Asset Protection

Who Will Inherit Your LLC if You Die?

If you are a member of one or more LLCs, do you know who will inherit your membership interest if you die?  If you do not prepare for your death and designate your heir(s) properly then the state where you live will determine who inherits your LLCs after you die after the LLC membership goes through a costly probate.

Every state has a law called the “law of intestate succession.” This law is the state’s statutory scheme for determining who inherits property when a person dies owning property and the person does not have a valid Will.  Arizona’s intestate succession laws are found in Title 14, Chapter 2, Article 1 of the Arizona Revised Statutes.  Arizona’s law of intestate succession provides for the following inheritance rules for an Arizona resident who dies without a Will:

  • If you die single with no descendants, your estate goes to your parents equally if both survive or to the surviving parent.
  • If you die single with no descendants and both of your parents are deceased, your estate goes to the descendants of your parents or either of them by representation.
  • If you die while married, your entire estate goes to your spouse if you do not have any descendants or if ALL of your descendants are descendants of you and your spouse.
  • If you die while married and have any descendants that are not descendants of you and your spouse, your spouse will inherit one-half of the intestate separate property and none of your community property.

If you are married and have any children with a person who is not your spouse, pay close attention to the last rule listed above because it could create a nightmare for your spouse.

Example: Homer has a son named Bob who is not his wife Marge’s son. Homer and Marge are estranged from Bob. Homer & Marge own 100% of World Wide Widgets Arizona, LLC, as community property. The LLC is worth $500,000. Homer is an Arizona resident and dies without a Will. Homer does not own any separate property. Arizona law provides that Marge inherits nothing, zip, zero, nada other than a spousal homestead allowance of $18,000. Homer’s membership interest in the LLC goes to Bob who now becomes half owner of the LLC with Marge. Not only has Homer’s failure to plan cost Marge $250,000, but Homer left Marge the giant headache of operating a business with Bob who knows nothing about the business and only wants his $250,000.

Arizona law does provide that “The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. This allowance shall not continue for longer than one year if the estate is inadequate to discharge allowed claims.” This allowance however, does not amount to a lot of money.

If you do not know for a fact that the person or people you want to inherit your ownership interest will actually inherit your LLCs when you die then you need to take action now to protect your loved ones and insure that the LLCs go to your desired heirs. However, if you are happy to do nothing and let the law of intestate succession determine who will inherit your LLCs, your heirs will still be required to open an expensive and public probate proceeding with an Arizona superior court.

Best, but More Expensive Solution

The best solution to make sure that your ownership interest in LLCs goes to your desired heirs is to create a trust and have the trust own the LLC.  When the trust owns the LLC there is no need for a probate because the trust owns the LLC interest before and after your death.  See “How to Transfer an LLC to a Trust” for more on this topic.

Cheapest and Simplest Solution

The simplest way to make sure your Arizona LLCs go to the right person or people after you die is to sign a Transfer of Membership Interest Testament. This simple document not only specifies who inherits your Arizona LLCs, but it also avoids an expensive probate of your LLC interest. To learn more about this important family protection document read my article called “Who will Inherit Your Membership Interest in Your Arizona LLC When You Die?

2017-05-01T07:19:55-07:00August 15th, 2011|Asset Protection, Members, Operating LLCs|0 Comments

When LLC Member May Be Held Personally Liable For Signing Loan Agreement

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.”

Should I Form a Do-It-Myself Arizona Corporation?

Question:  I am considering forming an Arizona corporation myself.  All I have to do is complete the Arizona Corporation Commission’s three page fill in the blanks Articles of Incorporation and file it with the Arizona Corporation Commission.  Why should I hire you to form my new corporation?

Answer:  Wow!  This is an actual question somebody asked me recently.  The question always reminds me of another question, “would you perform surgery on yourself?”  OK, it’s not quite the same thing, but there are a lot of reasons why people should not form corporations or limited liability companies themselves or use document preparers.  Here are a few.

