All Forum Posts by: Paul T.

@Mike Hern

Thank you for the kind remarks.

All of your suggestions are an excellent addition.

LLCs are not the magical barrier to personal lawsuits that many believe. The same is true for closely held corporations. There seems to be a common misconception that putting REIs into one or more LLCs will protect the personal owner from being sued. This is not true. Although an LLC can provide protection from a personal lawsuit, it will only do so if the LLC members consistently adhere to all of the requirements.

Nothing herein is legal advice.

For many decades, courts have allowed creditors of a corporation to recover judgments from the personal assets and wealth of the corporations' shareholders. This is commonly referred to as "piercing the corporate veil." The same doctrine applies to LLCs to allow creditors of an LLC to recover judgments from the personal assets of the LLCs' members.

Without digging into the many nuances of the doctrine, in CA, there are 23 factors that the courts look at to pierce the corporate veil, and support a finding that the individual owners are personally liable for the corporate debts. Although CA does not yet have a lot of case law applying the same factors to LLCs, it is reasonable to believe that most courts will apply the same factors to LLCs. Because piercing the LLC veil is an "equitable remedy," even if you are not located in CA, your local courts will likely look to a similar set of factors.

1. Commingling of funds and assets.

2. Failure to segregate funds.

3. Diversion of funds or assets.

4. Treatment by shareholder of corporate assets as own.

5. Failure to maintain minutes.

6. Identical equitable ownership in two entities.

7. Officers and directors of one entity same as controlled corporation.

8. Use of the same office or business location.

9. Employment of same employees.

10. Total absence of corporate assets.

11. Under-capitalization.

12. Use of Corporation as mere shell.

13. Instrumentality or conduit for single venture of another corporation.

14. Concealment or misrepresentation of the responsible ownership, management and financial interests.

15. Concealment or misrepresentation of personal business activities.

16. Disregard of legal formalities.

17. Failure to maintain arm’s length relationships among related equities.

18. The use of the corporate identity to procure labor, services or merchandise for another entity.

19. The diversion of assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors.

20. The manipulation of corporate assets and liabilities in entities so as to concentrate the assets in one and the liabilities in another.

21. The contracting with another with the intent to avoid performance by use of the corporation entity as a shield against personal liability.

22. The use of the corporation as subterfuge for illegal transactions.

23. The formation and use of a corporation to transfer to it the existing liability.

Although not common, under the right circumstances, one single factor from the above list, might be sufficient for a court to rule in favor of piercing the LLC veil. In no situation does the court have to find a violation of all factors. The court only need find enough factors to compel the court to conclude that personal assets should be held accountable for the damages. (Think: "Woke Judge" who hates landlords.) For those who adopt multiple LLCs with one LLC holding each separate REI, you have probably already ticked-off factors 6, 7, 8, 9 and possibly 17 and 18. For those who regularly remove equity from the LLC by refinancing, or buy REIs with little or nothing down, you have probably also ticked-off 11 and 19.

Two things to keep in mind if you are attempting to use LLCs to shield your personal assets from creditors. (1) Adhere to the rules and avoid as many of the above factors as possible. (2) Make sure the LLC(s) purchase as much insurance as can reasonably be afforded. If there are sufficient insurance proceeds available to pay a judgment creditor, there is little reason for an attorney (or court) to attempt to pierce the LLC veil.

The short answer is "yes."

Nothing herein is legal advice.

Going to small claims court and obtaining a judgment is actually the easiest part of the process. Collecting is generally much harder. The following is based on CA procedures, although most states will have similar if not identical procedures available. The good news is, assuming your defendant has (or may have in the future) the ability to pay, the judgment incurs interest at the rate of 10% per annum and the judgment is good for ten years. (Before ten years have expired, the judgment can be renewed (repeatedly).

Assuming your tenant filled out a written application, and that application included an employer name and address, that would be the starting point. Of course, that is also why one might want to have the tenant update their rental application, with each lease renewal, so that you have the most current information on that tenant. If the tenant has relocated and changed jobs, the former employer, or friends or neighbors of the defendant, are a potential source of informtion about the new employment. You can also obtain the defendant's forwarding address (if any), from the local post office. Skip tracers are another alternative.

Thanks to OP for this post! From it I have obtained the name of another competitive insurer to add to my arsenal.

I have not used Opie, but after reading the posts here, I went online and obtained a quote for one SFH rental. The price was lower than anyone else offered.

But ...

The first thing I observed was the replacement cost portion of the quote, was, IMO, less than what it will actually cost to demolish the remains of the existing structure, pay for any hazardous waste removal following a catastrophic loss, and actually pay to replace the property in the event of a total loss, even though I used the quote feature to increase the replacement cost value by 20% (the maximum it would allow). So I would caution everyone to make sure the replacement cost for your improvements will realistically cover your actual replacement cost in the event of a total loss.

And just a reminder. My recollection is (and insurance experts on BP can correct me if my memory is wrong), but most insurers will only pay "replacement cost"  policy limits, if you actually replace the damaged property. If you don't actually replace the damaged property, the insurer will normally only pay you the "actual cash value," i.e., the depreciated value of the property. So if your replacement cost valuation on the policy is not high enough to actually rebuild the property (oftentimes this is the situation when contractors are charging premiums because they are so busy with other losses), and unless you are personally willing to pay the shortfall to rebuild the property, the insurer will only pay you the depreciated (ACV) for your loss. And of course, if your actual cash value is less than the current mortgage(s) on the property, all of the cash value payment will go to the lenders.

