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Smoke & Mirrors: When Asset Protection Schemes Spell Trouble
The astronomical cost of medical malpractice insurance remains one of the most vexing challenges confronting U.S. health care professionals today. In fact, many in the field are considering dropping their high-dollar coverage altogether, which in turn has spawned a heightened interest in asset protection. Instead of paying exorbitant insurance premiums, physicians and other health care professionals are looking for new and creative ways to shield their assets from potential malpractice claimants.
Unfortunately, many of these plans--even when recommended by attorneys--turn out to be little more than smoke and mirrors. Not only can they fail to protect your assets, but in some instances they could actually increase your exposure. If you are not careful, the "cure" could be worse than the "disease." Just ask the group of physicians involved in the very recent case of Michael Brandon v. Anesthesia and Pain Management Associates Ltd., decided on August 15, 2005, by the Seventh Circuit Court of Appeals.
In the Brandon case, the federal appellate court came down hard on a group of Illinois doctor-owners who had made several attempts to shield their assets from potential malpractice losses. For starters, they had "sold" their professional corporation's accounts receivables to shareholders and other physician employees. The doctors' intent was to keep these assets outside of the corporation and thus safeguard them from creditors. However, since the sale price bore little resemblance to the actual value of the receivables, the court readily treated those transactions as shams.
The doctors had taken other steps to protect their assets as well. For example, after the plaintiff in the Brandon case obtained a $1 million-plus verdict against the corporation, the doctors set up a new company. From that point forward, they did all of their business through the new entity, although they never formally terminated the old corporation. Here again, the court had little trouble holding the new entity liable as the "successor" to or "alter ego" of the old company. More importantly, perhaps, the court also held the doctor-owners personally liable.
This outcome is not surprising. If you stop doing business as one entity and immediately begin doing the same business at the same location with the same owners, but as a different entity, that new company will likely be considered the successor to and alter ego of the old one. As such, the new entity might be liable for the old company's debts and obligations, which is what happened in the Brandon case.
However, there are legitimate steps you can take to protect yourself, and the attorneys of Much Shelist are available to discuss a range of options. If possible, such steps should be taken before you are subject to liability. Even more importantly, in deciding on an approach, always remember to act cautiously. As the Brandon court pointed out, "it is a risky gambit" to try to operate in a judgment-proof format, no matter how "natural [it might be] for a group of doctors [to want to do so], faced as they are with the possibility of malpractice suits."
Risky indeed. The doctor-owners exposed themselves to personal liability as a result of their conduct. If they had done nothing, the plaintiff might only have been able to go after the assets of the corporation. If those assets were insufficient and if the company went into bankruptcy, then the doctor-owners might have been able to start afresh, without fear of successor liability. Instead, they may now have to dip into their own pockets to pay off the judgment.
The moral here is to be wary of "smoke and mirror" solutions that promise asset protection but instead could actually increase your exposure.
If you have questions concerning the Brandon case, asset protection or any other issues addressed in this alert, please contact Tony Valiulis.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances.
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