The Best Protection Against Any Legal Threat Is A Multi-Layered, Cross-Disciplinary Defense Strategy

The worst part of having a position where you can really make a difference in the world is the constant fear of losing everything in frivolous litigation. In New York City, where I practice, that is a well-founded and very realistic concern. If you have a lifetime of responsible savings for your retirement and your family, and a house mostly paid off, there are many circumstances under which the courts are likely to allow a seizure/foreclosure by a judgment creditor.

In my experience a layered approach to legal liability defense is the only truly effective strategy for an accomplished person to protect their assets. This is not a silver bullet. In our state where the legal system is large and in constant flux, there is no such thing. My system takes time and commitment. But at the end of the day, if you stick to this path, you’ll be able to sleep at night.

Here are all of the steps that could be involved, depending on your circumstances:

Incorporation, waivers/disclaimers, strong contracts, trusts, best practices, insurance, defense litigation and bankruptcy.

How Attorneys Decide Whether To Sue

I substantial portion of my legal career has been dedicated to commercial debt collection. I’m very good at it because few business owners follow the system I outline below, making collection relatively easy. The typical criteria is as follows:

1. There has to be a strong claim of wrongdoing. People fight much harder when they know in their heart that they violated the contract or broke the law, regardless of how unfair they feel the situation is, than when they believe they’re 100% right. For example, when a contractor is hired to do a job and the customer pays to have the whole job done again by someone else for whatever reason, when the contractor sues the customer for the balance, it’s going to be a very involved case because the customer is highly unlikely to settle or back down. When I do collections work, I start by reviewing all of the pertinent contracts and communications to find out if there is a bona fide dispute or just a desire not to pay. If it’s the former, I cannot take the case on contingency, which means the case dies there 99% of the time.
2. The law has to be on my side. It doesn’t matter how right my client is. If the law allows our adversary to be excused from liability then the case is of questionable value at best. For example, I have a client with automatic renewal clauses in his contracts. Some of his clients ignored the notice of automatic renewal and then refused to pay the renewal invoice. New York State law has very rigorous, specific requirements for an automatic renewal clause to be valid. In my client’s case, this was not his first rodeo and he completely complied. But in most similar cases this situation would be a non-starter.
3. The judgment has to be collectible. This where 95% of the cases that come across a collections attorneys table go to die. Because of stringent city, state and federal consumer protection laws, most debts are only collectible when there is an insurance carrier on the hook, the debtor runs an upstanding, established business with meaningful income and assets, or is personally liable for the debt and has a good job or a mostly paid off house. Most defendants are not well-positioned to pay judgments and many judgments, if not most, are uncollectible.
4. If the client is willing to pay cash for the lawsuit, then most lawsuits will be filed. But, at $300/hr. minimum (few attorneys in NYC will work for less), and a $3000 likely minimum retainer (I cannot imagine less), probably needing to be refreshed when it runs out, very few lawsuits will move forward on a cash basis.

How To Tilt The Odds In Your Favor

Few attorneys understand in practice how to evaluate a contingency collections case without a deep pocket such as an insurance company guaranteeing the outcome. But if you do understand that, and you know what I will lay out below, you will have the ability to protect yourself better than 99% of the people without putting your money overseas, putting it all in your kids’ names. or taking other unnecessary risks.

Incorporate

When I talk incorporation, I’m using it as a general term to reflect any systematic separation of business and personal assets which could include a Limited Liability Company, C Corporation, Limited Partnership, etc. The important point here is that any of these corporate structures put up a wall between the assets belonging to the entity and assets belonging to you personally or other legal entities. A corporate entity is your very first line of defense.

For corporate entities to offer reliable protection, there are several things you need to do:

1. Meet the legal requirements to form the entity and stay in legal compliance. This depends on what kind of entity you form, but it isn’t particularly cumbersome as long as you do it.
2. Keep the entity’s financial and legal affairs separate from your own. It needs to have its own bank account and pay its own bills with that bank account. You can’t pay your personal bills with it. You sign contracts as an officer in the entity, not in your personal name. 
3. The entity needs to have the financial capability to operate. That means you need a certain base amount of funds in there to keep you going if some checks come late, etc. It’s fine to have a business line of credit and business loans. Again, it can’t be a mere shell with every dime of income sucked out regularly.
4. You can’t use the corporation to commit fraud of any kind or other illegal activities. If justice requires “piercing the corporate veil” and making you personally liable, you will not escape.
5. You’re going to be personally liable for unpaid sales taxes, payroll taxes and other taxes that you collect on the government’s behalf as an officer of a legal entity.
6. You can be held liable for non-contractual injuries known as torts. Torts can include fraud, misrepresentation, negligence, malpractice, etc. This is a big one and should be planned for.

Waivers/Disclaimers

While not every waiver/disclaimer is enforceable 100% of the time for public policy and other reasons, a well-drafted waiver/disclaimer can stop many lawsuits in their tracks. For example, many doctors are sued for failure of informed consent, meaning not letting the patient know about certain unlikely but not impossible risks of a procedure. It happens often because the informed consent documents provided to the patients are non-existent, or very poorly drafted. If you give them a good, comprehensive informed consent document, it transfers a heavy legal burden of proof from you to them. 

