Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate Planning

The Ohio Court of Appeals (10th District, Franklin County) recently provided some very specific guidance about "piercing the corproate veil" in Ohio.  The case is Lind Stoneworks, Ltd. v. Top Surface, Inc., 194 Ohio App.3d 98 (10th District 2011).

The trial court held a corporation and its sole owner liable for a corporate debt.  The trial court "pierced the corporate veil" and found the owner to be personally liable.  The owner admitted that the corporation had no officers, no directors, and had apparently failed to follow some other corporate formalities.

The Court of Appeals held that in this case, these facts alone were not sufficient to impose personal liability on the owner.  The appeals court basically found that there was insufficient evidence to pierce the corporate veil.  The decision of the trial court was reversed and the case was remanded for further consideration.

Many factors can influence whether or not personal liability will be imposed on a corporation owners.  The Court of Appeals noted that in general, shareholders, officers and directors are not liable for a corporation's debts.

A limited liability company does not have as many required formalities as a corporation.  Nevertheless, it should still have a separate bank account and otherwise be treated as a separate entity.

The message from this recent Ohio court decision is clear:  make sure that you follow basic formalities with your corporation, limited liability company, or other business entity.  This is relatively easy to do; and failing to do it can completely defeat the purpose of forming the entity in the first place.

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A federal judge in Cleveland, Ohio recently ordered a convicted public official to pay $57,000 in damages by taking those funds from his retirement account.  An Ohio law passed several years ago specifically authorizes such an action if a public official has been convicted of certain crimes, including bribery.  The decision by U.S. District Judge Sara Lioi was reported in an October 29, 2011 article by James McCarty in the Cleveland Plain Dealer.

The convicted public official (former state court judge Steven Terry) was ordered to cash out the $57,000 from his retirement fund.  Mike Tobin, a spokesman for the U.S. Attorney's office, acknowledged that this was clearly a precedent.

Retirement accounts are generally well protected from creditors.  The Ohio statute involved in this particular matter has limited application -- to certain convicted public officials.  It is nevertheless important to be aware of cases like this one -- because we would not want to see a law like this one extended too far.

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The statute of limitations relating to a fraudulent transfer can vary significantly from jurisdiction to jurisdiction.  In Ohio, Section 1336.09 of the Ohio Uniform Fraudulent Transfer Act provides that a claim for relief must generally be brought within four years after a transfer was made.  But even if that period has expired, a claim may be brought within one year after the transfer was (or reasonably could have been) discovered by a claimant.

Some other states and certain foreign jurisdictions (such as the Cook Islands) have much shorter statutes of limitation.  This is one of the considerations involved in choosing a jurisdiction for a domestic asset protection trust or an offshore trust.

Many jurisdictions (including Ohio) consider when a claimant reasonably could have known about a transfer.  For this reason, it is sometimes advisable to provide some sort of public notice of a transfer of assets.  Many clients mistakenly think that asset protection involves hiding assets.  That is not the case.  It is not always advisable to provide public notice of an asset transfer, but sometimes it is.  This can be done in a number of ways, such as filing a deed, a UCC financing statement, or some other public notice that a transfer of assets has occured.

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Approximately 900,000 businesses are incorporated in Delaware, including 63% of all fortune 500 companies.  This is according to Rita K. Farrell in a recent New York Times article.

In various other posts, I have explained how Delaware's LLC statute provides better asset protection for LLC owners than the law in many other states.  The Delaware law for corporations is also advantageous (particularly for larger corporations).  This is in part because the law in Delaware is generally favorable to businesses; it tends to be stable; and it is predictable.  According to the New York Times, 21% of Delaware's revenues come from franchise taxes!  Many businesses have obviously decided to be formed in Delaware; and Delaware obviously has an incentive to continue that trend.

Various other states are also very viable alternatives for forming a corporation or a limited liability company.  I am still forming a number of Ohio corporations under certain circumstances.  Each situation must be analyzed on its own.  But as noted in the New York Times article referenced above, Delaware is obviously a very popular choice for incorporating a new business.  It is also becoming a very popular choice for forming a limited liability company.

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As I mentioned in a post last month, limited liability company laws vary significantly from state to state.  Depending on your particular circumstances, one state could have significant advantages over another.