  • First and most important, the Arizona corporation is almost always obsolete and should rarely be used.  Arizona corporate law does not give the shareholders charging order protection unlike Arizona LLC law that provides that the sole remedy of a creditor who gets a judgment against a member of an Arizona LLC is to serve a charging order on the LLC.  The legal significance of the difference is that if a creditor gets a judgment against a stockholder of an Arizona corporation, the creditor can sell the stock at an auction and it is lost forever.  However, if the creditor gets a judgment against a member of an Arizona LLC, the creditor can get a charging order, but cannot force a sale of the membership interest in the LLC.  Bottom line:  If a you own stock in an Arizona corporation and a creditor gets a judgment against you, you will probably lose your investment in the stock forever.  If you are a member in an Arizona LLC and somebody gets a judgment against you, Arizona’s LLC law prevents the loss of your investment in the company.
  • Arizona corporations must file an annual report with the Arizona Corporation Commission and pay an annual fee of $45.  Arizona LLCs do not file an annual report with the ACC or pay it an annual fee.
  • If an Arizona corporation fails to file its annual report, the Arizona Corporation Commission will terminate its existence.  Let me say that again slower.  T h e    A C C    w i l l    k i l l    the    c o r p o r a t i o n!  What do you suppose happens to the corporate shield provided by an Arizona corporation when it dies?  It evaporates!  When the ACC revokes the charter of an Arizona corporation because it did not file an annual report, the legal significance of the revocation is that the shareholders no longer have a corporation – they have a common law Arizona general partnership and every one of them is 100 percent liable for everything that goes wrong.  If you have an Arizona LLC there is no annual report so you cannot forget to file it and the ACC cannot terminate your company for failing to file the annual report.  If you think revocations are rare, think again.  For its fiscal year ending June 30, 2011, the ACC revoked the existence of 18,342 Arizona corporations – that’s 10% of all Arizona corporations.
  • If you insist on forming your own corporation, the before you pull the trigger, do your self a favor and read the read “How To Incorporate In Arizona.”

Having said the above, if anybody insists on forming an Arizona corporation, I am happy to oblige that person.  I do form Arizona corporations, but it happens less and less as time goes by and more and more people realize that the limited liability company is the entity of choice in Arizona.

2016-11-16T08:23:54-07:00July 17th, 2011|Asset Protection, FAQs, Forming LLCs|0 Comments

Why Form an LLC?

Question:  I understand that if I form a limited liability company to operate my business and I am the only person who provides services on behalf of the business that I can be sued and be liable for my acts or omissions that cause harm to third parties.  Instead of forming an LLC, can’t I just load up on insurance and not form an LLC to operate my business?

Answer:   You could, but I think that would be a costly mistake.  When you operate a business, commercial insurance is always your first line of defense.  Your business should never operate without appropriate insurance coverage. Consult with several experienced business insurance agents and get their advice as to the type of insurance and the coverage amounts that are appropriate for your particular business.  Always buy as much insurance as you can afford of the type that is appropriate for your specific type of business.

You operate a business through a limited liability company because it is your second line of defense against things that can go wrong with the business.   What if  you have insurance and the insurance coverage is denied?  What if a plaintiff gets a judgment that exceeds the amount of insurance coverage?  If you don’t form an LLC to operate your business and a plaintiff gets a judgment that exceeds the amount of your insurance coverage against you as the owner/defendant, all of your personal assets are at risk.

Fundamental Fact of Business Life:  Without an LLC to operate your  business, you are 100% liable for every thing that goes wrong.  Do you really want to be in that position and have all of your life savings at risk?   It’s hard to predict how liability may arise, but if you operate the business through an LLC, the general rule is the owners are not liable for the debts or obligations of the LLC.  Wouldn’t you rather start from the position that you are not liable for anything (except your own acts and omissions) instead of the position that you are liable for everything?

