Why you need an LLC on your properties.

Question

I've been in this business for years and years, hundreds of units and untold thousands of tenants later, someone finally filed a lawsuit against us for their deposit not being returned.

The story is the tenant was inherited, they had lease from their old LL that was enforceable till May of 2017, and in Dec of 2016 they up and left the unit without notice. Under Virginia law any notice given would last through the month of Dec and till the end of Jan for rents owed at minimum if they where month to month. However since we had a lease agreement still under the term that was assigned to us at closing, we could collect on lost rents till the place got rented.

Within the last few months the old tenant got a free attorney, they mounted a warrant in debt lawsuit not against my management company, not against the company that owns the properties in question, not against the parent company, but against myself for some odd reason.

In the legal world, this is known as a lawsuit against an improper party, and it can easily be dismissed if the defended provides proof that they are not the correct party to be sued. In this case, a copy of the lease agreement, and the real estate purchase contract clearly showed I was not the owner of the property in question.

As I was defending myself in this case, before I got to the court hearing I filed a courter lawsuit under the company name against the tenant for warrant in debt. This was done to setup a backstop to any future lawsuits from them on this topic, just incase I needed to enter a motion to have the two cases merged.

The judge concluded that it was improper party, so the case was dismissed, but he also recognized the counter lawsuit had merit, and advised the plaintiff to find a way to settle out of court before that date.

So the next time someone tells you on BP that you don't need an LLC because it wont protect you. Remember this case got dismissed because of a LLC corporate vail separating the entity and myself from the property and contracts in question. Without it, I would have had to defend at that court hearing why we keep the deposit, and if by some wild chance the plaintiff won by any margin, I personally would have been liable, and could get garnished for the debt. The entity stops all that, and for the state of Virginia, $100 setup fee, and $50 a year is worth it.

Jeff B. · Answer

If your documentation was up to snuff and you followed the State procedure for deposits, it should have been a cake walk to defend. As you found out, you STILL had a court appearance and won only on a technicality, not the merits of the case.

So either way you still had to defend yourself.

David Dachtera · Answer

@Tiffany S.,

Ideally, you want your entities structured such that they are owned by each other and a revocable trust. not by any human person. This makes more work for the shyster ... uh, I mean prosecuting attorney and can help dissuade them from proceeding.

Finding the beneficiary of a trust IS possible (as John Anderson will be quick to point out), but this still not guarantee that the beneficiary is the correct defendant. So, the suit may still be dismissed on that basis. (Not legal advice - consult a qualified legal professional.)

Bill Henley · Answer

Insurance companies won't pay to defend a breach of contract case, and they won't pay the damages. Insurance companies might pay to defend an accusation of fraud, but they won't pay the damages. Insurance companies might pay to defend an accusation of other intentional misconduct, but they won't pay the damages.

JD Martin · Answer

Man, that had to be one hell of a deposit (or one bored, vindictive tenant with more money than sense) to file a lawsuit over a non-returned deposit. Don't know Virginia's law, but here in Tennessee it would have to be a ridiculous sized deposit before it wouldn't make more sense to just send the money than to start paying the lawyer or spend a lot of my own time on it. Glad you won, though!

Phyllis Cummings · Answer

I'm a commercial loan broker who worked in the legal industry for over 20 years specifically as a Paralegal for the Securities and Exchange Commission and the private sector performing due diligence and compliance on financing documents and securities.  I realized there are a lot of deals done poorly through inadequate documentation.

That said, it nearly ALWAYS makes more sense to place your real estate in an LLC.  Albeit, the original post was not the best example of its protection. Real Estate litigation is costly and ugly.  It's also a mistake to consider the expense of maintenance of an LLC as a deterrent to this protection or to believe insurance is all that is required.  I've seen and participated in litigation directly resulting from lack of this protection.  It's not only the likelihood of prevailing against a claim but the protection from forced discovery of personal assets.   These assets can be your home, other investment properties and anything else of value.  All this information can now be made public for use by claimants.  If they prevail they can place liens that can cripple your ability to obtain further credit and grow your business; jeopardize the stability of other credit agreements and even force a foreclosure on your personal assets.    Privacy is paramount in this industry.

As for insurance, most policies (I'm not an agent or attorney, I just have participated in a lot of lawsuits so this is general information and NOT professional advice) provide for a "nuisance" payment somewhere around $6K for things like nuisance claims and the like.  Depending on your deductible you can decide if its worth it to file a claim or not.  But having your assets properly structured, titled and then maintained is best first step.  Good Luck out there!

Thomas S. · Answer

In your case, based on th esize of your company, I assume having eplloyees etc it would be necessary to have a LLC. In the case you site clearly not a necessity in order for you to win. The technicality ended the case but you  would have wone based on you having followed proper procedure regarding deposits.

Having the need of a LLC is a common misconception as a necessary requirement for  for small time investors. In most cases it is more of a encumbrance to financing for the sole purpose of having double protection. If your insurance is not going to protect you a LLC probably won't either.

It's like having a gun and a dog in your home for personal protection. The dog is actually the primary protection making the gun redundant. Psychological protection only.

Levi T. · Answer

One could file a lawsuit again or just amend it to reflect the correct party, both parties could have done this without ever stepping into the court room, and I have seen judges allow it on the spot. I filed a countersuit to stop that. Courts will normally merge lawsuits to avoid both parties winning on their own cases, but because the plaintiff already lost their suit, and we've taken action to collect on money that where owed to us anyways, they are now left in the defending position vs being the plaintiff.

Yes it's silly in the context as they could walk out of the court room and file again, but the point to the OP was to show how at even the most basic level, the corporate veils works.

Levi T. · Answer

@Jeff B. While it is true that you will have to defend itself, or the the entity would have to defend itself in all court cases, depending on who the plaintiff is suing, the separation is what resulted in the case being won on that merit alone, which is not a technically, it's the law that you can not sue an improper party. A technically would be if one forgot to complete the warrant in debt form correctly, resulting in the case being dismissed because of a technically in a summons.

This same logic would work if let's say the tenant sued the company, and the company lost, thus owing the tenant the deposit. The tenant would only have the right to bring a judgement against the company and it's assets, and not the members or member.

Clearly defrauding someone would be out of the scope of this thread, as we are talking about people running real business without the intent to defraud people, which is the main avenue to pierce a vail in the court systems today.

Tiffany S. · Answer

Are you the sole owner of the LLC that owns the subject property? Could he not just file the lawsuit again and sue the correct entity?

Steve Vaughan · Answer

The first possible case for an LLC helping with 'asset protection'.  Avoided a $500 (ish?) lawsuit!

Either the claim against their deposit was delivered to them properly, in time, or it wasn't.  The LLC had nothing to do with it.  They will try again if above deposit performance was incorrect.

I still believe the 'benefits' of placing little houses with debt inside LLCs has way more disadvantages than advantages.   Now you have short term crappy lending terms usually with balloons and re-quals.

I have LLCs for my commercial assets.  I am not anti-LLC, but nope, not convinced for houses.  Thanks anyway though, @Levi T.!

Why you need an LLC on your properties.

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