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Odds And Ends

Uncle Gene’s Three Rules to Follow to Avoid Getting Sued
Rule One: Treat People Well
Rule Two: Follow the Law
Rule Three: Be Invisible


Rule One: Treat People Well


Angry people start lawsuits. If you treat people well, they will not get angry and will thus be unlikely to sue you. Treat your customers, your employees, your vendors, and – yes – your competitors with courtesy and patience. Listen to them if they have complaints, and resolve their complaints if you can. If you cannot, explain your reasons why. Avoid being defensive or argumentative. Remember that they, like you, are simply trying their best to earn a living, balance their budgets and otherwise muddle their way through life. They may not be abrasive people, they may just be having a bad day, perhaps because something awful has just happened to them. Give them the benefit of the doubt. While their complaint may seem a small matter to you, it may be huge to them. Remember that customer service is a vital part, perhaps the most important part, of your marketing program. If you’re not the one who is interacting with your customers or clients, imbue those who do with the importance of their role. And check up on them.

A corollary of treating folk well is that when you or one of your employees makes a mistake (we all make mistakes), admit it promptly and do what you can to rectify it. Sometimes the cost of making things right will be high, but owning up to your mistakes will rarely lose you any customers or friends. Indeed it will burnish your reputation – which is all that most of us have to trade on. Paying for your mistakes is just one of the normal costs of doing business – no matter what your business is. One benefit to owning up is that we free ourselves to learn from our mistakes and to be the better for that learning.

Never, however, try to cover up your mistakes. You may think you’re clever, but you really aren’t that good at lying. The person you’re dealing with probably won’t believe you, and if his lawyer catches you at trial in that lie (and he probably will; the trial lawyer’s best-honed skill is trapping liars on the witness stand) you will lose your case. As I always tell my clients, there is one sure rule in the courtroom: Liars Lose. And one of the beauties of telling the truth is that you don’t have to remember what you’ve said.

There is one further step in avoiding litigation. The Bible admonishes us to be “wise as serpents and harmless as doves.” We’ve just gone through the harmless-as-doves side of this saying. But why do you need the wisdom of serpents? Simple. Because there are two other categories of people of whom you must be wary: the Crazies and the Crooks.

The Crazies are those who will never be happy with you, no matter what you do. Nothing you can do will please them. Whether they are born that way or something in life put them on that road is unimportant; all that matters is they will be unhappy with you and will be sure to tell their friends of your incompetence and post their low opinion of you on the internet. A hint: if their opening conversation with you is a litany of their woes and of all who have mistreated them, gracefully find yourself too busy to handle their job. And never hire them. Trust your hunches. I do not know anyone who has been in business for more than a few years who has not been stung by at least one of these folk. If we are lucky, our losses will be small, but whatever the loss, the education we get is, again, invaluable.

The Crooks are those who lie, cheat, swindle and cut corners throughout their lives. They poison everything around them. One red flag: if they ask for a discount rate the first time you deal with them, promising that you will make it all up on the additional work they will send you, decline their business. Trust me: that repeat business ain’t happening, and if it does, it will be at the same discount rate you gave them the first time . . . or lower. Or if it sounds to you that the deals someone is talking about don’t seem on the up-and-up, avoid those deals even if you can’t figure out exactly what’s wrong with them. The Crooks are particularly dangerous to you and your business because they are habitual liars who will never take responsibility for their actions. They may even arrange things to that they can plausibly pass their misdeeds off on you. They will tell the victims of their frauds that it was all your fault, and you, who have done nothing wrong, will end up in the victims’ lawsuit.

Lesson from Rule One: Treating folk well and being careful about who you deal with will save you a lot of courtroom suffering.

Rule Two: Follow The Law


This seems both obvious and simple: Follow the Law. It is obvious because you would like it when your angry client/customer/employee (hereinafter: The Angry One) goes to a lawyer and the lawyer looks at what you did and says: you haven’t got a case, forget about it.

But it isn’t that simple. First and foremost, to follow the law, you must know the law – and the truth is that the law is not always simple. Many think that there is a book out there with all the rules written down and that all the lawyer has to do is look up the rule and tell you whether what was done is legal or illegal. There is no such book. The process of determining what is legal and what is not can be difficult. The law, whether it is embodied in statutes or based on the ruling of courts – what’s called the Common Law – only enunciates general principles and fitting the facts of a specific situation into those principles takes education, intelligence, and most important of all, practical experience. Mr. Justice Oliver Wendell Holmes famously stated that “The life of the law has not been logic; it has been experience.”


Please don’t think you know what the law is. You would doubtless like to think that the law is what you want it to be. But it probably isn’t. If the law has been made by courts, it may be pure guesswork as to what a court would rule in your case. The process is not always easier with legislation. The statutes the legislatures enact may make absolutely no sense. The legislators may have been profoundly ignorant about how their statute will affect the area of commerce it is regulating, and the solutions they have enacted may have created more problems than they solved. You can probably think of some examples on your own. And once a statute has been around a while, the courts will have interpreted (contorted? twisted?) its language, so once again we are back guessing what the next court will do with the facts of your situation.