Similarly, a marketing company should have exculpatory language making clear that past performance is not a guarantee of future success, and results are not guaranteed. Additionally, website designs are not going to meet ADA accessibility standards or any other standards for that matter. Otherwise, you could get dragged into an ADA suit you never even knew existed.  

Strong Contracts

In a business context, the court is highly unlikely to apply public policy and go against the language of the contract to reach a fair outcome. It is settled policy that businesses are expected to have a high level of sophistication and understand their agreements, no matter how one-sided and unfair they maybe. Here is how contracts work, in a nutshell:

1. You want as many options open as possible. The fewer rights you waive, the easier it will be for you to defend yourself and hold the other side liable for their actions.
2. Justice delayed is justice denied. You want the other side to waive as many rights as possible so you can get your case heard before the damages become so great that the whole effort becomes a loss.
3. You can do hardcore, aggressive negotiation while smiling, speaking softly and writing in plain English. A strong, well-drafted contract which gives you a major advantage does not need to appear repulsive and in fact, many attorneys barely glance at the agreements they recommend their clients to sign and will swallow more than their clients ever would, if you put sugar on it.

For that reason, it is essential that you have a great (i.e. non-lazy) attorney who focuses on contract law to draft and review contracts. And that you read the contract yourself, not relying on anybody to care as much as you do. The more you care, the more your attorney is likely to care.

Creating Entities To Hold Assets

A lot of accountants recommend creating separate LLC’s for each major asset you have. For example, let’s say you own a building and you have renters, and separately you have a daycare center. It totally makes sense to have an LLC for the daycare center and an LLC for the building the daycare center rents from. That way a judgment against the daycare won’t put the building in jeopardy. 

Sometimes this is all the asset protection you need, but there are a few caveats.

1. This is subject to the LLC liability protection exemptions discussed above.
2. If you are the sole owner of the entity, then the entity is just an asset of yours, like your house and your car. So the entity offers you no protection at all against personal judgments. For example, if you are sued on a personal guarantee of a business line of credit or some note you co-signed for someone, once they get a judgement the creditor can take your membership interest in the LLC or your shares in the corporation as they are just assets of yours like any other asset. 
3. You maybe able to circumvent this single-member entity problem in a variety of ways including forming the entity in a state with more favorable laws (if NY real estate is not involved), or adding a trust or some other entity as a partner with you, but these are complex strategies requiring an enhanced commitment on your part and few lawyers will get this right adequately to save you on game day.
4. Entities get costly, fast. You have to pay meaningful recurring fees to the state for each entity and forming the entity is costly. The accounting fees are also going to be higher each year. Your accountant may get the idea to setup a parent-subsidiary structure to ease the tax filing complexity, but this relationship between entities opens you up to legal attacks such as reverse piercing of the corporate veil, enterprise liability, etc. 
5. If you put a personal residence in an LLC, your mortgage rate maybe a lot higher.
6. If you transfer assets to an entity after there is a perceived risk, the transfer can be canceled as a fraudulent conveyance.

You get the greatest benefit when there are multiple owners of the entity and a strong shareholder or operating agreement is in place that allows the other owners to cut out the creditor completely.

Trusts

A trust is a contract between the owner of an asset and a person who agrees to manage the asset for the owner pursuant to the terms laid out in the trust. When you create a trust, you transfer the asset out of your name and into the name of the trust.

1. One major benefit of a trust is that it does not get filed anywhere, so your creditors don’t know it exists. For example, you can create a trust fully within your control called the Long Life, Good Life Trust. You can then buy a building with the trust as the buyer, not you. That means when an attorney is evaluating whether you are worth suing or whether a lawsuit against you is worth settling, they are very unlikely to know you own the building.   
2. There are two types of trusts, revocable and irrevocable. A revocable trust changes the name on the asset, but not your power over the asset. So it offers little creditor protection beyond potentially keeping things out of view and passing them quietly to your heirs when the time is right, with more positive tax consequences and fewer recurring costs than ownership by an LLC.  
3. Irrevocable trusts are close to bulletproof as long as there is no clear and present risk of a lawsuit when you transfer the assets to the trust. An irrevocable trust means there is some kind of permanent legal restriction placed on the asset which you cannot lift. Because a judgment creditor only has the power you have, they cannot overcome that restriction either. So if the house is transferred to your name as trustee, holding it for the benefit of your kids, then your creditors cannot take the house because it is no longer yours. All you have is possibly a lifetime right to live there but the house is ultimately now owned by your kids, This is complex and you should talk to a lawyer for more information. But very powerful. 

