Asset Protection in North Carolina - What can you do to protect your assets from your creditors?8/13/2020 By Attorney Kelly Jesson Creditors come in all shapes and sizes: ex-spouses, bankruptcy, personal and business debts, and claims involving real estate or professional malpractice. People in high risk professions or who deal with circumstances that are prone to litigation sometimes want to take steps to protect assets. However, this must be done before a dispute arises, because moving assets around afterwards can sometimes be deemed a fraudulent conveyance and voided by a court.
Unfortunately, there is no “magic wand,” and protecting assets oftentimes involves investing your earnings into protected accounts, such as life insurance and retirement. An individual’s retirement account is exempted from their own creditors (but not from a beneficiary’s creditors once the assets are inherited, which will be discussed in the next blog dealing with asset protection in estate planning). The cash value of a life insurance policy is also protected from the insured’s creditors, but again, not from a beneficiary’s creditors once the assets are inherited. Additionally, the state of North Carolina exempts certain amounts of property from creditors:
One of the most important things you can do is title property as “tenants by entireties” (TBE). If a husband and wife purchase property together, by default, it is owned as TBE and is therefore protected from the creditors of just one of them, meaning a lien will not attach. However, if a creditor gets a judgment in both spouses’ names, a lien can attach. Also, if the spouses divorce or one passes away, a lien can attach if the remaining owner is the debtor. Another alternative or high-risk professionals is to have the low-risk spouse own the majority of assets because they will not be responsible for debts unless joint. Another really important step is for self-employed people to form businesses and formalize businesses to protect assets. If you follow business formalities, business creditors cannot reach your personal assets for business debts. If you own investment properties, you are running a business. In fact, the definition of “operating a business” is pretty loose, and oftentimes people will move high-value assets over to LLCs for asset protection purposes. Again, you must follow business formalities (set up a tax identification number, maintain a separate bank account, have an operating agreement). If you own a business but you have personal creditors, those cannot reach assets titled in the name of your business. They are limited to collecting only the distributions you receive from the business, which you control as the business owner. Distributions do not include your pay made through payroll, which is another reason to run your business like a business. Finally, we’re often called by people to set up trusts to avoid creditors. General living trusts or revocable trusts are not protected from creditors of the grantor (the person who sets it up), although the funds could be protected from beneficiaries’ creditors after the grantor dies (the subject of our next blog). North Carolina residents have a few not-so-great options: First, they can set up an irrevocable trust for the benefit of others. For example, if you are married, you can create an irrevocable trust that benefits your spouse for his or her lifetime. Presumably, your spouse will take care of you while you’re married, so you will indirectly have access to the money you put into the irrevocable trust, although on paper it will no longer belong to you, so your creditors cannot reach it. This obviously has risks, but it is an option. Another option is an asset protection trust. In an asset protection trust, the trustee has discretion to distribute money to the grantor as well as other beneficiaries. These trusts are not valid in North Carolina, although they are available in seventeen other states and other countries. However, North Carolina residents can pick the situs (jurisdiction) of their trust and where the trustee is located, meaning, for example, that you can state that Georgia law applies to your trust even though you live in North Carolina. However, lawmakers in North Carolina have questioned whether this practice is valid for asset protection trusts, and, therefore, there are some risks involved. Of course, transferring funds to another country is always risky. If you are interested in implementing any of the above ideas in order to protect your assets, please give the attorneys at Jesson & Rains a call!
4 Comments
By Attorney Kelly Jesson
Business owners around the country are starting to reopen their businesses up to employees and customers. However, regardless of government announced “phases,” businesses owe a duty to their employees and customers to keep them safe while on the premises. Lawsuits are starting to pop up, according to Market Watch. What can you do to limit your potential liability? Businesses should follow healthcare and government recommendations, such as wiping down surfaces, frequent hand washing, wearing masks, socially distancing, etc. These recommendations sometimes change, so business owners should stay abreast of updates. Keeping your employees from getting sick on the job in the first place is key: in a worker’s compensation case, all the worker has to do is prove they were injured on the job and there’s a causal connection between the two. For example, a grocery store cashier may have a claim due to exposure to the public. A worker’s compensation claimant does not need to prove that the business was negligent. For businesses that don’t have a large volume of public traffic (such as law firms), owners may ask patrons to sign a document before coming into the premises stating that they do not have COVID-19, are experiencing no symptoms, and they have not been around anyone with COVID-19 or who has otherwise been experiencing symptoms. While patrons can, of course, lie on these forms, at least it’s one additional step that business owners can show that they are taking to protect their employees and other customers. Showing that you are taking the necessary steps to keep people safe is important in defense of personal injury lawsuits, where the plaintiff has to show not only causation (that they caught COVID-19 at your business) but negligence (that you failed to act with reasonable care). A defense to a negligence action is “assumption of risk.” Some business owners may ask patrons to sign waivers of claims, saying that the patron is “assuming the risk” of contracting COVID-19 by coming to their establish. For example, someone who voluntarily eats at a restaurant or goes to a nail salon knows that there is a risk that they may be infected, and a business is not guaranteeing 100% that they will not be infected, because there’s no way to do that. Governor Cooper provided business owners with extra protection a couple of weeks ago when he signed the Coronavirus relief bill. The act provides for limited liability for businesses deemed “essential” under the Governor’s prior stay-at-home order. If an employee or customer gets COVID-19 from spending time at an essential business, the business is not liable for damages unless it is “grossly negligent” or worse. Gross negligence is a higher standard than simple negligence. Instead of a plaintiff showing the absence of reasonable care in a negligence lawsuit, a plaintiff would have to show the conscious disregard for reasonable care to prove that a business was grossly negligent. While essential businesses should be comforted by this law, we are of the opinion that this should not change how they do business. In fact, if they consciously fail to abide by social distancing and cleaning protocols, they could arguably be grossly negligent. If you have any questions about how to prepare your business for reopening, give Jesson & Rains a call! By Attorney Edward Jesson