In addition, virtually every important statute has interpretive regulations drawn up by some governmental agency, whether state or federal, that is charged with enforcing the statute. These regulations are usually much longer and more complex and more unreadable than the long, complex, unreadable statutes from which they are derived. If you think the Internal Revenue Code is impenetrable, just try to read the regulations promulgated to interpret even the simplest section of the Code. They will make your head spin.

While most matters are governed either by state law or federal law, there are cases where you must follow both state and federal law, which doubles your headaches. For example, if you offer securities for sale, you are likely to be governed not only by federal securities law, but also state blue sky laws – and every state’s law is different. And the term “security,” you may be appalled to learn, covers a lot more than stock in a company traded on the New York Stock Exchange. You may think that you are simply bringing a new partner into your business; the Securities and Exchange Commission may decide that you are selling a security.

And every year (every two years in Texas*), statutory law, whether it is enacted by a state legislature or the United States Congress, becomes more complex. Legislators only have one function: to enact laws. And enact laws they do . . . with a vengeance, laws which are ever more complex, which often do not improve our lives in any discernible way. While legislatures can also repeal laws, they rarely do so. Even statutes that have been declared unconstitutional will languish on the books, despite the fact that they are completely unenforceable. And since it easier to create regulations than to pass statutes, administrative regulations prior forth in huge volumes all year round. In 2014 alone, the federal government printed over 75,000 pages of regulations.

Things you have been doing for years may now be unlawful, even criminal. Especially prolific have been statutes that purport to protect consumers. The buying, selling, renting, and mortgaging of residential housing, for example, has changed radically over the past two decades, with massive regulation at both the state and federal levels. The Occupational Health and Safety Act, the Environmental Protection Act, the Americans with Disabilities Act and a raft of other federal statutes have not only placed substantial administrative burdens on business owners, but have also increased their risks of ending up in court.

It should be obvious, then, that you will need a lawyer to guide you through these thickets. In order to get the guidance you need, you will have to find a lawyer who is familiar with your area of business and is conversant with the various statutes that you have to comply with. Once you find that lawyer, build a relationship with him. Use him on your bigger deals and pay him without objection. Occasionally take him out to lunch. The gift of doing these things will be that when you call him up with smaller problems, he probably won’t charge you. You may even find that what you think are big problems are quite small and easily solved. Even then you may sometimes discover that you have run into an area of enormous complexity beyond your lawyer’s expertise and will require the assistance of a more specialized attorney – as for example when you are dealing with securities law or more arcane aspects of the Internal Revenue Code, adverted to above.

It is possible, however, that all this effort to follow the law may not stop the filing of a lawsuit against you. An abiding problem in the prophylactic power of this tactic is that the lawyer The Angry One engages might not know what the relevant law is. To combat this, if you have consulted your lawyer before taking your action, ask him to write a letter to The Angry One setting out the legal justification for your action. That way you can be sure that the lawyer he goes to will have expert advice to guide him.

Even this, however, may not be enough. The Angry One’s attorney may not care that your actions have been completely legal. He is only interested in his fee (I am sure that you will be shocked, shocked to learn that there are such lawyers), and if The Angry One is willing and able to finance the lawsuit, he will be glad to take it on. This lawyer knows that any lawsuit has blackmail power: even if the suit is baseless, the business owner may find it cheaper to settle than to fight. Business lawsuits are only rarely about principles; they are always about money. Most of the lawyers I know will not file a frivolous lawsuit, but I have been surprised during the downturn in legal activity in the last few years that firms that I have held in some esteem have taken on questionable lawsuits to guarantee themselves an income stream.

All that having been said, however, following the law will go far to discourage lawsuits, and if a lawsuit is filed, your having sought and followed sound legal advice will stand you in good stead in the courtroom and will substantially reduce the chances of an adverse judgment.

There are some additional legal steps you can take to prevent lawsuits as will be set out in my newsletters to come, for example: Rule Three of Uncle Gene’s Three Practical Rules For Business Owners To Avoid Being Hauled Into Court and Provisions That Should Be in Every Contract You Use in Your Business.

Lesson from Rule Two: Your lawyer is your friend, and seeking his advice before acting may save you from lawsuits.

*The Texas legislature only sits for seven months every two years. When I first came to Texas I thought that was weird . . . until it occurred to me how much less damage our duly elected Lone Star representatives do than if they met all year round, every year, as is the case in our benighted companions in federation.


