The Forgotten LLC Protection: Your Sale
Clients sometimes tell me, “I would deed my property into a LLC, but I’m about to sell, so what’s the point?” The sale IS the point! If you own an investment property or vacation property, the most likely plaintiff you will face is your eventual buyer.
The recent Washington Court of Appeals case Orvold vs. Kotelevskiy illustrates an all-too-common example of LLC protections. In that case, the Kotelevskiys solely owned an LLC which in turn owned investment real estate (the “Property”). In 2015, the LLC sold the Property to the Orvolds. Around 2019, a neighboring owner sued the Orvolds, claiming adverse possession over a portion of the Property.
Under the Warranty Deed given by the Kotelevskiys, the Orvolds could force the LLC to pay for their lawyer to defend against the neighbor’s lawsuit. But the LLC was penniless – the Kotelevskiys had (naturally) caused the LLC to distribute all the sale proceeds to themselves immediately after closing in 2015. Attorney fees defending the neighbor’s lawsuit would likely cost the Orvolds tens of thousands of dollars, if not six figures. Worse, if they lost, the Orvolds risked owing the neighbor’s attorney fees, too. The Orvolds knew the LLC was a dry well, so they added the Kotelevskiys to the lawsuit personally.
How could the Orvolds force the Kotelevskiys to personally pay for their attorney fees? By claiming that the Court should “pierce the veil” of the LLC. i.e. allow the Orvolds to reach the Kotelevskiys’ personal assets even though the Orvolds bought only from the LLC, not from the Kotelevskiys personally. But in short, the Court rejected the Orvolds’ veil-piercing argument, and dismissed the Kotelevskiys from the lawsuit.
The facts of this lawsuit are very common. But there are also other traps for unwary sellers. For example, buyers can claim sellers breached the Seller Disclosure Statement aka Form 17. The moral of Orvold vs. Kotelevskiy? Hire counsel to form you a proper LLC, and transfer your investment/vacation real estate into it. THEN sell. The lawyers at Beresford Booth have extensive experience forming LLCs, and also litigating a wide range of LLC and real estate issues. Please call us if we can help.
To learn more about The Forgotten LLC Protection: Your Sale, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.
