Suing Everyone In Sight: Asset Protection in Action
Frank Johnson invented a new type of dump truck, one that could dump its load both (1) out the back by raising up its trailer; or (2) through its doors in the belly of the hopper. It was called the “Shape Shifter.” Martin Kirbie, an employee of Hoss Equipment Co., heard about it and introduced his boss, Gregg Hoss, to the idea. Hoss bought into it hook, line and sinker, and seems to have called his lawyer for the next step.
Hoss, already the sole shareholder of Hoss Equipment Co., formed a limited partnership, JHC Ventures, LP, and a new corporation, JHC Holding Co., as its general partner. JHC Ventures was to obtain the patent for the Shape Shifter dual dump truck, manufacture it, and sell it. The limited partnership structure eliminated all franchise taxes on the earnings of JHC Ventures, and provided asset protection by keeping the income stream–and any associated liabilities–of JHC Ventures separate from his other operations.
If you are paying franchise taxes every year, contact your lawyer or CPA about restructuring your businesses to eliminate or at least reduce Texas (or most states, for that matter) franchise taxes.
Hoss appeared on the cusp of success as JHC began marketing the Shape Shifter. Sam Vale, sole shareholder of Fast Trucking, Inc., saw an ad and was so impressed he began negotiations to buy several Shape Shifters. Unfortunately, Hoss’s mouth nearly destroyed his asset protection planning. Hoss expressly assured Vale about the superior durability of the Shape Shifters, their ability to haul various, and very different, types of materials, and their dual-dumping capabilities. Hoss told Vale these trucks could haul grain, sand, and sludge with the purchase of certain additional accessories. These representations became an express warranty, meaning if the trucks didn’t live up to their billing as blabbed by Hoss, somebody would be liable for something.
The hot air must have worked, because on December 13, 1994, Fast Trucking, Inc., Vale’s corporation, signed a commercial invoice with JHC Ventures to buy five new Shape Shifters for $175,000 plus $21,000 in federal excise tax. Under separate invoice with JHC Ventures, Fast Trucking also bought accessories for $9,750. This one act would later become a critical fact.
Sure enough, the trucks did not live up to their spectacular billing. The sludge seeped out. Hydraulic lines and structural welds broke. The belly dump doors failed to function properly. The back dump feature worked only part of the time. Within a few short months, the Shape Shifters were returned for repairs, and returned over and over for a total of about 10 times. Apparently the repairs were completed by Hoss Equipment Co., and not the seller, JHC Ventures.
Finally, on October 30, 1998, Fast Trucking gave up and sued JHC Ventures over the Shape Shifter trucks. Fast Trucking included Hoss Equipment Co. in the lawsuit. Later, Fast Trucking added Hoss individually as a defendant, because he allegedly told Fast Trucking that the seller was Hoss Equipment, as opposed to JHC Ventures. Plus, he’s the one who was spouting all the wonderful qualities of these trucks. The asset protection planning wasn’t looking too good right about then.
In November of 1998, Fast Trucking sold the Shape Shifter trucks plus the accessories for the abysmally low price of $43,000, and that was probably a good deal for Fast Trucking.
At trial, the jury decided that damages were $104,500, plus $5,000 for transportation and freight charges, and they assessed $50,000 in punitive damages against both JHC Ventures and Hoss Equipment. On top of that, the jury awarded Fast Trucking its trial attorneys fees of $150,000. The attorneys fees were larger than the amount of actual damages!
Here’s where it begins to get interesting. Because Fast Trucking leveled different claims against Hoss and his various business entities, it ended up with a trial court judgment of different amounts against different parties, as follows:
And somebody was liable for everything and then some.
On appeal, the various defendants whittled away at this judgment. First, the Court of Appeals agreed that Fast Trucking could not, by law, get a judgment for its attorneys fees on its breach of warranty claims. Then, it held that Fast Trucking didn’t put on the right evidence to get its “transportation costs” and so the $109,500 was reduced to $104,500.
And here is where the case got really interesting. The defendants argued that Hoss individually should not have any judgment against him. The jury had been asked by what date Fast Trucking should have known the false, misleading or deceptive trade practices it alleged Hoss committed in the case. The jury answered “December 13, 1994.” This is the date on which Fast Trucking signed the invoice for the trucks on JHC Ventures letterhead. The invoice clearly indicated that the seller was “JHC Ventures, L.P.” Fast Trucking had 4 years after that date, December 13, 1994, to sue Hoss personally, or it would lose its right to sue him by law (these sorts of laws are referred to as “statutes of limitation). Sure enough, they waited until over 5 years after that date before they added him to the lawsuit.
But Fast Trucking wasn’t ready to just let Hoss walk. It argued that the judgment really meant Hoss was the alter ego of his businesses. The Court of Appeals noted that the jury found that “Hoss was responsible for the conduct of JHC Holding,” a non-party to the case. It was not asked whether Hoss was the alter ego of JHC Ventures. Without an express jury finding of alter ego, Hoss could not be included in the judgment on the basis of alter ego. The corporate/limited partnership veil could not be pierced, and so Hoss was spared individual liability in this case. Things were lookin’ up.
Finally, the defendants pointed out that JHC Holding was never even a party to the lawsuit, so it couldn’t have any judgment entered against it. Fast Trucking countered “but it’s the general partner of JHC Ventures, and it’s liable for all its debts as a matter of law, and we sued JHC Ventures by serving JHC Holding as its general partner.” Said the Court of Appeals, “you should have served ‘JHC Holding Co., by and through its registered agent Gregg Hoss’ and you didn’t.” And so, all of the judgment against JHC Holding Co. was out, as well. The asset protection was looking better and better.
Next issue. This is just beautiful. Texas has a “proportionate responsibility” statute which says, for tort claims (but not for breach of contract claims), where there is more than one party involved the jury decides how much responsibility for the injury should be allocated to each party. In this case, on the fraud claim, the jury had allocated responsibility like this:
Since the Court of Appeals threw out the judgment against Hoss, what was to happen to its 30%? Fast Trucking wanted to re-allocate that to Hoss Equipment and JHC Ventures. The Court of Appeals said “no can do, we have to send this case back to the jury and see what they have to say.”
And so, after all this wrangling, the final result was modified like this:
My suspicion is the only reason Hoss Equipment had the judgment against it is because it performed all the repairs to the Shape Shifter trucks. The bottom line is that this case is a good example of why us professionals like for our clients to use a separate business entity for each separate business activity. As a result of that, the ensuing $104,500 judgment (down from $359,500) was only against two entities, and not against the owner individually in any way.
This case also shows very clearly the importance of written documents, because the only thing that saved Hoss individually were the 2 written invoices signed by JHC Ventures and Fast Trucking. Those written invoices clearly indicated that JHC Ventures was the seller, notwithstanding Hoss’s oral platitudes, which made the case for the jury and preserved Hoss’s asset protection planning. They basically saved him from himself. Can your documents do that?