A July 31, 2011 article in The Sacramento Bee had a good summary of what a debt collector can and cannot do.  The article was written by Claudia Buck (McClatchy Newspapers).  It included excerpts from an interview with Robert Tavelli, former president of a private California debt collection firm.

Debt collectors are subject to a number of legal restrictions.  For example a debt collector cannot contact you before 8:00 a.m. or after 9:00 p.m.; and cannot contact you at work once they have been told you cannot take calls there.

This article caught my attention because it mentioned that debt collectors will generally not pursue individuals who look like they are financially unable to pay the debt.  This of course makes perfect sense — a debt collector would gain nothing by pursuing someone who appeared to be uncollectable.

This same concept applies in general to asset protection planning.  A creditor is going to be far more likely to aggressively pursue you if it appears all of your assets can be seized with relative ease.  The harder it looks to collect from you, the more likely a creditor will settle for a lesser amount. So taking appropriate steps to lawfully protect your assets before you have any creditor problems is highly advisable.

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.

The Court of Chancery in Delaware is well respected by business lawyers from coast to coast.  A recent New York Times article (which I discussed in another recent post) explains that the Delaware Chancery Court has a reputation for quick and knowledgeable business decisions.  This is one of several reasons that so many businesses are incorporated in Delaware.

Leo E. Strine, Jr. was recently confirmed as the new Chancellor of the Delaware Court.  Chancellor Strine is a graduate of a top national law school (University of Pennsylvania) and worked for Skadden Arps in New York City (one of the most recognized corporate law firms in the United States).  The new Chancellor previously served as Vice Chancellor of the Court, and has already written hundreds of business decisions.  While there are many competent judges in other states, the Delaware Chancery Court has very specific expertise in business law.  And it has a long tradition of excellence.  Chancellor Strine is the 21st Chancellor of the Delaware Court since 1792.

There are a variety of reasons that many businesses are formed in Delaware.  The long and very stable history of the Delaware Chancery Court, and the excellent qualifications of its judges, are among the many reasons that Delaware is often a good choice when forming a new business.

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.

Some new investment vehicles — called "black swan funds" — are designed to go up in value if there is an economic collapse.  They are designed to protect against what some investment professionals are calling "tail risk" (basically meaning the economy going into some sort of disastrous tail spin).

Not all analysts are sold on this new kind of costly protection (similar to buying insurance).  There is an excellent discussion of this new type of investment product in a front page New York Times article written by Azam Ahmed.  The article is appropriately subtitled "On Off Chance of a Total Collapse, a Little Insurance".  Not very long ago, this kind of investment protection probably would have been ridiculed.  It seemed for a while that things like housing and the stock market were always going up.  We have certainly learned in recent years that this is not always the case.

I am not an investment specialist, and I do not know a lot about the so-called black swan funds.  Their existence, however, is a stark reminder that protecting your assets in advance of a calamity is clearly a good idea.  While black swan funds, hedge funds and various other techniques can be used to protect the value of certain assets, a variety of legal techniques can be used to better protect your assets from creditors.  Our litigious society and our uncertain economic times make asset protection planning more important than ever.

Given the poor state of our economy in recent years, one would expect that the number of lawyers in the United States would be declining. There has been significant downsizing at larger law firms. Many businesses have been deferring some discretionary legal services. So one would expect a decreased demand for lawyers.

But according to James Podgers (writing in the July 2011 edition of the American Bar Association Journal), the lawyer population in the United States in still on the rise’. Mr. Podgers reports that only five states experienced a drop in their lawyer population between 2010 and 2011. There are over 1.2 million active attorneys in the United States. The American Bar Association reports that is an increase of 2% over 2010 and a 17% increase over 2001. 

Ironically, despite the increasing number of lawyers in the United States, many low and middle income individuals simply cannot afford basic legal services.

We live in a litigious society. The ever-increasing number of attorneys (many of whom are coming out of law school with huge amounts of debt) is certainly not likely to make us less litigious at any point in the near future. This is just one of many trends in the United States that make it increasingly important for individuals and businesses to protect their assets to the greatest extent permitted by applicable law – preferably before they end up in any kind of catastrophic lawsuit.

In several prior posts on March 19, 2010, February 23, 2010, November 6, 2009 and July 2, 2009, I emphasized that a business succession plan is critical for most closely held businesses. Yet according to an article last week by Marcia Pledger in the Cleveland Plain Dealer, fewer than 30 percent of small business owners have any kind of succession plan. That is according to Bob Nemeth of the consulting firm of Apple Growth Partners in Independence, Ohio.

There are all kinds of reasons that small business owners never get around to focusing on business succession. One of the principal reasons is that they are simply so busy with day to day business operations; and there is frequently inadequate time for long term planning.

Over the years I have helped many clients with business succession planning, and I have found that there are numerous benefits that clients do not even expect. In addition to getting a solid plan in place, the succession planning process often helps focus the business owner on a variety of other matters that may not have received adequate attention including:

  • key person life insurance
  • personal estate planning
  • updating corporate records
  • strategic planning for the business
  • a variety of other matters that simply have not been focused on in many years

Perhaps most important of all, getting some sort of business succession plan in place can bring great peace of mind to the business owner. This is one of those “priceless” benefits of the planning process.

This post is just another reminder that the time and effort involved in business succession planning can pay huge dividends for a closely held business owner.

A June 8, 2011 New York Times article by Steven M. Davidoff (a law professor at the University of Connecticut School of Law) notes that personal liability for directors and officers of large publicly held companies is less common than most of us think.  Professor Davidoff argues that the upside of serving as a director or officer of a large public company is huge, and the down-side is very limited.

Even if the potential liability of public company officers and directors is not all that high, such individuals are still in need of asset protection planning.  These individuals will generally have a high net worth.  They can face potential liability from numerous other sources — anything from divorce to an auto accident.  While many potential risks can be covered by insurance, personal asset protection is still advisable.

Small business owners may face a far greater risk of personal liability than public company officers and directors for a variety of reasons:

  • Small business owners frequently have to personally guarantee company obligations — which makes them directly responsible for those debts.
  • "Piercing the corporate veil" arguments will more likely be raised against a smaller business than a larger one.
  • Legal fees alone can be catastrophic for a small to medium sized business owner, even if he or she is eventually successful on the underlying claim.
  • Smaller businesses and their owners frequently carry less insurance than larger companies.

Whether you are running an international conglomerate or you own a small or medium sized business, you should focus on protecting your personal assets to the greatest extent permitted by applicable law.

On June 16, 2011, Nevada’s governor signed a new law specifically making a charging order the exclusive remedy of a judgment creditor against owners of both LLCs and corporations in Nevada.  The legislation specifically includes a sole member of an LLC and a sole shareholder of a corporation.

Nevada is clearly working to provide better asset protection for owners of closely held businesses.  The new law, which was signed by the governor a few days ago, passed the Nevada senate by a vote of 21-0 and the Nevada Assembly by a vote of 42-0.

Earlier this year, the Florida Supreme Court ruled that under Florida law, creditors of a sole member of an LLC were not limited to pursuing a charging order, but could also pursue other remedies against that debtor.  Since that time, a lot of attention has been focused on single member LLCs.

Since the new Nevada statute is only a few days old, commentators are just beginning to offer insights into the new legislation.  But the new Nevada statute is a clear reminder that some states provide better protection than others for business owners (particularly single owners).  Nevada, like Delaware, is currently a good choice for forming a corporation or a limited liability company from an asset protection standpoint.

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.