Stephen Eichelberger is a construction law attorney and a friend. Because he saw the same legal problems arise time and again in construction litigation, he became interested in practicing "preventative" law for those involved in construction projects. His office provides a wide variety of legal services to owners, contractors, subcontractors, suppliers and insurers.
With over 20 years' litigation experience in such diverse construction-related areas as contracts, real property, commercial transactions, unfair business competition, consumer law, accountings, insurance and negligence, to name just a few, Steve can identify the classic signs of an emerging legal dispute even before it gets heated up. Why not, he thought, use this experience to avoid legal problems?
Steve likes to help his clients achieve their business and personal goals by helping them think through their decisions before they take action. Or, if the damage is already done, he represents his clients in court, in arbitration, or in negotiations. Most of his clients are small businesses, and the individuals who run them, but Steve has also represented banks, insurance companies and other large businesses. He also handles a wide variety of transactions and document drafting, in addition to serving as an arbitrator, mediator, and consultant to other attorneys.
Below is the text of a letter we received from Steve, outlining a method he has used with many of his clients to protect their assets. If you are interested, feel free to contact him at 503-585-5000 or 503-363-0834 (fax).
Michael Stone
Construction Programs and Results
1001 49th St.
Washougal WA 98671-9761
Re: Protection of Contractors' Assets
Dear Michael:
It was good talking with you earlier this week. This is the letter which you requested, describing the legal methods I have been using for years to help my contractor clients protect their hard-earned assets. These rock-solid, time-tested legal procedures are often overlooked in contractors' business and estate planning.
Let me use a recent case as a typical example. Joe (not his real name, of course) has a small, successful residential construction company. His insurance carrier discontinued all of its contractors' liability policies because of mold and other construction defect issues.
Joe had built many stucco homes over the years, quite a few of which are still within the statute of limitations period for mold claims. Joe had followed the stucco application instructions to the letter, but he knew the sad truth was that some or all of these homes would nonetheless develop mold problems. Joe feared that one mold litigation could wipe out everything he had accumulated during his twenty-year construction career.
Before anybody sued him, we needed to think ahead and create a place to put Joe's assets out of the reach of anyone who might in the future obtain a judgment against him. At the same time, Joe wanted to have full control of his assets, so that if there wasn't a judgment creditor hounding him, he could buy, sell, or borrow against his protected assets whenever he pleased, and have access to the cash for his personal use at any time.
I formed a legal entity for Joe that can do all of these things. This form of business organization has been around for years, and it is superior to corporations and LLC's as an asset-protection device. Joe transferred his equipment and vehicles into the new entity. He also deeded over his office building, his vacation home, and several of his rentals. He has the full benefit and use of the monthly rental income, and he can buy, sell or borrow against any of the property which he transferred into his new asset-protection entity.
What happens if there is a mold litigation resulting in a judgment against Joe? If Joe had transferred his assets into a closely-held corporation, he would not have been protected. The judgment creditor could seize Joe's shares of corporate stock, and would then be entitled to plunder the corporation to satisfy the judgment. Most forms of business organization do not afford the necessary protection, and that is why I used another, long-established legal entity to safeguard Joe's assets.
Joe's assets are protected within his asset protection plan, because the law does not allow a judgment creditor to seize his share interest, as with a corporation or General Partnership. The law only allows a judgment creditor to obtain a "charging order" against distributions from the entity to Joe. In other words, a judgment creditor cannot reach inside Joe's new entity. They can only stand outside and wait for a distribution to Joe, then take whatever little amount, if any, is distributed to Joe. Naturally, Joe controls when and if distributions will be made. Also, we structured the plan so that distributions could be made to Joe's family, but not to Joe. His familyıs welfare is secured by their majority interest in the entity (which also makes this an excellent estate planning device). Thus, Joe and his family can still live in their accustomed manner, even in the midst of a storm of litigation.
One other protection afforded by this approach is its deterrent effect. A collecting judgment creditor may get their charging order, but while they are waiting endlessly for a distribution, they will be taxed on the full amount of their judgment, even though they have not received a single cent! (See IRS Rev. Rule 77-137.)
I consulted with Joe's accountant in the course of setting up his asset protection plan. Among other things, we agreed that the tax benefits of home ownership outweighed other considerations, and decided not to lose that benefit by deeding his home over into the asset protection entity. Rather, I advised Joe to refinance his home, so as to reduce his equity below the amount of the homestead exemption. That way, he and his family could stay in the home even with enormous judgments against him. Joe asked me what to do with the $200,000 he received from the refinance, and I suggested that he put it into an income-producing instrument, owned by his asset-protection entity, to be applied toward making the loan payments.
This asset protection strategy is used primarily to guard against future liabilities. It works best if put in place before a contractor is sued. Also, utilizing this approach wonıt make a contractor immune in contractual transactions such as loans, where the lender will require a personal guarantee. This is not an inexpensive legal procedure, but it only costs pennies on the dollar, compared to what one could lose.
I have utilized this approach in my own life. Being a practicing attorney is a high-risk occupation. I am also a licensed contractor, so I face doubly high risks of liability. I feel very comfortable having my assets sheltered in my own asset protection plan.
Sincerely,
Stephen Eichelberger
Attorney at Law
915 Lancaster Drive S.E.
Salem, Oregon 97301
503-585-5000 / 503-363-0834 (fax)