Here are a few reasons why Delaware is one of the best states to form a limited liability company from an asset protection standpoint:

• Formation is relatively convenient and inexpensive compared to many other states.
• The applicable Delaware statute clearly makes a charging order the exclusive remedy of a creditor.
• Certain other creditor remedies are expressly barred.
• Delaware law allows various provisions in the LLC Operating Agreement that could be favorable from an asset protection standpoint.
• Delaware has a more developed body of case law than many other states; and the Delaware Chancery Court is a very sophisticated court from a business standpoint. 

If you form your LLC in Delaware but it does business in another state, you will have to file additional papers in that other state to qualify to do business.

Ohio LLCs may provide significant protection; but they are currently not as solid as the protection offered by Delaware law.  I am now generally forming Delaware LLCs even when one of my clients will be doing business in Ohio.

Each situation should always be examined on an individual basis.  As I have mentioned many times before, there is no magic asset protection formula that will be appropriate in all situations.  But in situations where a limited liability company is appropriate, Delaware is currently a very reasonable choice.

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The "Internal Affairs Doctrine" means that the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation.  For example, if there is a dispute between two shareholders of a Delaware corporation, it would typically be decided using Delaware law, even if the company operates in another state.  This means that the state in which you form a corporation or a limited liability company can be important.

A recent decision by the Court of Common Pleas of Franklin County Ohio affirms this doctrine.  The Court held that the law of Delaware (where the corporation was incorporated) rather than the law of Ohio (where the case arose) applied to a dispute involving corporate directors.

While many state corporation and LLC statutes are similar, they are not all the same.  Frequently it is fine to form a new entity in the state where it will be operated.  In some circumstances, however, it is advisable to form the new entity in another state.

So whenever an entity is formed for asset protection purposes, one factor to be considered is whether to form the entity in one state rather than another.

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It is now well settled that a limited liability company insulates the owners from the debts of the company.

It is nevertheless reassuring when a court re-affirms basic LLC protections.  In Dover Phila Heating v. SJS Restaurants 185 Ohio App.3d 107, 2009-Ohio-6187, the Ohio Court of Appeals for the Fifth Appellate District confirmed once again that members of a limited liability company generally have no responsibility for the debts of the entity.  The case was decided in late 2009 and published in the April 5, 2010 Ohio State Bar Association Report.  Citing another Ohio case, Slimans Printing Inc. v. Velo Internatl., Stark App. No. 2004CA00095, 2005-Ohio-173, 2005 WL 100963, ¶ 13, the court noted that pursuant to Ohio Revised Code §1705.48(B),

Neither the members of the limited liability company nor any managers of the limited liability company are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the limited liability company.

While there is nothing surprising in this recent decision, it is always good to see a court re-affirming the basic protections of a limited liability company.

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An article in the September 20, 2009 Business section of the Cleveland Plain Dealer contains a good summary of the various remedies available to a creditor who has a judgment against you.  Cleveland Plain Dealer columnist Sheryl Harris is discussing a $3,000 judgment obtained in a small claims court in Rocky River, Ohio; but the alternatives she outlines would be just as applicable to a $3 million judgment in Ohio and many other states.

Here are a few of the things a judgment creditor may be able to do:

• Garnish your wages
• Attach your bank accounts
• File a lien against your home and/or other real estate that you own
• Force a sale of your home and/or other real estate that you own
• Attach your personal property

There are of course limits on these remedies.  A creditor can garnish only a certain percentage of your wages.  As I have discussed in other posts, a small portion of the equity in your home will be protected in Ohio pursuant to Ohio Revised Code Section 2329.66 (while states such as Florida and Texas protect almost all the equity in your home).  It may be possible for the creditor to seize the full amount of your bank accounts, up to the amount of the judgment against you.  Transferring assets after a judgment has been entered (or even after a lawsuit has started) will likely be a prohibited fraudulent conveyance under Ohio Revised Code Section 1336.04 and similar statutes in other states.

The situation that columnist Sheryl Harris is writing about sounds like one in which we would all be rooting for the creditor.  The creditor is trying to collect on a judgment against a roofing company that failed to make proper repairs.  In many cases, however, I am representing a potential debtor.  And in those situations I want to lawfully protect the assets of that person or entity to the greatest extent reasonably possible under applicable law. 