Rule Three: Be Invisible


What on earth do I mean by “Be Invisible”? Do I want you to run out and get Dumbledore’s Cloak of Invisibility? Hardly. What I want you to do is keep your name out of public records and fly under the radar in your personal life. Here’s why. When The Angry One (you remember him from Rule Two, right?) goes to his unscrupulous lawyer, the first thing that lawyer will do is start look in public records to see what you own. And why does he do that? Because he wants to see if you have any assets for him to sell to pay off a judgment against you. 1

There are two places where every lawyer will look. First is real estate records and real estate tax records to see what real property you own. All states have some form of homestead protection, so finding the house you live in may not help him much, but if you own commercial properties, or a second house, he can certainly get those with a writ of execution. The rule here is: don’t own real property in your own name.2

The second place he will look is the records of the Secretary of State of the state you live in. Why? Because records of every entity operating in your state – whether limited liability company (LLC), limited partnership (LP), limited liability partnership (LLP) or corporation – are lodged with the Secretary of State. In those records, the lawyer can probably find your name if you are one of the owners or officers of the entity which holds some of your assets. Many of my clients are amazed at how much information about them I can pull from state records in just a few minutes. It may even be worthwhile for the lawyer to look into your county’s assumed name (d/b/a) records to find the name of the business you are running in your own name (and thus totally unprotected from a writ of execution). You have read my article “How to Protect your Assets from a Judgment Against You,” (it was the first thing I sent you) where I briefly discussed entities in which you can hold your assets. All of those entities except a trust (and you will remember the downside of trusts) will be in the records of the Secretary of State. And if that lawyer sees that you own something, whatever it may be, he will have an incentive to bring suit.

Remember that lawsuits have a blackmail value: people will pay to get rid of them rather than follow the vastly more expensive and riskier route of taking the case to trial and hoping to win. So a lawyer brings a lawsuit knowing that he may not be able to get your assets with a writ of execution, but also knows that you will have to reach into those assets to pay defense costs. He files his suit to get indirectly the assets that he cannot get directly. The choice of the defendant is either to pay his lawyer on the chance that he will win at trial or to pay the same amount, or perhaps a little less, on the absolute assurance that the lawsuit will end. In business cases, where only money is at issue, the responsible attorney will try to steer his client towards a settlement. Lawyers don’t like to call it blackmail value; they call it settlement value. But it’s blackmail.

You think, however, what if the plaintiff’s attorney only wants his fees paid and is indifferent to whether the judgment he gets will be collectible. His plan is just to bring the lawsuit and, after he gets a verdict, walk away from it. Remember, he has The Angry One for a client, someone who is spitting fire at the very mention of your name. He’s a very easy mark for a greedy attorney; spare no expense is his motto – I want revenge. At the end, his lawyer will say to him: “I did what you paid me to do. I got you a verdict. Collecting it is none of my business.” 3 That’s a risky business model. If his paying client’s judgment comes up uncollectible, he will be furious to find out that after shelling out mightily for a verdict that the defendant has no assets to pay – and perhaps even angrier if he finds that the lawyer never bothered to investigate the defendant’s asset situation. There’s a real risk that this Angry One, angry enough to pay for a lawsuit against you, now doubly enraged, will be angry enough to turn on his lawyer and sue him for malpractice. Since the lawyer probably has malpractice insurance, that judgment is not going to be uncollectible.

I have digressed, but I think you are beginning to see the value is keeping your ownership of assets private. Through the use of trusts (which are not public instruments) in conjunction with formal entities, an attorney can put a client into, for example, a limited liability company (“LLC”) where the only name of a human being in the Secretary of State’s records is the attorney’s and the only physical address is the attorney’s. And if the attorney is asked what person owns the company, he cannot reveal that information because it is protected by the attorney-client privilege. Entities can be owned by trusts and can be the beneficiaries of trusts. There is almost no limit to the ways that these various devices can be combined to shield your ownership from public view. By the same token, you do not want to flaunt your assets. If you drive a Rolls Royce or a Ferrari, you are putting a target on your back for lawyers to aim at. Live modestly

The same carries over when you are running a business where your ownership is not public knowledge. Don’t tell your customers that you own the business. Tell them that you are the manager and are responsible to the owners. If your customers know it’s your shop, you will be subjected to heart-rending sob stories, and you will not find it easy to tell them that their stories are utterly bogus, obviously ginned up for the purpose of getting a mercy discount. It’s a lot easier to say: “I just work here. The owner won’t let me do that.” That way if they turn into Angry Ones, they won’t be angry at you.

Lesson From Rule 3: No shark will attack a bloodless being

1 Those of you who have heard my talk “Case Closed: Why You Shouldn’t Bring A Lawsuit Unless You Are Ready To Lose,” know that getting a verdict is not like drilling an oil well. Money doesn’t just spout out of the earth like a gusher when you get a verdict. What you get when you get a verdict is another piece of paper: a Writ of Execution (in Texas; called other things in other states), a piece of paper that allows a public officer, usually a deputy sheriff or a deputy constable, to hunt for the losing defendant’s assets, and if he finds any, to sell them. More a hunting license than a cashier’s check. The problems with this process will be dealt with in a later newsletter.

2 Unless less it is your homestead, and you live in Texas or Florida where your home is 100% protected from judgments.

3 It reminds one of the lyrics to Tom Lehrer’s ode to Wernher von Braun, the Nazi missile expert (father of the V-2 rocket that pounded Britain) who came to work on the American space program: “I make them up go up, but where they come down, is none of my business, says Wernher von Braun.”