Baudtender
04-24-2003, 11:31 AM
We were discussing corporate structure in a different thread
and I thought it might be useful to branch off into a new area
that holds a lot of interest to folks in our industry.
In our business, the bottom line is that we are big targets for
a myriad of different kinds of lawsuits - personal injury, liquor
liability, product liability, ADA, sexual harassment and other
employment concerns, and a whole bunch more that makes
my stomach churn to think about.
Many years ago, I had started the process of buying a
failing bar/restaurant/nightclub when my lawyer and accountant
put on the brakes. "Are you nuts? You need to incorporate!"
they said. That's when they sat me down and really enlightened
me about the way the world works, and why I needed to cover
my assets personally in such a high-exposure venture.
I have to say, I was awfully dismayed to hear how many of their
clients had been sued out of business, but thankfully didn't
lose their personal savings, homes, etc. thanks to having the
corporate veil. I started doing some thinking about this and
wasn't much reassured that even the corporate veil didn't
protect the business. I had remember reading about a strategy
in a book (I think it was called "Outfox The Foxes" or something
like that) and decided to see if it could be applied to the
hospitality industry. We tweaked it and refined it a bit to make
it workable for our particular circumstances and our industry.
A couple of disclosures here: I'm neither a lawyer nor an
accountant, so don't take any of this seriously until you get
proper analysis and professional counsel. If there's a hole
in this strategy, I haven't found it yet, but that doesn't mean
that one doesn't exist. Every lawyer and accountant I talked
about this with were awestruck - they had never heard of such a
thing, and it struck me by the looks on their faces that they
(especially the lawyers) regard it as both a thing of beauty as
well as personally terrifying.
It's called the Double Corporation Gambit, as far as I can
remember, and here's how it works. As the name suggests, you
will create 2 corporations, we'll call them Corp A and Corp B.
You start off by creating Corp A with minimal stock value, and
capitalize it through personal loans. You file UCC-1 liens against
Corp A for the full amount. Corp A then purchases all of the
property and assets of the proposed business - everything
except for the liquor licenses and operating stock. Then you
create Corp B, again with minimal stock value. Corp A then
loans Corp B its necessary venture capital needs, which Corp
B uses for starting funds, and to purchase the liquor license and
operating inventory. Corp A leases the property and contents
to Corp B. Corp A then also files UCC-1 liens against Corp B, for
the full value. You want these liens to be as large as possible,
and there are lots of legal ways to create true debt above and
beyond the initial cash movement. The UCC-1 filings work just
like a bank's first mortgage on your house. If the home has to be
sold to pay its owners' debts, the bank gets first crack at the
proceeds of the sale of its assets to satisfy their liens.
Since Corp B is leasing from Corp A, and both are controlled by
the same folks behind the corporate veil, it is perfectly proper
to write a lease that, well, doesn't benefit Corp B very much. In
fact, your whole goal is to make Corp B appear to be as debt-
ridden as possible, and holding a wretched and worthless
lease to boot.
Enter Snake Lawyer. He has a client who stubbed his big toe in
the parking lot and figures, due to intense personal
embarassment, pain and suffering, emotional distress, and loss
of consortium with his wife, that he's going to take Corp B
to the cleaners. As he prepares his suit, he does an asset
search on Corp B and discovers that it has nothing but huge
debt that's worth way more than its paltry assets. Let's just say
lawyers generally don't sue homeless people, and for the same
reason Snake Lawyer finds no hope for a fat contingency
percentage and slithers off. Since it happened in the parking
lot, he may try to go after the landlord Corp A. Bang, same
story. The shareholders personally? Whoops, the old corporate
veil has been meticulously managed and stands firm (but see
my warning below.)
If Snake Lawyer tries to play hardball and looks for a settlement,
you just tell him "Come on down and I'll sign over all the Corp
B shares to your client right now. But be warned that Corp A
(or higher up the ladder, the investors) will then hit them for
immediate full payment of their demand notes, and if your client
can't come up with these huge amounts, there will be a Sheriff's
Sale on Corp B and once the debts are settled (to Corp A or
the Corp A investors) there won't be anything left for your client
except shattered dreams, legal fees, and a bum big toe, and
the investors will have everything of value that they started with.
