Asset Protection

People form limited liability companies to limit their personal liability, but that goal will not be reached if a person signing legal documents for the LLC does not understand contracts facts of life.  The general rule of LLC law is that if an LLC signs a contract only the LLC is legally bound and the members of the LLC are not liable.  There are exceptions to this general rule and all members and managers who sign contracts for an LLC must understand the contract signature rules or they may find that by signing on the dotted line the signer becomes personally liable to satisfy the obligations of the LLC under the contract.

The case of Ubom v. Suntrust Bank, involved an attorney obtaining a line of credit for his law firm, a Maryland limited liability company.  Mr. Ubom signed a loan agreement which contained a section for a personal guaranty.  Ubom filled in the personal guaranty section with his own personal information including his social security number, personal address, employment information, and financial information.  However, Ubom left the line blank which asked for the “Legal Name of the Guarantor.”

The loan agreement contained two lines for signatures.  The agreement asked for the signature of the “applicant” and of the “guarantor.”  Mr. Ubom signed in both places and after his name he wrote “Managing Attorney.”  Unfortunately, Mr. Ubom’s law business went south and he failed to make the payments on the loan.  The bank brought suit against both Mr. Ubom and his LLC.

The bank argued Mr. Ubom had personal liability, because the language of the loan agreement clearly provided Ubon personally guaranteed the loan.  The language of the loan agreement stated:

To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).

Both the trial court and appellate court agreed with the bank, that this language clearly provided Ubom personally guaranteed the loan.  The court found it insignificant that Ubom left blank the section asking for the “Legal Name of the Guarantor.”  However, the court found it significant Ubom listed his personal financial information.  The court, further, found it would be pointless to have Ubom sign a guaranty in his corporate capacity when the LLC was already obligated to repay the loan.

When signing any contract, the signer must read the contract to determine if the contract obligates the signer in addition to the LLC.  If you are to sign a contract for your LLC and you are not sure if it will cause you to become personally obligated you should  seek the advice of an attorney.

We can learn another important less from this case.  According to Mr. Ubom, his banker told Ubom there was no personal guaranty on the loan.  Ubom took the banker at his word.  The court did not even take this conversation into account because of the personal guaranty found in the agreement and the clear language used to describe the guaranty.  The moral of the story is “if it is not in writing, it never happened.”

Thousands of times I have said and written that if you own an Arizona business or have investment real estate in Arizona, you must protect your life savings from things that can go wrong with the business by having an Arizona limited liability company own the business or real estate.  Here are the facts of life every business owner and investment property owner must understand:

• There are an infinite number of ways that something can go wrong and harm or damage people or property.

• If you are the owner of the business or the real estate, you are 100% liable for anything and everything that goes wrong and ALL of your LIFE SAVINGS is at risk!

• You must insert a shield called a limited liability company between things that can go wrong with the business or the real estate and you, your family and your life savings by creating an Arizona limited liability company to own the business or real estate.  The general rule of Arizona law is that the owners (called members) of an Arizona LLC are not liable for the debts or obligations of the company.  This means that when something goes wrong the defendant in the lawsuit will be the LLC, not you (unless you caused the harm).

Insurance is always your first line of defense.  You should not operate a business or own investment real estate without adequate insurance coverage.  However, the LLC is your second line of defense in case the plaintiff wins a judgement greater than your insurance coverage.

Here are two real life examples of  how lawsuits can arise and why you want the defendant to be your LLC instead of you:

• Rental  property owner sued by a tenant who lived in an older home the tenant claimed had lead paint.

• Older couple used savings to buy a duplex and rented it.  An accident occurred and a person died.  The estate of the victim sued the couple for millions, an amount that exceeded the couple’s insurance coverage.  Some of the claims were not covered by the insurance policy.

• A man with a net worth of $2 million owned a piece of raw land worth $150,000, but he did not have it insured.  A boy climbed a tree on the land and was injured when he fell. The boy’s parents sued asking for more than the man was worth.

In each of the above situations the people involved could have saved themselves a lot of worry, stress, time and money if they have placed the real estate in a limited liability company.

Don’t allow your life savings to be at risk.  Protect yourself and your family now by hiring me, the Arizona llc attorney, to form your Arizona LLC.