Bottom Line:  I believe it is foolish to operate an Arizona business without adequate insurance coverage and without operating the business through a limited liability company or a corporation.

Yes, I form Arizona limited liability companies.  I’ve formed 6,700+ AZ LLCs.  For the reasons why so many people hire me to form LLCs, see “Contents of Arizona LLC Attorney Richard Keyt’s Bronze, Silver & Gold LLC Formation Packages.”

KEYTLaw Girl Shows What Is In Every LLC Portfolio

When we form an Arizona LLC for $597 we don’t just send our clients a stack of papers.  We put all of your LLC documents in a beautiful red Arizona Limited Liability Company portfolio with the documents organized behind tabs.  Every LLC gets our custom drafted Articles of Organization, Organizational Resolutions signed by the members,  the 50 page Charging Order Enhanced Operating Agreement, the 170 page Arizona LLC Operations Manual customized for the LLC, and a numbered membership certificate for each member.

We Answer LLC Formation Questions for Free

If you have questions about forming an Arizona LLC, contact Arizona LLC lawyers Richard Keyt (480-664-7478) or Richard C. Keyt (480-664-7472).  We do not charge for entity formation related questions.

Two Easy Ways to Hire Richard Keyt to Form Your Arizona LLC for $397 (Bronze), $597 (Silver) or $997 (Gold)

To learn about what is included in each of our three LLC formation packages see our Bronze ($397), Silver ($597) & Gold ($997) LLC Formation Packages Comparison page.

We’ve made it very easy to hire Richard Keyt (6,700+ LLCs formed) and KEYTLaw, LLC, to form your new Arizona LLC.  It’s a simple 5 – 10 minute process.  To hire Richard to form your new LLC select one of the following two options:

Option 1 – Telephone

Call any of the following KEYTLaw people and give your LLC and credit card information over the phone:

  • Richard Keyt – 480-664-7478
  • Richard’s son LLC attorney & former CPA Richard C. Keyt – 480-664-7472
  • KEYTLaw legal assistant Emily Conrad - 480-664-7846

Option 2: Online – Available 24/7

Real Estate Owners Sued – a Too Common Nightmare for Property Owners

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 Damage Awards in Premises Liability Cases

Owners of residential and commercial buildings face potential liability for accidents which occur on the property’s premises.  Two premises liability cases found their way into the top ten civil damage awards in Arizona during 2010.  In LeClair v. Lumberman’s Building Center, the jury awarded $3,900,000 to a truck driver who slipped and fell on black ice.  The accident occurred at the Lumberman’s Building Center and caused the truck driver to lose his leg.  In Kerege v. Viscount Hotel Suite, an elderly woman fell down carpeted stairs in a hotel atrium, ultimately, caused her death.  The jury awarded the plaintiff $3,000,000.

These two cases illustrate the need to form an Arizona Limited Liability Company (LLC) to protect the personal assets of the owner.  Imagine you just purchased a small strip mall in Phoenix.  You depend on this strip mall as one of the assets to help fund your retirement.  However, when you purchased the strip mall, you did not have title to the strip mall held in an LLC.  Rather, you personally held title to the mall believing an insurance policy covering the strip mall sufficiently fully protected you against any lawsuits and judgments arising from the real estate.

The  insurance policy on the strip mall covered the first $2,000,000 of damages occurring to any person on the property.  During a rainy monsoon day, a prospective plaintiff slips on the sidewalk of the strip mall and injures themselves badly.  The upset plaintiff sues the owner of the real estate, i.e., YOU, and the jury awards the plaintiff $3,000,000 in damages. Your insurance company pays the policy limits of $2,000,000, but you now have a $1,000,000 problem, which is the unpaid amount of the judgment.  Guess where the plaintiff will collect the additional $1,000,000.  If you said from your life savings you are correct.  Unfortunately, the plaintiff will be able to collect the unpaid amount of the judgment from your personal assets.  The strip mall you depended on to help fund your retirement has caused you to expend other personal assets you depended on for retirement to satisfy a judgment on a lawsuit.