The Cleveland Plain Dealer article is a good reminder that while debtors have many rights, so do creditors.  Asset protection attorneys must have a thorough understanding of the rights of creditors.  When an attorney is working to protect your assets, he or she must be knowledgeable about the various techniques that can be used to seize those assets.

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Holding property as joint tenants has numerous advantages.  It can be convenient, and it can generally avoid probate of the jointly held assets.  It is a big misconception, however, that joint tenancy provides very much asset protection.

A recent Ohio Court of Appeals Decision, White v. Parks is a perfect illustration of the drawbacks of joint tenancy from an asset protection standpoint.  A creditor filed a judgment lien against Robert Parks.  When Mr. Parks failed to pay the judgment, the creditor filed a foreclosure action against his residence, naming both him and his wife (the co-owners), even though the judgment was only against Robert Parks and not his wife.  The trial court ruled that even though Mrs. Parks was not subject to the judgment, the residence nevertheless had to be sold.  Mrs. Parks was to get half of the net equity after the sale and the creditor would receive the other half.  The Ohio Court of Appeals, Ninth District, affirmed the ruling of the trial court.

From the Parks' standpoint it was a lot better that their house was in joint name than in Mr. Park's name alone.  The joint tenancy provided some protection.  However, even though title was held jointly, the couple was forced out of their house.  In addition, the creditor got one half of the net equity.  Not a great result for this couple.

Holding certain assets as joint tenants (such as a checking account with relatively limited funds) often makes great sense, simply for convenience.  Advantages of joint tenancy may out-weigh the disadvantages for certain parties.  When deciding whether to hold assets jointly, the assets cannot be looked at in isolation.  How best to title your assets will depend on a wide variety of factors, including your occupation, marital status, income, net worth, asset mix and many other considerations.  Titling an asset one way could be good for one purpose and not for another.  You should not assume, however, that jointly held property will provide great protection from any of your creditors.

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Asset protection planning generally involves transferring and/or re-titling some or all of your assets in order to better protect those assets from claims of creditors. Not surprisingly, however, there are statutory prohibitions against transferring your assets with the intent of avoiding your legal obligations. Whenever any assets are transferred or re-titled for protection purposes, it is critical to focus on applicable “fraudulent conveyance” laws, which give creditors the ability to void certain asset transfers in order to satisfy a judgment. Asset protection planners must have a thorough understanding of fraudulent conveyance laws.

The Ohio Uniform Fraudulent Transfer Act (Chapter 1336 of the Ohio Revised Code) is fairly typical of the statutes found in most other states. An examination the statute reveals how broadly a fraudulent conveyance is defined. Whether a conveyance is “fraudulent” under Ohio Revised Code Section 1336.04 depends on a variety of factors, including the following:

1. Was the conveyance intended to hinder, delay, or defraud any creditor of the debtor?
2. If the transfer was as sale, did the debtor receive a reasonably equivalent value in exchange for the asset that was transferred?
3. Did the debtor know (or reasonably should have believed) that due to the transfer he would have debts beyond his ability to pay as they became due?

Whether a conveyance is “fraudulent” depends heavily on the “intent” of the person making the conveyance. Ohio Revised Code Section 1336.04 (B) says that in order to help determine that intent, consideration should be given to many different factors, including but not limited to:

1. Whether the transfer was to an insider (like a family member or partner);
2. Whether the debtor retained possession or control of the property transferred after the transfer;
3. Whether there was a lawsuit pending or threatened;
4. Whether the transfer made the debtor insolvent.

Whether or not a transfer is “fraudulent” is often a complicated issue that depends on a wide variety of factors. Other terms in the Ohio statute also frequently raise complicated questions. Debtors and creditors frequently argue about whether an asset was “transferred” at all. The term “transfer” is defined very broadly in Ohio Revised Code Section 1336.01(L) to include a direct or indirect, absolute or conditional, voluntary or involuntary method of disposing of an asset or an interest in an asset. The term “transfer” includes the payment of money, a release, a lease, creation of lien or other encumbrance. Exactly when a transfer occurs can be very important and may determine whether or not a creditor can reach a particular asset.   

Each state has its own fraudulent conveyance statutes. The Ohio statute discussed here is typical, but each applicable state law must be reviewed separately.

Fraudulent conveyance statutes do not make asset protection planning impossible. They are intended only to prevent improper transfers.  

