The author has worked in California and Federal litigation
since 1995 and has seen things that are astounding to put it mildly. Many years ago, he worked on a case preparing
an answer to a complaint for someone who was being sued because he had
performed some work for someone whose house had slid down a hill. The person being sued was the electrical
contractor!!!! There were so many
defendants listed in the complaint that listing all of them on the caption took
almost the whole first two pages of the complaint. Now that is outrageous!!
While most attorneys are ethical and would never dream of
taking on a case like that, some are not so ethical and will gladly file
lawsuits just to get some "nuisance money." And many also work with
process servers who are unethical to say the least. The author once saw a case
where a process server claimed to personally serve someone at a house in
California when the individuals had sold the house and moved to Texas over 10
years before, and to top if off was at the exact moment of alleged
"service" in California on an airplane flight to the Philippines!!
Clearly for certain individuals, especially those with
substantial business and/or personal assets, Lawsuit protection should be
looked upon as insurance.
Lawsuit protection generally involves the use of one or more
different entities which can protect valuable assets from creditors and judgments. Proper use of an FLP is a very effective
technique. The entity is set up as a limited partnership with special
provisions to provide the asset protection features. In some cases a corporation can be designated
as a general partner.
In using an FLP all personal and business assets are
generally placed into this partnership. The family house, bank or brokerage
accounts, and other real estate investments would be transferred into the
partnership. Multiple partnerships can be set up to hold substantial and
diverse investments.
These techniques are very effective, because in the event of
a lawsuit or a judgment, creditors will generally not be able to reach inside
the partnership and seize any of these assets. Under California law, and the
law of most other states as well, a creditor has no right to execute or levy on
partnership assets with a judgment against one of the partners. This law applies to Limited Liability
Companies as well and is contained in the California Corporations Code.
The California Supreme Court has stated that, under the
proper circumstances, the ONLY remedy that a creditor can use is called a
"charging order". See
Evans v. Galardi (1976) 16 Cal.3d 300, 310. If any cash is distributed to a person by the
FLP, the creditor can take that cash to satisfy the judgment. If no
distributions are made to that person, the creditor will receive nothing.
The partnership can sell assets and retain or reinvest the
proceeds, however if no money comes out to that person there is nothing for the
creditor to take. A creditor cannot take a person’s interest in management and
control of the partnership and cannot take any of the assets in the
partnership. Also the creditor may be subject to tax on any income allocated on
the partnerships tax returns. This fact is truly a "shark repellent."
If it is properly structured, the FLP can provide an entity
to protect the assets of individuals, couples and families from the claims of
creditors.
Assuming that the transfer of the assets to the FLP was not
a fraudulent conveyance under State law, the ability of a creditor of a partner
or member to reach the assets of the FLP is extremely limited due to several
facts such as:
(i) The creditor can only become an assignee of the
Partner's interest.
(ii) The creditor would not be entitled to exercise any of
the rights or powers of a partner.
(iii) The only result of the assignment would be to entitle
the assignee to receive the distributions and allocations of profits and losses
to which the assignor would be entitled.
(iv) This places the creditor in a relatively poor
bargaining position vis-a-viz the FLP and may make it possible to repurchase
the interest from the creditor at a steeply discounted price.
(v) The partnership agreement can provide that the FLP (or its partners) have the option to purchase the interest of a partner in the event the interest is seized by or otherwise transferred to a creditor utilizing extended payment terms, in some cases 15 years or more (see the sample FLP below), in the event the option is exercised.
With so many people concerned about frivolous lawsuits the
use of an FLP in California is a choice that growing numbers of people,
especially ones who have accumulated substantial assets, are using.
Attorneys or parties in California who would like to view a
sample Family Limited Partnership Agreement sold by the author which contains
the purchase option mentioned above can see below.
The author of this blog post is a freelance paralegal and
entrepreneur who has worked in California and Federal litigation since 1995.
If you enjoy this blog post, tell others about it. They can subscribe to the author’s weekly legal newsletter by visiting the following link: http://www.legaldocspro.net/newsletter.htm
To view all of the sample documents sold by the author visit http://www.scribd.com/LegalDocsPro/documents
Copyright 2013 Stan Burman. All rights reserved.
DISCLAIMER:
Please note that the author of this blog post, Stan Burman
is NOT an attorney and as such is unable to provide any specific legal advice.
The author is NOT engaged in providing any legal, financial, or other
professional services, and any information contained in this blog post is NOT
intended to constitute legal advice.
These materials and information contained in this blog post
have been prepared by Stan Burman for informational purposes only and are not
legal advice. Transmission of the information contained in this blog post is
not intended to create, and receipt does not constitute, any business
relationship between the author and any readers. Readers should not act upon
this information without seeking professional counsel.
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