This disaster could have been avoided if the property owner had formed an Arizona LLC to hold title to the real estate.  The general rule regarding property held or a business operated through an Arizona LLC is that the owner(s) of the LLC are not liable for the debts or obligations of the company. People form LLCs to protect their assets from things that go wrong with investment real estate and businesses.  Thus, in the above example the property owner could have protected the owner’s life savings by forming an Arizona LLC and transferring title to the strip mall to the LLC.

Important Lesson for Business Owners & Investment Real Estate Owners:  Insurance is always your first line of defense, but your second line of defense is the LLC.

Who Should Borrow Money to Purchase Real Estate – Me or My LLC?

I’ve been an Arizona real estate and business lawyer since 1980.  Based on my knowledge and experience the type of entity to form to hold Arizona real estate is an Arizona LLC.  When I represent buyers of multi-million dollar properties the lenders always require that the borrower form a single purpose LLC to own the real estate.  Over half of the 6,700+ LLCs I have formed have been to hold real estate.  Your other choices are the corporation and the limited partnership.  Both of these types of entities have been obsolete since Arizona enacted its LLC law in 1992.  A general rule is never own investment real estate in a corporation because of adverse tax consequences.  That’s why before 1992 the limited partnership, not the corporation, was the entity commonly used to own investment real estate.

When you have an LLC, you want the LLC to be the borrower that signs the promissory note and becomes obligated to repay the loan.  The general rule is that if the LLC is the borrower, the owner(s) of the LLC are not liable to the lender to repay the loan if the LLC defaults.

A sophisticated commercial lender will require you to form an LLC and have the LLC be the borrower and take title at closing with you guarantying the loan.  Single family home lenders and lenders that do not understand the legal reasons for having the LLC be the borrower will require the person to be the borrower.  If your lender will not let the LLC be the borrower then you must be the borrower and take title in your name and then transfer the real estate to the LLC after closing.

If you are an owner of an LLC that will borrow money, the best structure for you is for the LLC to borrow the money and sign the promissory note without you signing a guaranty by which you promise to repay the lender if the LLC defaults.  If you can do this, then if the LLC were to default on the loan and did not have sufficient assets to repay the loan, the lender would not be able to pursue you for the unpaid amount due to the lender.

2019-06-15T08:22:29-07:00May 20th, 2011|Asset Protection, FAQs|0 Comments

Scottsdale’s Fleming’s Restaurant to Pay $250,000 in Sex-harassment Suit

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?

Bankruptcy Court Sells Debtor’s Arizona Limited Partnership Interest

In July of 2010, the U.S. Bankruptcy Court for Arizona ordered the sale of a debtor’s limited partnership interest in an Arizona limited partnership in disregard of Arizona Revised Statues Section 29-655.  This Arizona statute that says that the sole remedy of a creditor who gets a judgment against a partner of an Arizona limited partnership is a charging order.  A charging order is a court order served on the limited partnership that orders the limited partnership to make any payments of money or distributions of property intended for the judgment debtor to the creditor.  When served with a charging order, the limited partnership usually ceases making payments and distributions to the partner who is the judgment debtor, which means the creditor gets nothing from the limited partnership.

In re Michael L. Gauvin, the United States Bankruptcy Court ordered the sale of the debtor’s fifty percent interest as a limited partner of an Arizona limited partnership called “Draco Enterprises II, an Arizona limited partnership.”  See the Notice of Sale.

Here is the text of Arizona’s charging order statute applicable to Arizona limited partnerships:

29-341. Rights of judgment creditor

On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partner’s partnership interest. This chapter does not deprive any partner of the benefit of any exemption laws applicable to his partnership interest. This section provides the exclusive remedy by which a judgment creditor of a partner may satisfy a judgment out of the judgment debtor’s interest in the partnership.