Legal Best Practices Audits

A little common sense goes a long way. Not getting sued is the absolute best liability defense mechanism. While you cannot control everything, you can reduce the chances dramatically. One service I provide for clients, for example, is an annual legal best practices audit where we verify the client’s risk profile is being managed. For example: 

1. Do employee contracts, handbook, classifications, etc. comply with the latest employment laws and changes in the number of employees the entity has?
2. Has the customer makeup changed? Do we need to be more concerned about European data privacy laws, government agency regulators, copyright laws, etc.?
3. Do we need to make changes to the legal structure of the company to reflect additional partners, employee stock sharing plans, new healthcare or retirement benefits, raising capital, etc.?
4. Is there now the potential for lawsuits which did not exist previously? Is the company doing anything differently in terms of product, people, place or purpose?
5. Is the company in close contact with all stakeholders and can anything be done better to become aware of problems and address them before someone leaks the opportunity to an opportunistic attorney or government agency? 
6. Are there proper training and procedures in place for all risks that we know about?

Insurance

You can insure against a lot of risks, and you should at least find out what it would cost to do so. Insurance can bring a lot of comfort. The problems with insurance are as follows:

1. Insurance companies are in the business of selling insurance and not paying out claims. They can find 100 reasons not to pay your claim in your time of need. If you consult with an attorney to make sure your policy doesn’t exempt the risks which most concern you (hint: it very likely will, using language you would never recognize), you will increase your likelihood of ultimately having your claims paid, but not necessarily when you need the money.

2. Insurance is very expensive. If you buy insurance at the level you truly need and it reflects your actual risk, they will likely non-renew your policy. Just like a credit card that you fully repay at the end of each month. They want profitable clients. Sometimes the insurance company will even tell you that you have not requested enough coverage. You’ll need a higher premium to make it worthwhile to them. So if you don’t have a problem for 10 years, and you most likely won’t, you might end up having paid for the entire risk in insurance premiums. You may have been better off self-insuring. Which is why many larger firms create captive insurance companies, etc.

Defense Litigation

When push comes to shove and you get sued, most of the time the situation is one of two things:

1. The person suing you is paying cash and the attorney has led them to believe that you will surrender for the cost of the retainer and they won’t need to pay much more than that. The attorney almost definitely did not make clear what the true cost of litigation is. Eventually when the costs get too high they will settle or quit.

2. Someone is convinced that you have money and you are legally wrong, and the amount you will pay out is much higher than the initial investment required to sue you. Few plaintiffs are banking on a long, painful, time-consuming, very expensive process. I deal with this by aggressively countersuing them whenever possible, fighting every paper they file when relevant, maximizing the scope of discovery so that they understand their own bad deeds will come to light, and aggressively continuing to prosecute our counterclaims until we reach an acceptable resolution.  

Even if you have done nothing to protect your assets, almost every case settles sooner or later. If it doesn’t, we can oftentimes continue fighting the judgment and settle it for a fraction of the total amount..

Bankruptcy

Bankruptcy is one of my favorite practice areas because it is so incredibly effective. It is barely understood by most attorneys and not understood at all by almost everyone else.

Here’s a very brief overview:

1. Bankruptcy does not in any way mean vagrancy. As you know, the wealthiest people in the world declare bankruptcy. Bankruptcy is a legal process for resetting your debts to better match your income. 

It’s built into our Constitution to encourage the capitalist spirit of taking risks without being ruined by an unfavorable outcome. It goes hand in hand with the notion of corporations, or fictitious entities being able to enjoy the contractual rights of a person. It’s all there to encourage people to invest.

2. There are two types of bankruptcy, total debt wipeout and partial debt wipeout. Total debt wipeout, better known as Chapter 7, with certain very limited exceptions such as most tax and student loan obligations, will wipe out all your credit card debt, your medical debts, your personal obligations on your car and office leases, judgment debt, ongoing lawsuits, etc. Many people, if not most, who are struggling with debt qualify for a Chapter 7 bankruptcy.  Most people who own a home in my experience qualify for Chapter 7 bankruptcy and they keep their home, along with the mortgage obligations. Most people with a  steady job in my experience also qualify.

3. Almost everybody struggling with debt qualifies for a partial wipeout bankruptcy, better known as Chapter 13, Chapter 11, or Chapter 12. This type of bankruptcy is the one to use if you are in foreclosure and wish to keep your house. It is also what you need to use if you have enough money pay some percentage of your total debt, but not all of it. Or if you just need your debt put into a more manageable payout plan. 

Bankruptcy is not the last option, but one of the best options if and when you are eligible for it. You’d be working for many years with terrible credit to even come close to what you maybe able to achieve in a few months with a bankruptcy filing. Bankruptcy is a long and complex topic better discussed with an attorney who knows your specific situation and can discuss only what is relevant to you.

I hope after reading this you feel a lot better about taking risks, and have a sense of what options are available to you and how you can start planning. My life is dedicated to helping people in business succeed. I don’t charge unless I am doing work for you. So please feel free to call me at 646-326-9971, email me at [email protected], visit my website, and connect with me on LinkedIn, Twitter or Youtube. I’ll answer your questions if I can, speak or write for your organization if possible, and you will learn a lot from what I publish online.