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What is Frivolous Lawsuit?
Imagine you are the owner and CEO of a successful business.
You graduated from one of the most prominent universities in
the country and after years of hard work, you finally worked
your way to the top. You and your loving family live in a
vintage house surrounded with white picket fences. Life
cannot be better as you are living the American dream.
But not every story ends with a happy ending. One day you
got a call from your attorney. He informed you that one of
your employees attempted to call his coworker regarding a
meeting while he was driving. Right when he took his eyes
off the road, he crashed into the car in front and severely
injured the 78-year-old driver. After a series of trials,
the court found you liable and the jury awarded $21 million
against your business. While you have trouble paying the
penalty, your attorney calls again. This time an employee is
suing you because he spilled hot coffee over his lap which
burned his thigh. The employee argued that the coffee from
the office coffee machine was “too hot” and asked for $3
million in compensation.
Shocked and angered by the outrageous claim, you immediately
consulted your attorney but only to be disappointed again.
Your attorney explained, “It is obvious we’ve became the
victim of frivolous lawsuit. We can only pray that we get
lucky in this lawsuit lottery”. While the legal fees started
to build up, you watch powerlessly as your whole life’s work
evaporate before your very eyes.
The examples above might sound over exaggerated but don’t be
surprised as they are real cases of frivolous lawsuits.
Under similar scenarios, Dykes Industries of Little Rock
received a $21 million judgment and fast food giant
McDonalds ended up paying $640,000 to the plaintiff. These
major companies survived, but countless other businesses did
not and they became the prey of frivolous lawsuits.
We, the U.S. Financial Education Foundation, are entrusted
to educate the public about the risks of frivolous lawsuits
and how to protect personal assets against lawsuit abuse.
Most people don’t realize the importance of asset protection
until it’s too late. Join us now in order to secure your
wealth against financial predators.
Frivolous Litigation is the practice of starting or carrying
lawsuits that have infinitesimal chance of winning. In legal
terms, the claim/defense is said to have no legal merit and
the plaintiff is well aware of the case being futile from
the beginning. Thus many frivolous lawsuits can be easy
identified by its ridiculous claim.
Financial predators such as predator-attorneys bear
interests in the financial outcome of litigation. It’s
estimated that over 40 million lawsuits are filed every year
in the United States and the total number of registered
lawyers exceed one million. The proliferation of excessive
litigation has given predator-attorneys the power to abuse
the legal system and transform it into a “lawsuit lottery”,
where everyone is forced to join. If the predator-attorney
got lucky, he could get rich quickly at the public’s
expense. Furthermore, predator-attorneys often use forceful
tactics to intimidate and mislead plaintiffs in order to
achieve financial purposes.
In short, frivolous lawsuit can be treated as a form of
“legal extortion” and every year excessive tort costs sums
up to an estimated $589 billion in the United States. To
learn more about frivolous lawsuits, take a look at the two
famous examples below:
McDonald’s Coffee
Case
Synopsis:
On February 27, 1992, Stella Liebeck, a 79-year-old woman
ordered a cup of coffee from the drive through window of a
local McDonalds restaurant in Albuquerque, New Mexico. She
placed the cup of coffee between her knees so she could add
cream and sugar. However as she tried to open the lid, she
spilled the coffee over her lap and suffered third degree
burns on six percent of her skin. She had to undergo skin
grafting and remained in the hospital for eight days.
Unsatisfied with the settlement, she sued McDonalds claiming
that the coffee was “too hot” and McDonalds was negligent
about its potential danger. Her attorney argued that
McDonalds prepared coffee at 180–190 °F (82–88 C) which was
sufficient to produce a third degree burn. If only the
coffee was prepared at a lower temperature, the victim will
have more time to react thus avoiding severe injury. The
twelve-person jury reached its verdict and awarded Stella
$2.86 million in damages which was later reduced to
$640,000.
Impact:
This case, dated almost two decades ago, is often quoted as
the poster child of excessive lawsuits. In fact the Stella
Award, an award established to mock outrageous lawsuits, was
named after this case.
Dry Cleaners Case
Synopsis:
On May 3, 2005, Roy L. Pearson, an administrative law judge
in the District of Columbia, sued the owners of Custom
Cleanings over a lost pair of trousers. The pair of pants
was mistakenly taken to another dry cleaners shop and was
returned five days after the initial pick up date. However,
Pearson refused to accept it, claiming that it wasn’t the
original pair which he left with the cleaners, and demanded
an amount of over $1,000 as compensation. Later on, Pearson
filed a lawsuit against the Chungs, the owners of the dry
cleaning shop, demanding a combined amount of over $67
million for “inconvenience, discomfort, mental distress and
attorney fees”. Pearson argued that the “Same day service”
and “Satisfaction Guaranteed” signs advertised outside the
store was misleading and thus fraudulent. Throughout the
case, the Chungs presented three settlements of $3,000,
$4,600 and $12,000, but Pearson rejected all three offers.