Arizona Revised Statutes Section 29-655 is the equivalent law for Arizona limited liability companies.  This statute states:

29-655. Rights of judgment creditors of a member

A. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member’s interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest.

B. This chapter does not deprive any member of the benefit of any exemption laws applicable to his interest in the limited liability company.

C. This section provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor’s interest in the limited liability company.

Bottom line:  Despite these two Arizona statutes that state that the charging order is the exclusive remedy of a creditor that gets a judgment against a partner of an Arizona limited partnership or a member of an Arizona limited liability company, if the partner or member is a debtor in bankruptcy, the bankruptcy court can and probably will sell the interest and give the proceeds to creditors unless the interest is worthless.

2011-12-03T10:39:17-07:00August 17th, 2010|Asset Protection, Charging Orders|0 Comments

How Can I Legally Omit My Name as a Member of an Arizona LLC?

Question:  I want to form an Arizona limited liability company.  I understand that Arizona law requires that the names and addresses of all members of an Arizona member managed LLC must be disclosed in the Articles of Organization, which is a public record on the internet.  How can I form an Arizona LLC and avoid having my name and address appear on the Arizona Corporation Commission’s public records?

Answer:  Yes if you do it the right way.  Arizona Revised Statutes Section 29-632.A.5 requires that the Articles of Organization filed with the Arizona Corporation Commission must contain the name and address of all members if the LLC is member managed or the names and addresses of only those members who own 20% or more of the LLC if the company is manager managed.

There is a simple and relatively inexpensive way to comply with Arizona law, but not disclose your name in the Articles of Organization filed with the Arizona Corporation Commission to form an Arizona LLC.  For the solution and how to keep your name off the records of an Arizona LLC, see my article called “How to Form an Arizona LLC without Disclosing Its Ultimate Owner(s).”

Driver Liable for $5 Million after Being Rear-ended by Motorcyclist with Meth & Marijuana in His Blood

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.

Family of 16 Year Old Wins $5 Million Lawsuit Against Driver & Property Owner

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

Olmstead vs. Federal Trade Commission

This Florida Supreme Court case involved the attempt by the Federal Trade Commission to enforce collection of a $10 million judgment it got against Shaun Olmstead and Julie Connell for their involvement with entities that operated an advance-fee credit card scam. The issue before the court was:

“Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all, ‘right, title, and interest’ in the debtor‘s single-member limited liability company to satisfy an outstanding judgment.”

Olmstead argued that the issue should be answered in the negative because the only remedy available to a creditor who has a judgment against a member of a Florida single-member LLC is a charging order.  The court said:

“we rephrase the certified question as follows: ―Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member limited liability company to satisfy an outstanding judgment. We answer the rephrased question in the affirmative.”

The reason the court allowed the creditor to get to the assets of the single member Florida LLCs is because the court ruled:

“that there is no reasonable basis for inferring that the provision authorizing the use of charging orders under section 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor‘s interest in single-member LLC.

Arizona LLC law is different from Florida’s LLC law.  Arizona’s LLC member charging order protection is contained in Arizona Revised Statutes Section 29-655 which states:

“A. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member’s interest in the limited liability company with payment of the unsatisfied amount of the judgment plus interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest.

B. This chapter does not deprive any member of the benefit of any exemption laws applicable to his interest in the limited liability company.

C. This section provides the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor’s interest in the limited liability company.”

Because of this statute, an Arizona court should not reach the result of the Florida Supreme Court in Olmstead vs. FTC.  See “Olmstead Decision Does Not Make All Single Member LLCs Useless.”