The following is not legal advice.

Having read numerous horror stories here on BP about failed projects and lost money due to less-than-honorable contractors, I feel compelled to try to provide some guidance to those who are interested in avoiding some of the pitfalls.

1. Either learn the contractor licensing laws and mechanics’ lien laws of the state in which your project is located, and how to protect yourself, or retain and be willing to pay an attorney who is knowledgeable about construction laws in that state. There are no shortcuts. Would you knowingly hire a contractor who was insolvent? For decades in CA, to obtain a contractor’s license, one had to “affirm” that he/she/it had a net worth of $2,000. Actual proof of that net worth was not required. Today, even that modest requirement has been eliminated. Are you sure you want to entrust your $100k rehab to someone who is already potentially insolvent? At a minimum, wouldn’t you want to know what the financial requirements are for a contractor in your state? And how to protect yourself from contractors who take your money, but don’t pay their bills and subcontractors, so your property is subject to mechanics’ liens? Or the maximum limits on advance payments by contractors?

2. Independently verify that the contractor’s exact name and information on your construction contract, has a valid contractor’s license. In CA, that information is all available online. Make sure that all of the information the contractor has provided you, matches the information in the state records. If something does not match exactly, consider that your first warning bell. Yes some unscrupulous folks have been known to illegally use other’s licenses. (Under CA law, if you employ an unlicensed or improperly licensed contractor, “you” become the contractor and are thus responsible for all injuries or deaths on the work.)

3. The contract that the contractor prepares and asks you to sign, is likely written by attorneys for the contractor, and is designed to protect the contractor, not you. Exceptions are very rare. Use a contract form that is either neutral or designed to protect owners, not contractors. After all, it is your money. If you are not willing to pay to have an owner-friendly construction contract drafted by an attorney for your use, at a minimum, use a neutral construction contract like the AIA A105-2017. Although the A105-2017 is not perfect, it offers at least some owner protections.

4. Know and understand the contract form that you use, before you sign it, or be prepared to employ an attorney to explain how it is to be used. This would seem self-evident to many, but the construction contract details the rights and obligations of the parties. For example, a well drafted contract will have a time of commencement, time of completion, a detailed description of the work to be provided, how the work is to be paid for, when the work is to be paid for, insurance requirements and who provides and pays for the insurance, indemnity agreements, and much, much more. If you don’t know the ins and outs of the contract, how can you possibly expect to follow it, or require that the contractor follow it? Does the contract allow the contractor to perform work “outside the scope of the agreement” without your written consent? If so, why? If not, then why would you want to pay for that work?

5. If you are not knowledgeable about construction in the area of the work, then be prepared to hire someone who is, to periodically inspect the contractor’s work for compliance with codes, the contract, and best practices. If you are not knowledgeable, and don’t employ someone to protect your interest, there are contractors who will take advantage of that situation, all at your expense. “Oh, but I trusted the contractor!” Why? Isn’t the contractor doing the work for the contractor’s own interest and profits, first and foremost? The contractor does not owe you any fiduciary duty to protect you. “And why should I pay someone to make sure the contractor’s work is to code? The building department inspects the work.” Who is going to do a more thorough inspection of the work? (1) A building inspector who has 32 inspections on his/her list for that day, and has budgeted 5 minutes on your jobsite, or (b) someone you are paying who can spend a couple of hours once every couple of weeks, monitoring the work? How else are you going to know if the work is performed correctly, or if the work is unsafe or shoddy and will cause you endless maintenance or other problems?

6. Any time the contractor asks to be paid in advance of work being performed, operate under the assumption that any money you pay, will simply disappear. By relying on that assumption, hopefully you will take extra-ordinary steps to make sure that you have the maximum protection to avoid having that money disappear. “But the contractor said he needed to pay for the permits.” Fine. After he/she/it pays for the permits and provides proof of payment, reimburse the contractor (while obtaining the appropriate lien release from the contractor). If the contractor does not have the funds to pay for the (usually) modest cost of a permit (except in CA), shouldn’t that set off alarm bells for you about his/her/its financial condition? (CA, for example, by law, limits advance payments to contractors, to $1,000, or 10% of the contract price, whichever is LESS.) If a situation arises where you feel that an advance payment should be made by you (i.e., permits, cabinet order, custom manufacturing order, etc.), then make the payment directly to the payee (not the contractor; or jointly with the contractor), and exchange that payment in return for the appropriate lien release (for your state).

7. Assuming the construction contract has provisions to protect you from unauthorized extra work without advance written authorization, follow the terms of the construction contract to the letter. Do not “waive” the protections set forth in the construction contract by being lazy and giving verbal approval for extra work over the phone, or otherwise not adhering to the construction contract. How can you claim the contractor breached the construction contract, when you didn’t adhere to the contract yourself?

8. Obtain appropriate lien releases from the contractor, subcontractors and material suppliers, before issuing payment to the contractor. Always. Don’t know what the appropriate lien releases are? See #1, above. If this requirement is set forth in the construction contract, a reputable contractor will provide all of the signed releases along with the contractor’s request for progress payment.

I’m aware that this short post does not cover every possible scenario and contingency, but maybe it will help someone.