In the end, Judge Judith Bartnoff ruled in favor of the dry
cleaners and Pearson was sanctioned $12,000 for creating
unnecessary litigation.
Impact:
The case drew International attention and is often held as
an example of frivolous lawsuit. Chris Manning, attorney for
the Chung family, said that the Chung family experienced the
“American Nightmare”, an ironic comparison to the “American
Dream”.
Why do we care?
It’s funny to laugh at ridiculous frivolous lawsuit cases
but it is no laughing matter when you become a victim
yourself.
Recall the Pearson v. Chung case: The Chung family was lucky
because their case went public quickly. Many people,
especially Korean families like the Chungs, aided their fund
raising efforts and contributed to the legal fees. When
Pearson lost the case, he was fined and soon later lost his
job as a judge. However this didn’t bring a happy ending for
the Chung family. Due to accumulated legal fees and mental
stress, the Chungs were forced to close down their dry
cleaners shop and were considering moving back to South
Korea. This shows that even if you win the case, you still
lose, not even to mention hundreds of hours time spent in
court.
According to the National Federation of Independent
Business, each frivolous lawsuit case costs small companies
$100,000 on average to fight. Small companies are vulnerable
targets because of the heavy legal cost, hence they can be
easily forced into settlement rather than going to court.
Yet small businesses typically spend about $5,000 to settle
one legal dispute, about 10 percent of a small business
owner’s average salary . In today’s litigation-prone
atmosphere, people are willing to go after quick cash at
your expense. Lawsuits, taxes, accidents and all sorts of
financial risks could put one’s assets at stake
So don’t stand still and wait till someone hit you in the
face.
How do we protect ourselves?
Ultimately there is no way to reduce risk unless you cut off
all contact with the world. Hence the best way is to reduce
the business’ exposure to risk through implement asset
protection techniques.
Asset protection is the positioning of assets to make it
legally unreachable by creditors. Many people have the wrong
impression that asset protection is the same as hiding
assets or evading taxes but this is not true. Asset
protection helps you avoid “unnecessary” liabilities
Consider asset protection as a form of economic self-defense
to shield against financial predators.
Follow the 5-3-1 Plan
Five Asset
Protection Goals:
1.
Minimize risk of loss
2. Establish
asset anonymity
3. Prevent
future lawsuits
4. Preserve
financial security
5. Create
artificial poverty
Three Basic Asset Protection Concepts:
1.
Asset Placement:
Transfer liabilities to other persons or entities, for
example trusts and corporations. If you’re a business owner
and there are other employees in your company, consider
incorporating a subchapter “S” or “C” company or a limited
liability company. Since the corporation is considered a
separate legal entity, your personal assets will be
protected when your business is affected by frivolous
lawsuits.
In addition, never sign personal guarantees for business
obligations. Always maintain a clear distinction between
personal assets and corporate assets. Also be very careful
about forming general partnership since there’s unlimited
liability. You can be held responsible for your partner’s
debt.
2.
Insurance:
By purchasing an insurance policy, you are sharing risk with
other parties. However insurance coverage and availability
may vary. So make sure you buy sufficient liability
insurance with adequate coverage. Communicate with your
insurance advisor about the worst scenarios and list your
insurance needs. More is better than less! It’s always
better to have excess insurance than be under-insured.
3.
Statutory protections
Utilize financial protection mechanisms offered by the
state. Irrevocable Trusts and retirement plans such as
401(k) are usually exempted from creditors both in and out
of bankruptcy. If you experience financial distress, talk to
your advisor to see if you qualify for Federal exemptions.
One
Ultimate Advice - Always be prepared:
You should setup and maintain an asset protection plan to
reduce risks around your home and business. Believe it or
not, many frivolous lawsuits started through disputes
between friends or business partners. Your trusted partner
might sue you tomorrow for their financial interests. So do
your best to make sure your partners and employees are
people you can trust, especially when they are major
stakeholders in your business. Keeping an employment manual
outlining preexisting agreements will help you resolve
disputes much easier. In addition, purchase umbrella
insurance for employment claims. It may seem expensive at
the time but you’ll be thankful when accidents happen.
More importantly, be very cautious when you conduct
business. Watch what you say because verbal/non-contractual
agreements might haunt you one day. You should routinely
check your surroundings for potential hazards. Even the
slightest things such as fixing broken steps, tacking the
carpet to prevent falls or warning customers about slippery
floors may protect you against frivolous lawsuit. Try to
carry a camera to document the accident. When an accident
occurs, always file a report with the police and your
insurance company immediately.
Take the Next Step
Consult a professional before starting an asset protection
plan. Asset protection may look simple at a glance however
costs and suitability varies for each business. Also,
different regulations and state tax rules is often complex
and requires professional expertise.
Contact the following resources for more information
regarding asset protection and frivolous lawsuits:
OGDEN PAGE ACCOUNTANCY CORPORATION
1427 North Wilcox Avenue
Hollywood, CA 90028-8123
Telephone: 323-962-2550
Fax: 323-962-2010
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