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Commentary by Carl Kanowsky, Esq.
| Friday, Jan 24, 2014
Carl Kanowsky, Esq.

Carl Kanowsky, Esq.

Some real estate brokers I know like to form new limited liability companies or corporations for each development they represent.

The common wisdom is that isolating the assets and liabilities of each discrete project keeps all of their assets in other developments free from creditors.

That philosophy is valid as far as it goes. Keeping every property segregated from the others can provide an important layer of protection.

For instance, if Joe Broker, in the cloak of Big Development LLC, represents the buyer of a piece of land that will be developed into new apartment buildings, that company’s assets stand alone from other developments Joe Broker represents under other LLCs.

But it is true only so long as Joe is diligent in keeping the books, bank accounts, assets and liabilities of each LLC separate from the others.

For instance, Joe risks losing the benevolent protection of the corporate veil if he uses a Big Development LLC bank account to pay the bills or employees of other LLCs he might control.

There are some potential pitfalls for the unwary.

Even though the state Legislature has changed the law relative to contractors, as it stands now, a real estate broker cannot attach his license to an LLC.

This gets back to the incomprehensible rule that the LLC structure cannot be used for businesses that require “professional licenses,” such as the license brokers hold. So, if the broker is to perform professional services for one of his or her LLCs, he or she must make sure the services are rendered by a corporation or partnership where he or she has placed his or her license.

If a broker has numerous corporations, it’s easy to see how he might get confused and forget to use the corporation where he has registered his license.

Failure to do this can be costly.

Jim Ward, a California-licensed real estate broker, forgot this fundamental rule, and he’s now paying the price.

In the Court of Appeal decision, Creative Ventures LLC v Jim Ward & Assoc., a California corporation, Ward represented some investors providing mortgage-brokerage services. They lent Creative Ventures $3 million.

This is the way it worked: Ward got some well-heeled friends to pool together the funds that were then lent to Creative Ventures by Jim Ward & Associates, which is a California corporation.

Ward charged Creative a 16-percent rate of interest. Well, the statutory rate of interest is 10 percent. Exceeding that percentage is tantamount to usury. Dictionary.com defines “usury” as “the lending or practice of lending money at an exorbitant interest.”

Lenders who violate usury laws are prohibited from collecting anything beyond 10 percent. So, a borrower can sue an unlicensed lender to reimburse any payments that exceed 10 percent. Licensed mortgage brokers, however, can exceed 10 percent.

Ward’s problem wasn’t that he’s not a licensed real estate broker. It’s that he apparently got confused. You see, his license was originally with a corporation called Jim Ward & Associates Inc. – not the same corporation as the one called simply Jim Ward & Associates.

But Ward used the entity Jim Ward & Associates to handle the loan (not Jim Ward & Associates Inc.). Did Jim forget where he had parked his license? Did he get befuddled by such similar-sounding corporate names? Or was he trying to pull some type of fast one on Creative?

Those questions are not answered in the appellate decision. What is answered is that Ward and his investor friends had to give back all payments that exceeded 10 percent.

And the Department of Real Estate revoked Ward’s license with Jim Ward & Associates Inc. and denied his application under Jim Ward & Associates. This effectively put Jim out of business.

Even though he dodged the imposition of treble damages for his violation of usury laws, he now faces the prospect of having to pay not only his attorney, but also Creative’s. On top of that, he’ll likely be sued by his investor friends for his negligence that cost them a lot of money.

Overall, not a good day for Ward.

So, brokers, double-check every time you do a transaction to make sure you are using the entity where you parked your license. Failure to do so could amount to a huge parking violation.

 

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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