Veil-Piercing

Owners of corporations and limited liability companies worst nightmare is that a creditor will sue the company and its owners and ask the court to “pierce-the-corporate-veil” and hold the owners liable for the debts and obligations of the company.  Peter B. Oh, Associate Professor of Law at the University of Pittsburgh has written a scholarly article called “Veil-Piercing.”  Here is the abstract of the article:

From its inception veil-piercing has been a scourge on corporate law. Exactly when the veil of limited liability can and will be circumvented to reach into a shareholder’s own assets has befuddled courts, litigants, and scholars alike. And the doctrine has been bedeviled by empirical evidence of a chasm between the theory and practice of veil-piercing; notably, veil-piercing claims inexplicably seem to prevail more often in Contract than Tort, a finding that flouts the engrained distinction between voluntary and involuntary creditors.

With a dataset of 2,908 cases from 1658 to 2006 this study presents the most comprehensive portrait of veil-piercing decisions yet. Unlike predecessors, this study examines Fraud, a long-suspected accessory to veil-piercing, as well as specific sub-claims in Contract, Tort, and Fraud to provide a fine-grained portrait of voluntary and involuntary creditors. And this study analyzes the rationales instrumental to a piercing decision.

The findings largely comport with our legal intuitions. The most successful civil veil-piercing claims lie in Fraud or involve specific evidence of fraud or misrepresentation. Further, claims not only prevail more often in Tort than Contract, but adhere to the voluntary-involuntary creditor distinction. Surprisingly, though, veil-piercing presents a greater risk to individual shareholders than corporate groups.

Arizona Court of Appeals Finds Officers & Directors of Arizona Corporation Personally Liable for Corporation’s Debt

Arizona Republic:  “Corporate officers can be held personally liable in some situations when their defunct firms don’t pay suppliers, the Arizona Court of Appeals has ruled.  The judges maintained that lawsuits against a corporation for failing to pay a debt are valid only against the corporate entity. And when the corporation goes away, the creditors generally cannot go after the individual shareholders  or directors.”  The case is Arizona Tile, LLC, vs. Howard Steven Berger, Cynthia Berger and John McCarthy.

The general rule of Arizona law is that the shareholders, officers and directors of an Arizona corporation and the members and managers of an Arizona limited liability company are not liable for the debts and obligations of the company.  There are, however, many exceptions to this general rule.  This case illustrates one of those exceptions.  Arizona Revised Statutes Section 33-1005 requires contractors who receive payments intended for subcontractors and materialmen to hold the money in trust for the intended payee.  This statute is the basis for imposing liability on the corporation’s officers and directors beca1use they had a duty to see that the money was paid to the proper payee, but instead they paid other corporate debts that the officers and directors had personally guaranteed.  In short they used money intended for Peter to pay the corporation’s debt to Paul because if Paul did not get paid, Paul could collect the debt owed by the officers and directors under their guaranties.

2016-11-16T08:23:57-07:00February 12th, 2010|Asset Protection, Lawsuits, LLCs & Corporations|0 Comments

President of Corporation Personally Liable for Signing Contract

Improperly Worded Company Contracts can Cause Signer to be Liable

One of the primary reasons people form limited liability companies and corporations is to protect the owners from the debts and liabilities of the company.  The general rule of Arizona law is that the members of an Arizona LLC and the shareholders of an Arizona corporation are not liable for the company’s debts.  One of the biggest exceptions to this rule arises when an owner signs a contract and becomes personally obligated to pay the company’s debt.

The Personal Guaranty

The most common type of contract that obligates an owner of a company to pay the company’s debts is called a “guaranty” or “personal guaranty.”  A guaranty is a contract by which the signer/guarantor promises to pay or satisfy the debt of another person (the company).  Guaranties are frequently required by landlords and lenders who know that if the company doesn’t pay, the debt will never be paid.  Arizona law provides that if only one spouse signs a guaranty, then the debt cannot be collected from the community property of the guarantor and his or her spouse.

Contracts that Create Personal Liability

Owners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company.  The Arizona LLC Quick Start Guide that I give every LLC that I form contains actual examples of the exact language that should be used in contracts to prevent the signer from inadvertently becoming personally liable to pay the company’s debt created under the contract.