In effect, you've created a legal tar pit.
Now, you don't have to play the same hardball game, you can
be magnaminous and say "Hey, I feel bad about your client's
big toe. I think it's only proper that I cover your client's trip to
the doctor for a big toe splint as well as the day off work he took
to go there." Let your own morality and sense of fairness be
your guide - the attacker is not in control. Whether or not you
pay for him being embarrassed or not getting laid is up to you
and I have no particular advice to offer on that matter.
This is just the overview, but it has the essential working
mechanics - there's a lot of details that have to be filled in by
smart lawyers/accountants. Originally, I felt that if the thing
truly had merit, I could get rid of liability insurance altogether,
but I have to admit I never had the guts to do that. About a
year ago, I was shopping for a new insurance company, and
stopped in to see a fellow club-owner to see who they were
using. He looked at me strangely and laughed. "What's so
funny?" I asked. "I'm using your Double Corporation Gambit,
I don't have any liability insurance." I must have had a few
beers way back when and told him about it, but couldn't
remember it for the life of me. "How's it working for you?" I
asked, keeping a straight face. "We've had about a dozen
threatened bullshit lawsuits in the last 10 years, and every
last one of them disappeared just like you said." He then
confessed that he had passed it along to a whole bunch of
other club/bar/restaurant owners, and I was more than a bit
horrified to hear that this strategem was not only being
attributed to me, but also was becoming the local stuff of legend
before I had total confidence in it myself.
Warning - if you are an employee/officer of any corporation,
you may need to have special insurance to cover you personally,
whether or not you use this strategy or any other. Perhaps
the best place to start would be to ask your attorney how they
would attack this, and then ask them how they could refine it to
make those sorts of attacks distasteful.
So, I'm not telling anyone to do this (I don't want it on my
conscience) and don't particularly claim that it has any merit
at all, but rather throw this out for intellectual dissection and
discussion.
There it is, have fun.
Baudtender
and I thought it might be useful to branch off into a new area
that holds a lot of interest to folks in our industry.
In our business, the bottom line is that we are big targets for
a myriad of different kinds of lawsuits - personal injury, liquor
liability, product liability, ADA, sexual harassment and other
employment concerns, and a whole bunch more that makes
my stomach churn to think about.
Many years ago, I had started the process of buying a
failing bar/restaurant/nightclub when my lawyer and accountant
put on the brakes. "Are you nuts? You need to incorporate!"
they said. That's when they sat me down and really enlightened
me about the way the world works, and why I needed to cover
my assets personally in such a high-exposure venture.
I have to say, I was awfully dismayed to hear how many of their
clients had been sued out of business, but thankfully didn't
lose their personal savings, homes, etc. thanks to having the
corporate veil. I started doing some thinking about this and
wasn't much reassured that even the corporate veil didn't
protect the business. I had remember reading about a strategy
in a book (I think it was called "Outfox The Foxes" or something
like that) and decided to see if it could be applied to the
hospitality industry. We tweaked it and refined it a bit to make
it workable for our particular circumstances and our industry.
A couple of disclosures here: I'm neither a lawyer nor an
accountant, so don't take any of this seriously until you get
proper analysis and professional counsel. If there's a hole
in this strategy, I haven't found it yet, but that doesn't mean
that one doesn't exist. Every lawyer and accountant I talked
about this with were awestruck - they had never heard of such a
thing, and it struck me by the looks on their faces that they
(especially the lawyers) regard it as both a thing of beauty as
well as personally terrifying.
It's called the Double Corporation Gambit, as far as I can
remember, and here's how it works. As the name suggests, you
will create 2 corporations, we'll call them Corp A and Corp B.
