraordinary position to delay/renegotiate the judgment.

But yes, for most people it's completely unnecessary because 1) Single member LLCs can be pierced if they are used like an alter ego and 2) if you buy with a mortgage the bank will make you sign a personal guarantee for the LLC, which is just like not having an LLC at all, except with additional fees attached.

Also edited to add, that this is NOT legal advice, it's not intended to be relied on and I am NOT your lawyer.  This is for general discussion / entertainment purposes only.