It happens more often than we would like to see, but sometimes work is complete, a dispute arises, and suddenly it is discovered that the contract that everyone assumed to be in place was not signed. This happens frequently in construction cases (most often seen with contracts between General Contractors and Subcontractors) but the issue can also rear its ugly head in any other contractual setting, especially where independent contractors are involved. In legal terms, in order for an agreement between two parties to be binding and valid, there needs to be a “meeting of the minds”. Put simply, it needs to be clear that the parties to the contract intended that contract to govern the relationship between them. Most frequently, a signature on a contract signifies each party’s intent to be governed by that contract. So what happens when, sticking with the construction industry example, a subcontractor performs all work under its subcontract agreement with the general contractor and then a dispute arises and it turns out the contract wasn’t signed? Generally, when courts are confronted with an unsigned agreement, their default opinion will be that the parties never reached that “meeting of the minds” and therefore they did not intend to be bound by the terms of that contract. However, this doesn’t mean that no contract between the parties existed and that the party seeking to enforce its rights under the agreement has no recourse. The court will next look to all other evidence which indicates what the agreement was between the parties. For example, if there were multiple drafts of a contract with different terms included, the court may decide that the earlier draft contracts that had parts removed from them at a later date is evidence that those removed contractual terms were not a part of the parties’ agreement. Courts may also look to whether there was a “contract implied in fact” between the parties. In the general contractor subcontractor example, evidence that the general contractor asked the subcontractor to perform work and the subcontractor did perform that work would certainly be evidence of a “contract implied in fact”. It would be unreasonable for a court to decide that the subcontractor did that work and did not expect to receive any payment for that work. Oral agreements are oftentimes valid. There is no requirement that many types of contracts be in writing. Therefore, if you’re on the other side (someone completed work for you but you didn’t sign the contract), you don’t get a free pass! If you do not pay, you may find yourself on the receiving end of a lawsuit. In any event, it is important to have a written contract signed by the parties. It sets the expectations of both parties – what they’re supposed to do in exchange for compensation. When it is reduced to writing, there are less evidentiary issues in court. When it is reduced to writing, it is less likely that there will ever be a lawsuit about the terms because a signed contract shows that all parties agreed to the terms. The attorneys at Jesson & Rains are ready to assist with drafting and review of contracts, and, importantly, assist clients who find themselves in disputes arising from unsigned contracts. Just because you do not have a signed contract, it does not mean you have no rights. By Attorney Edward Jesson
In 2012, North Carolina’s mechanic’s lien statutes were overhauled. One of the biggest changes was the requirement for a lien agent to be appointed on certain jobs. We still frequently receive questions about lien agent requirements and what the consequences of a contractor’s failure to file a “Notice to Lien Agent” actually are. Lien agents are only required on projects involving improvements to real property valued at over $30,000.00, except that a lien agent does not have to be designated for projects where improvements are being done to an existing single-family residential building, occupied by the owner, even if those improvements are valued over $30,000.00. That exception also applies if the contract is for the construction of accessory buildings where “the use of which is incidental to that residence.” Generally speaking, the appointment of lien agents is more prevalent in commercial construction projects but it is also sometimes necessary to designate a lien agent for residential projects. While designating a lien agent is generally the owner’s responsibility, there is a limited ability for “custom contractors” (as defined by the statute) to designate the lien agent on residential new construction projects as, presumably, custom contractors should be more familiar with these laws than the average home owner. In order to fully protect its rights as a contractor to pursue a claim of lien on real property, a contractor must file a Notice to Lien Agent within 15 days after it first “furnishes labor or materials to the project.” While failing to file a notice to lien agent within 15 days is not necessarily fatal to any future lien claims, it may limit the contractor’s lien rights should it be necessary to file a lien at a later date. If a contractor fails to file a notice to lien agent and, prior to filing the notice or to filing a claim of lien on real property, the property is sold or otherwise encumbered, the contractor seeking to enforce its lien rights at a later date may have issues doing so. On the other hand, if a contractor fails to file a notice to lien agent and it then becomes necessary to file a lien, the contractor will likely be able to do so if the property has not been sold or otherwise encumbered. It is important to note that the lien agent does not take place of the owner or upper tier contractor for purposes of service. Any claims of lien on real property or claims of lien on funds should be filed (where necessary) and served on the owner and any necessary contractors and/or suppliers. It is best practice, in projects where lien agents are appointed, to file the notice of lien agent as soon as possible—even prior to beginning work. There is a portal to provide Notices to Lien Agents on LiensNC.com, but if you have any further questions, the attorneys at Jesson & Rains would be happy to help. We encourage business owners to form formal business structures like Limited Liability Companies and Corporations in order to protect their personal assets from business debts and creditors. However, simply filing the Articles of Organization or Articles of Incorporation with the Secretary of State’s office is not enough. If you do not keep your business and personal finances and operations separate, a court could potentially find that, while there was an apparent separation of the two, in reality, the individual was using his or her business for their own personal affairs and order that the two are not really separate. If this happens, a court could satisfy a business debt or judgment with your own personal assets.
