We live in the most litigious society on the planet and at the most litigious time in our history. The current recession has eliminated the opportunity for many people to get rich. Some of those people are looking for alternatives to achieve wealth. An increasingly appealing alternative is to find a rich target and sue him, or at least, threaten to sue him, and get a fat settlement. According to statistics, one out of five of us will be sued during our lifetime. Most of us will settle rather than incur heavy legal fees.
The purpose of this article is to show you how to discourage lawsuits and thereby avoid legal fees and coercive settlements. This article can be summarized in four words:
Don’t Become A Target.
Many of us are already targets. Doctors, lawyers and other professionals are targets because our malpractice laws subject them to a higher standard of liability than other service providers. Real estate owners and developers are targets because our negligence laws and landlord-tenant laws subject them to greater liability than ordinary citizens. Businessmen are targets because our product liability, environmental protection and labor laws make them potentially liable to customers, visitors, employees and almost everyone else. Stockbrokers, investment advisors and promoters are targets because our securities laws and contract laws expose them to claims of liability from dissatisfied investors and partners.
All this liability exposure is magnified exponentially by our unique contingency fee system. In America you can sue anybody at no cost to yourself. The plaintiff risks nothing – providing he agrees to give a portion of the winnings to his lawyer. If he loses, he pays nothing. “Heads I win, tails I break even.” So why not sue?
However, most lawyers won’t take a case unless there is a reasonable chance that there will be some winnings to share. But “winning” means not just a court award of damages but also settlement proceeds. Thus, even if the case is not winnable, a lawyer will take it for its nuisance value – the likelihood that you will settle the case to get rid of it and avoid the legal fees.
Why does our legal system work this way? Because of our Constitution; specifically, the 14th Amendment, which guarantees to all citizens equal protection under the law. Equal protection also means equal access to our courts. If people would have to pay to sue, or if, as in other countries, the loser pays the winner’s legal costs, poor people would be effectively shut out of our courts. Therefore, our system allows you to sue without it costing you a dime.
Now that we know how the system works and why it works that way, how do we protect ourselves from its abusers? The answer lies in understanding why we are targets and how we can use the very same legal system to erase the bull’s-eye from our backs.
We need to understand that we are not targets because of our professions or because of the liability laws mentioned earlier in this article. They are merely the tools used and abused by those who want to get rich by suing us. We are targets because we are wealthy. Generally, nobody sues a poor doctor, poor businessman or poor anything. The reason is simple – it doesn’t pay.
Now here is the most important point of this article: To avoid being a target, become poor! “No thank you, I’ll take my chances with the lawsuits.” Ah, dear reader, you need to understand how our laws define “poor”. Under our legal system a judgment creditor can take pretty much whatever you own. If you don’t own it, he can’t take it.
Our laws also exclude certain assets from a creditor’s reach even if you own them. The laws vary from state to state as to what assets are excluded. However, one asset is excluded in every state: ownership interest in a limited partnership or limited liability company.
Thus, if you transfer your assets (your home, your money, your business) into a limited partnership, you won’t own those assets and a judgment creditor will not be able to take them. If you have an ownership interest in that limited partnership, it will also be exempt from the creditor’s grasp under state law. If your ownership interest is a controlling partnership interest, you will control all the assets (home, money, business) in the partnership, but you won’t own them.
Thus, here’s the epiphany: To avoid getting sued, don’t be a target. To avoid being a target, own nothing but control everything!
Now that you understand the essence of asset protection, how can you use this information to discourage lawsuits? The answer is: Don’t keep it a secret. Whenever someone threatens a lawsuit, at the first opportunity tell him or, more importantly, his lawyer: “I have no attachable assets; all of my assets are owned by limited partnerships, not by me.” The claimant will realize that he is wasting his effort. More importantly, his lawyer will realize that his share of zero, no matter how large, will still be zero. The lawsuit will be discouraged and for a change, our legal system will have worked for you, instead of against you. Don’t you feel lighter without a bull’s eye on your back?
Kenneth Rubinstein is Of Counsel at Gallet Dreyer & Berkey, LLP. Mr. Rubinstein received a Bachelor of Business Administration, with Honors, from the City College of New York, Bernard M. Baruch School of Business and Public Administration in 1968, and he received his Juris Doctor degree from the New York University School of Law in 1979. Mr. Rubinstein lectures extensively in the areas of Estate and Tax Planning, and Domestic and International Asset Protection.