In addition to the specific provisions of Ohio Revise Code Section 1336.04 (and/or any other applicable statute), debtors must also consider how certain transfers may be perceived by a judge who may try to “do justice” notwithstanding the words of the statute. 

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A debtor’s personal residence is a natural target of his or her creditors. Some states (Florida, in particular) provide special protection for your home against claims of creditors. Currently, Florida’s protection is so strong that some debtors have re-located to Florida solely to take advantage of this protection. Texas also provides a very strong homestead exemption. Ohio, however, currently provides little statutory protection. Until very recently, the Ohio homestead exemption was only $5,000 -- one of the lowest in the country.  The exemption was recently raised to $20,200 (Ohio Revised Code Section 2329.66).  Furthermore, Ohio law does not permit residents of Ohio to utilize the federal bankruptcy exemption, which would be a higher amount. Even in bankruptcy, therefore, Ohio residents have only a $20,200 homestead exemption. There are huge variations in state homestead exemptions.   Texas and Florida are essentially unlimited; Nevada is currently $550,000. Other states -- like Ohio -- offer very limited exemptions.  

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has significantly curtailed the previous ability to move from state to state to take advantage of a better homestead exemption. Essentially, the federal law provides that the state homestead exemption is limited to $125,000 if the debtor moved within 3 years and 4 months of the bankruptcy and in certain other limited circumstances. This limitation applies only in bankruptcy, however, and not to a creditor’s action outside of bankruptcy.

In several states, debtors may benefit from re-titling their residence as “tenants by the entireties.” Ohio, however, does not currently recognize this form of home ownership. While “joint” ownership is sometimes used to avoid probate, it is not helpful from an asset protection standpoint. Creditors of either joint tenant may be able to reach the entire property to satisfy debts of the joint tenant.

In light of the fact that Ohio provides such a low statutory homestead exemption, we look at alternative means of protection for our Ohio clients. We can sometimes gain some protection for clients through certain trusts. Not all trusts provide creditor protection. Certain trusts, however, may provide some protection for a residence. We also frequently advise re-titling the house in the name of the spouse who is least likely to face future litigation.

Issues relating to your personal residence cannot be analyzed in isolation. They should always be considered in connection with an over-all asset protection strategy.

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Corporations and limited liability companies (LLCs) provide significant liability protection to their owners.  Shareholders of corporations and members of limited liability companies generally are not responsible for debts of the corporation or LLC.  A recent Ohio case, however, serves as a reminder that creditors may attempt to "pierce the corporate veil" and hold an owner individually liable for debts of the entity. 

In RCO International Corporation v. Clevenger, 180 Ohio App.3d  211 (2008) the Plaintiff brought a breach of contract action against an LLC and its two members.  While the lower court granted summary judgment in favor of the owners, an Ohio appeals court held that the creditor may have made sufficient allegations against the owners, to sue them personally.  While the Plaintiff did not allege fraud, it did allege an illegal act (the company's sending a false invoice).  On the surface, the facts of this case did not seem to present a strong case for "piercing the corporate veil".  The decision, however, may have rested on certain procedural issues.  In any event, this recent case is a good reminder that simply forming a corporation or LLC does not in and of itself automatically give the owner limited liability in all circumstances. 

What can be done to prevent a creditor from "piercing the corporate veil" and holding an owner personally liable?

• Make sure your corporation or LLC is properly set up.  If you are setting up an entity without the help of an attorney, you may not be taking all the necessary steps to make sure that the entity is properly formed.
• Observe formalities once the entity is formed.  Corporations should hold annual meetings of shareholders.  There should be meetings of the Board of Directors.  An LLC should have an Operating Agreement, and the terms of that Operating Agreement should be followed.  Your entity should have a separate bank account and be treated as a separate entity.
• Your corporation or LLC should have usual and customary insurance for whatever business it is conducting.  A court is far more likely to try and "pierce the corporate veil" if the owner has intentionally failed to provide customary insurance for the entity's activities.
• Follow good business practices.  Forming an entity will not shield an individual owner from fraud or illegal acts.

The leading court decision in Ohio, Belvedere Condominium Unit Owners Association v. R.E. Roark Companies, 67 Ohio St. 3d 274 (1993), as well as decisions in many other states, make clear that if usual and customary practices are followed, a corporation or an LLC should provide limited liability protection for its owners.

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