Arizona Republic:  “Fleming’s Prime Steakhouse & Wine Bar at DC Ranch in Scottsdale will pay nearly a quarter-million dollars and furnish other relief to settle a same-sex sexual-harassment lawsuit filed by the U.S. Equal Employment Opportunity Commission, the agency announced.”

If you operate your business as a sole proprietorship or a general partnership, this story illustrates why a person should always operate a business through an LLC, corporation or limited partnership.  How would you like to owe the EEOC $750,000 for something your employee did?

Two Arizona Superior Court cases tied for 9th place in the list of the top 10 largest Arizona court judgments of 2009. The other case is Herman Martinez and Romelia Martinez vs. Desert Sky Esplanade, LLC, and Michael Manzutto.

The $5 million case of Randolph Groom v. Roger Clyne and Susan Clyne arose from an accident between a vehicle with a cattle trailer driven by Roger Clyne and a motorcycle driven by Randolph Groom in 2005.  Groom was behind the Roger Clyne’s trailer when it turned left and Groom ran into the side of the trailer.  There was evidence that the trailer’s lights were not on and neither was the headlight of the motorcycle.  Groom’s blood tested positive for the presence of marijuana and methamphetamine.

Randolph was not wearing a helmet.  He suffered severe brain damage and multiple orthopedic injuries.  The jury found that Groom sustained damages equal to $5 million, but Roger Clyne was liable only for 75% of that amount because Groom was responsible for 25% of the harm he suffered.

The plaintiff argued that Susan Clyne should be liable, but the jury found that she was not liable because her son Roger was operating the vehicle for his personal business.  If Susan Clyne was named as a defendant because she was the owner of the vehicle she got lucky.  When a car is owned by Person A and Person B is driving the car and causes and accident that kills or injures one or more people and/or destroys or damages property, most of the time Person A (the vehicle owner) is named as a defendant in the lawsuit along with Person B (the driver).  This is why people who own vehicles that are driven by other people should form an Arizona LLC and transfer title to the vehicle to the LLC.

For more on using a vehicle LLC for asset protection, see my article called “When to Use a Vehicle LLC for Asset Protection.”

The case is Randolph Groom v. Roger Clyne and Susan Clyne, Santa Cruz County Superior Court Case Number 2006-0051.

Two Arizona Superior Court cases tied for 9th place in the list of the top 10 largest Arizona court judgments of 2009. The other case is Randolph Groom v. Roger Clyne and Susan Clyne.

The 9th largest civil judgment in Arizona during 2009 involved the death of a 16 year old young woman who was a passenger in a car driving on mall property when it crashed into a tree.  The accident occurred on a private road owned by Desert Sky Esplanade, LLC, when the driver of the car, Michael Mansutto, hit a speed bump and lost control of the vehicle.  The parents sued the driver and the owner of the land on which the road was located.

The parents claimed that the speed bump failed to satisfy city and federal requirements and that the property owner should have placed a warning sign before the speed bump.  Despite the fact the girl was not wearing a seat belt, which might have prevented serious injury, the judge instructed the jury not to attribute any fault to the victim.  Desert Sky Esplanade defended by saying the private road was not subject to federal or city rules and that the driver was speeding.

The jury awarded the parents $5,000,000 for their damages arising from the death of their sixteen year old daughter.  Each defendant was liable for $2,500,000.

This case illustrates two important asset protection concepts.

1.  Because the real estate was owned by an LLC rather than outright by the owner(s) of the LLC, the loss of the owner(s) of the LLC, if any, after payment of any insurance proceeds, was limited to the equity in the LLC.

2.  If the driver of the car was not the owner of the car, the owner(s) of the car would have been named as co-defendants and potentially be liable for the $2,500,000 judgment awarded against the driver.  If you have children or third parties driving your vehicles, protect yourself from liability arising from an accident caused by the driver by creating an an LLC that owns the LLC that owns the vehicle.  With this structure, the LLC will be named as a defendant in the lawsuit.  The general rule of Arizona LLC law is that the owner(s) of an Arizona LLC are not liable for its debts.  For more on using a vehicle LLC for asset protection, see my article called “When to Use a Vehicle LLC for Asset Protection.”

The case is Herman Martinez and Romelia Martinez vs. Desert Sky Esplanade, LLC, and Michael Manzutto, Maricopa County Superior Court Case Number CV-2006-014888