You start off by creating Corp A with minimal stock value, and
capitalize it through personal loans. You file UCC-1 liens against
Corp A for the full amount. Corp A then purchases all of the
property and assets of the proposed business - everything
except for the liquor licenses and operating stock. Then you
create Corp B, again with minimal stock value. Corp A then
loans Corp B its necessary venture capital needs, which Corp
B uses for starting funds, and to purchase the liquor license and
operating inventory. Corp A leases the property and contents
to Corp B. Corp A then also files UCC-1 liens against Corp B, for
the full value. You want these liens to be as large as possible,
and there are lots of legal ways to create true debt above and
beyond the initial cash movement. The UCC-1 filings work just
like a bank's first mortgage on your house. If the home has to be
sold to pay its owners' debts, the bank gets first crack at the
proceeds of the sale of its assets to satisfy their liens.
Since Corp B is leasing from Corp A, and both are controlled by
the same folks behind the corporate veil, it is perfectly proper
to write a lease that, well, doesn't benefit Corp B very much. In
fact, your whole goal is to make Corp B appear to be as debt-
ridden as possible, and holding a wretched and worthless
lease to boot.
Enter Snake Lawyer. He has a client who stubbed his big toe in
the parking lot and figures, due to intense personal
embarassment, pain and suffering, emotional distress, and loss
of consortium with his wife, that he's going to take Corp B
to the cleaners. As he prepares his suit, he does an asset
search on Corp B and discovers that it has nothing but huge
debt that's worth way more than its paltry assets. Let's just say
lawyers generally don't sue homeless people, and for the same
reason Snake Lawyer finds no hope for a fat contingency
percentage and slithers off. Since it happened in the parking
lot, he may try to go after the landlord Corp A. Bang, same
story. The shareholders personally? Whoops, the old corporate
veil has been meticulously managed and stands firm (but see
my warning below.)
If Snake Lawyer tries to play hardball and looks for a settlement,
you just tell him "Come on down and I'll sign over all the Corp
B shares to your client right now. But be warned that Corp A
(or higher up the ladder, the investors) will then hit them for
immediate full payment of their demand notes, and if your client
can't come up with these huge amounts, there will be a Sheriff's
Sale on Corp B and once the debts are settled (to Corp A or
the Corp A investors) there won't be anything left for your client
except shattered dreams, legal fees, and a bum big toe, and
the investors will have everything of value that they started with.
In effect, you've created a legal tar pit.
Now, you don't have to play the same hardball game, you can
be magnaminous and say "Hey, I feel bad about your client's
big toe. I think it's only proper that I cover your client's trip to
the doctor for a big toe splint as well as the day off work he took
to go there." Let your own morality and sense of fairness be
your guide - the attacker is not in control. Whether or not you
pay for him being embarrassed or not getting laid is up to you
and I have no particular advice to offer on that matter.
This is just the overview, but it has the essential working
mechanics - there's a lot of details that have to be filled in by
smart lawyers/accountants. Originally, I felt that if the thing
truly had merit, I could get rid of liability insurance altogether,
but I have to admit I never had the guts to do that. About a
year ago, I was shopping for a new insurance company, and
stopped in to see a fellow club-owner to see who they were
using. He looked at me strangely and laughed. "What's so
funny?" I asked. "I'm using your Double Corporation Gambit,
I don't have any liability insurance." I must have had a few
beers way back when and told him about it, but couldn't
remember it for the life of me. "How's it working for you?" I
asked, keeping a straight face. "We've had about a dozen
threatened bullshit lawsuits in the last 10 years, and every
last one of them disappeared just like you said." He then
confessed that he had passed it along to a whole bunch of
other club/bar/restaurant owners, and I was more than a bit
horrified to hear that this strategem was not only being
attributed to me, but also was becoming the local stuff of legend
before I had total confidence in it myself.
Warning - if you are an employee/officer of any corporation,
you may need to have special insurance to cover you personally,
whether or not you use this strategy or any other. Perhaps
the best place to start would be to ask your attorney how they
would attack this, and then ask them how they could refine it to
make those sorts of attacks distasteful.
So, I'm not telling anyone to do this (I don't want it on my
conscience) and don't particularly claim that it has any merit
at all, but rather throw this out for intellectual dissection and
discussion.
There it is, have fun.
Baudtender