You Used Your Name: LLC Mistake Number Three

Dr. Fred F. Funkel LLC. Fred F. Funkel sets up his own LLC to own his money market funds, stocks, bonds and savings accounts. Fred does this because he wants to protect these assets from a future creditor. Fred is a medical doctor who delivers babies and therefore is at high risk for medical malpractice claims. Fred proudly names his LLC the Dr. Fred F. Funkel LLC. Fred sets it up in a state where the state law is not clear as to whether a creditor is able to obtain a court order requiring that Fred’s LLC membership interest be sold on the courthouse steps. (See “You Choose the Wrong State: LLC Mistake Number Two” blog)

Investigator Finds Funkel LLC. A couple lost their baby while Dr. Fred F. Funkel was the attending physician. There is no clear medical reason as to cause of death and Fred does not think he is at fault. The grieving couple consults Tom Triallawyer to see if they should sue Fred. Tom does an asset search and does not find that Fred personally has much liquid assets. (Fred’s liquid assets are held by Fred’s LLC). Tom also does an internet and name search and finds that Fred owns the Dr. Fred F. Funkel LLC. Tom retains an investigator who finds out that the Dr. Fred F. Funkel LLC has about $2,000,000 of liquid assets. Tom looks at recent judgments in his state and finds that a botched baby delivery is getting an average of $5,000,000 in jury awards. Tom decides to take the case of the couple on a contingency fee basis-that is the couple pays the expenses of the lawsuit, but no legal fees unless Tom gets a settlement or wins the case.

Tom Files Against Fred. Tom Triallawyer files the medical malpractice case against Fred. Fred consults Susan Sharp, his own personal lawyer, separate from the lawyer appointed by Fred’s malpractice insurance carrier.

My LLC Was Supposed to PROTECT ME! “I thought my LLC would stop people from suing me”, Fred painfully complains to Susan. Susan sees Fred is in pain and doesn’t say “I told you that I should set up your LLC because of all of the mistakes you could make”. Instead, Susan says in a soft voice: “The investigator’s job was a lot easier finding you because you used your own name as the name of the LLC. I recommend that we change the name of the LLC in the future to make it harder to find your assets.”

My LLC is Secret. Fred replies: “Well, I will just won’t tell them what my LLC owns.” Susan: “At a point in the litigation, the other side will require a statement of all of your assets and at that point, the court can force you to list the value of all of your assets in your LLC. This can happen in any lawsuit, whether or not they know that you have an LLC.”

My Assets Are Safe in My LLC. Fred: “At least I have the LLC. My assets in my LLC should be safe even if I lose the lawsuit”. Susan: “Unfortunately, the law of Maryland is not clear on this point. In general, a state court judge has the power to enforce judgments and this may include the authority to reach the assts in your LLC. For example, if Tom Triallawyer obtains a judgment for $5,000,000 against you in the existing litigation and your insurance carrier pays $3,000,000 of the judgment, the remaining $2,000,000 could be collected against you. After entry of the judgment, Tom Triallawyer will schedule a deposition of you to force you under oath to disclose everything you own, including the assets of your LLC. If you have a bank account in your name, then Tom Triallawyer will request that the Judge place a lien on your bank account, remove the funds from your bank account and deliver the resulting funds to Tom Triallawyer. The general power of a judge may authorize the court to order that your membership interests in your LLC be sold to the highest bidder in a court supervised auction sale. Tom Triallawyer buys your membership interests at a low price at the sale, takes over your LLC, liquidates the LLC, retains a third of the proceeds and disperses the remainder to his clients.

Fix My LLC Now! Fred: “What can I do to fix this? Could I move the LLC to another state?”

Too Late for Now. Susan: "If you had formed the LLC in Virginia, Delaware and several other states, we would have a strong argument that the judge does not have the power under those laws to have your LLC sold. However, since you have been sued, we can not now change the state of your LLC because this could be held by the court to be an action that hinders or delays an existing creditor. This is called a fraudulent conveyance and may be grounds to set aside the move of the LLC from Maryland to Virginia.” (Susan says to herself that when Fred consulted her about setting up an LLC she told Fred about this and Fred decided to save some legal fees and set up the LLC himself.) Susan gently adds: “We need to examine a strategy for the future after this awful time is past you.”

Fred Loses $1,000,000 from his LLC. In the settlement of the case, Fred is forced to pay $1,000,000 out of his LLC because of the possibility that Triallawyer could penetrate the LLC. If Triallawyer didn’t know that Fred had an LLC with $2,000,000, Triallawyer may not have taken the case. If the LLC had been stronger, Triallawyer probably would have settled for just a payment from the insurance company without a significant contribution from Fred.

Don’t Use Your Name. Fred let his pride make the mistake of using his own name in his LLC that was intended, but failed, to provide protection of his cash and securities assets. Fred could have named it the FFF LLC, or Chesapeake Three LLC or some other name, not used or trademarked by someone else, which does not so quickly lead the asset investigator directly to Fred’s doorstep.

When to Use Your Name. This is different if Fred conducts his medical practice in an LLC. In that case, if Fred is promoting his name “Fred Funkel” as a preeminent obstetrician, the name of Fred’s medical practice would be the Dr. Fred Funkel MD LLC. Or, if Fred’s practice uses medically sound natural childbirth techniques, the practice could be the Natural Child Birth Center LLC. You should have a conversation with your advisors as to the best name for your LLC.