Why an LLC may not protect you from a Lawsuit

[John Underwood]

I stumbled across this lawsuit while looking for something else.

As I have mentioned before in this forum an LLC that is not 100% property ran can easily be pierced and the owner sued personally.

Here is an example of where an attorney went after someone that thought their LLC would protect them:

18. Upon information and belief, the member(s) of the Defendant have failed to observe any corporate formalities in that: a. b. c. d. e. f. g.

19. The members did not observe corporate formality; The Defendant did not pay dividends; The Defendant was insolvent at the time of its actions; The Defendant’s members siphoned funds from the Defendant for their own personal use; The Defendant’s members comingled funds; There are no corporate records; The corporation(s) were a facade and alter ego of the member(s) of the Defendant. In addition to the eight (8) factors laid out above, failing to pierce the corporate veil in this matter would create an elementary injustice and fundamental unfairness. The member(s) of the Defendant have used the corporate shell as a way to avoid any liability for the serious injuries that were caused to the Plaintiff and others by the reckless action of the Defendant’s member(s) and agents. With this in mind, Plaintiff should have compensation directly from the member(s) if the same cannot be had from the corporate Defendant. To deny this compensation would create an injustice and fundamental unfairness.

20. For the reasons and for other reasons to be proven, the Plaintiff is entitled to pierce the corporate veil and assert individual liability against the member(s) of the Defendant.

[Stuart Udis]

At the end of the day, plaintiff attorney's can name whomever they please in a complaint. A real estate investor is less likely to be named personally if the property is owned by an LLC although that's not a hard and fast rule to live by. Plaintiff's attorneys are normally after the insurance money and they are generally making their decisions on who to name, add or remove from complaints based on that.

Ironically its the investors in the layered LLC's who believe they are hidden in the cloaks of secrecy and better protected who end up in the most costly and drawn out litigation while giving the plaintiff attorneys reason to take a more thorough look under the hood.

Keep your LLC ownership simple, carry appropriate insurance, make sure ever vendor you work with carries appropriate insurance and those who perform work functions most likely to lead to liability exposure list you ad additional insured (not merely certificate holder) and it should go without saying, avoid negligent conduct. If real estate investors perform these tasks consistently, you make the plaintiff's attorneys job far easier because again they are chasing insurance proceeds and you are handing that over on a silver platter in a way where they are far less likely to care about you personally.