What can you do to avoid this? First, the easiest thing to do is to keep your finances separate. Open a business bank account and only use that account for business income and expenses. Do not pay for personal items out of this account, even if you’re going to reimburse yourself. Keep good records. Do not take liberties with categorizing something as a business expense when it’s really a personal expense. Use a trustworthy business accountant. It is not worth the risk of stretching your deductions to pay less taxes (if it’s not really a business expense) because you’re opening yourself up to personal liability. Second, sign all of your contracts as member of your LLC. Don’t sign them as you personally. Third, if you own a corporation, you have to comply with the North Carolina Business Corporation Act. You are required to have bylaws, even if you are the sole owner. You are required to vote and install a Board of Directors. If you want to own your corporation, the board (which may just be comprised of you) needs to issue you shares so that there’s a record that you own the business and that you’re not simply just a director or the president of the business. Directors need to keep thorough records of annual meetings and need to vote on business decisions (even if it is just yourself voting). If you do not have robust corporate records, you risk having a creditor ask a court to “pierce the corporate veil” … meaning that a court may find you and your corporation one of the same, and you may be ordered to satisfy corporate debts and judgments with your personal assets, defeating one of the main purposes of owning a corporation. If you or someone you know on a business and you believe that the books and records need to be improved, please give us a call. No one ever wants it to happen, but it happens. The mailman asks you to sign for certified mail, or, even worse, a sheriff’s deputy shows up on your doorstep and “serves” you. Once the dust settles you are left with a summons and complaint, which are the documents showing that someone has sued you. Furthermore, because you signed for the documents when the USPS dropped them off, or because the sheriff’s deputy personally handed them to you, the person suing you (the “Plaintiff”) knows that you received them.
What to do next? The answer is not to ignore these papers! The clock is now ticking. Under the North Carolina Rules of Civil Procedure, you have 30 days to respond to a lawsuit (whether that response is an “answer,” “motion for extension of time to respond”, “motion to dismiss the lawsuit” or otherwise). If you do not respond to the lawsuit in any way within 30 days, then the Plaintiff has the option to pursue a default judgment against you. A default judgment is a court order granting judgment in the Plaintiff’s favor because you failed to respond. It is the same as a regular judgment, just as if you had gone to trial and lost. You now owe the Plaintiff money. By ignoring these legal papers, you have waived your ability to present any valid defenses to the Plaintiff’s case. The first step in obtaining a default judgment is to obtain an entry of default from the clerk of court. The clerk (or judge) will look at the court’s records and any affidavits provided by the party seeking a default in deciding whether to enter default. The most important effect of the entry of default is that all allegations in the Plaintiff’s complaint are deemed admitted. The second step is to obtain a default judgment. The party moving for a default judgment must show the court that complaint and summons were properly served on the defaulting party and that personal jurisdiction exists. In certain instances, a default judgment can be granted by the clerk without the need for a hearing, but in most cases an evidentiary hearing in front a judge will be required before awarding an amount of damages. Further, the court may not award punitive damages by way of a default judgment. If you mistakenly fail to respond to a lawsuit, there are ways to set aside the entry of default and/or a default judgment, though it is not certainly not guaranteed that you will be successful. To set aside an entry of default, you need to show the court that there is “good cause shown” for you to fail to respond to the complaint. The North Carolina Rules of Civil Procedure also provide a procedure to have a default judgment set aside, but again, you are only able to do so under a limited set of circumstances. Of course, to set aside a default judgment you must show that there was mistake, excusable neglect, fraud, or other extenuating circumstances. If you received a copy of the summons and complaint but simply ignored the lawsuit, the default judgment will not be set aside. Because there is no guarantee that a court will set aside an entry of default or default judgment, especially if legal papers are intentionally ignored, if you receive a summons and complaint, be it in the mail or personally delivered to you, the best course of action is to contact a litigation attorney, like Edward Jesson at Jesson & Rains, who can guide you through the process and make sure to avoid any issues with defaults. If you learn that a default judgment has been entered against you or your business, and you believe you have never been served with any legal papers, please contact Jesson & Rains at once. |
Subscribe to our newsletter.AuthorKelly Rains Jesson Categories
All
Archives
April 2024
|