If the signer of an LLC or corporate contract wants to avoid becoming personally liable for the debts of the company created in the contract, the language in the contract must clearly state that the party is the LLC or corporation and indicate the capacity of the signer.

Iowa limited liability company and corporate attorney Marc Ward reports on a recent Iowa case that where the court found that the person who signed a two page contract on behalf of a corporation was personally liable to pay the corporation’s debt under the contract.

The Iowa Court of Appeals opinion in Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren’t as simple as they appear.

Unfortunately for Moyer the contract contained a clause that said “I hereby personally guarantee to pay on demand any and all sums due that my/our company shall fail to pay.”

Mr. Moyer did not sign the signature block for the personal guaranty, but the court found he was liable anyway.

Proper Way to Sign Contracts

Right Way to Designate the Company in a Contract:  World Wide Widgets, LLC, an Arizona limited liability company.  Note the LLC after the name and the written out “limited liability company.”   Make sure both the abbreviation and the full designation are used.  Typically the proper designation of the company should be in the first paragraph and in the actual signature block where the signer signs.  If it is not, the signer should hand write the missing information above where he or she signs and/or on the first paragraph where the company is named.

Right Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson, President (for an Arizona corporation), or Homer Simpson, Manager (for a manager-managed Arizona LLC), or Homer Simpson, member (for a member-managed Arizona LLC).

Wrong Way to Designate the Company in a Contract:  World Wide Widgets

Wrong Way to Designate the Capacity of a Signer in a Contract:  Homer Simpson.

Beware of Personal Guaranty Language in the Contract

If a contract contains any language that would cause the signer to be a guarantor and impose personal liability on the signer, the signer who wants to avoid personal liability must take a pen and cross-out or strike-out all of the guaranty language.  If you are signing a contract, you must read it and strike-out any language you don’t want and write on the document any additional language you want.  You can modify with hand-written changes all pre-printed contracts before signing.

Personal Guaranty’s & LLC’s

Question:  My LLC is borrowing money and the lender wants me to sign a guaranty.  Should I sign it?

Answer:  It depends on whether you can convince the lender that it should drop the guaranty.  A prudent lender will always require that the members of an LLC that is borrowing money personally guaranty the loan.  No guaranty – no loan unless the LLC has sufficient assets to assure the lender that the loan will be repaid.  Without a guaranty signed by the members, the lender’s only source for repaying the loan is the LLC and its assets.  Prudent lenders require the owners of an LLC and a corporation to sign guaranties by which the owners of the LLC promise to pay the loan if the LLC does not do so.

A client sent me a copy of a guaranty that a contractor asked each member of the limited liability company to sign.  The client asked:

“If I sign the guaranty, can the contractor come after my personal assets?  If so, why doesn’t my LLC protect me from the liability?”

The general rule of Arizona law is that the members (owners) of an Arizona limited liability company are not liable for the debts or obligations of the LLC.  There are exceptions to the general rule.  The biggest and most common exception arises when a member guarantees the debts or obligations of the LLC.

By guarantying the LLC’s debts or obligations, the member becomes liable under contract law to satisfy the LLC’s debts and obligations that were guaranteed.  For example, if the LLC borrows $10,000, the general rule is that the members are not liable for the debt.  However, if a member signs a guaranty in favor of the lender that says the member will pay the debt if the LLC defaults, the member is agreeing in the contract (the guaranty) that the lender can sue the member for the amount owed on the loan if the LLC defaults and obtain the member’s personal assets to pay the debt.

LLC members should avoid guarantying debts and obligations of their LLCs unless absolutely necessary.

The concepts described above also apply to shareholders of Arizona corporations and limited partners of Arizona partnership.

2019-06-15T11:24:27-07:00September 10th, 2009|Ask the KEYTLaw Girl, Asset Protection, FAQs|0 Comments