Ignore an Unhappy Customer

This week, I am lucky to have Rhonda Miller as a guest blogger.  Rhonda A. Miller is an attorney with over 15 years of experience specializing in Estate Planning, Asset Protection Planning and Business Planning.  Ms. Miller is the co-founder and Principal at Matsen & Miller, PLLC, and is licensed to practice law in Virginia, California and the District of Columbia.  You may contact her at rhonda@rhonda4law.com.  Rhonda and I have many shared clients.  Take it away Rhonda.....

You own a business.  What should you do if someone threatens to sue you?

If you are a business owner, chances are someday you are going to make someone unhappy.  It is just the law of averages.  It is what you do when that happens and how well you have protected yourself that will affect how much it hurts. 

A few months ago, I got a frantic phone call from my client.  Let’s call her Sue. Sue is a decorator, and she had just gotten a letter from an attorney representing Mary, one of her customers who was unhappy with the price she was paying to design her vacation home.  After the work was done, Mary decided she was being charged too much.  Sue had collected only half of her fee, but she had completed all of the work. 

Sue’s knee-jerk reaction was to call the lawyer who wrote the letter.  She just wanted to make this go away and she did not want to hire her own attorney.  After all, attorneys are expensive!  When speaking with Mary’s lawyer, Sue blurted out, “Fine, I will just refund all of the money.”  Mary’s lawyer responded, “Well that is a good starting point.”  Realizing she was in over her head, Sue hung up and called me.  Then I called the attorney.  The problem was the negotiation in his mind was starting at a full refund and only going up. I had to find something to counter his positions.  This is a situation that was made far more complicated because of a knee-jerk statement made by my client. 

 What should Sue have done?  She should have stayed calm, listened, said nothing, and then called me!

 If you have an unhappy client, do not promise anything.  If you hear from an attorney, do not communicate with him.  Instead, call your own attorney.   We all have a natural instinct to be sympathetic, but that sympathy can and will be held against you.  Anything you say or write is admissible to prove fault. 

Now, back to Sue and Mary.  In Sue’s case, I contacted the other lawyer and we were able to come to a mutually agreeable arrangement.   But what if that had not worked and Mary went ahead with a law suit?

Let’s take a look at a situation in which one of my other clients found himself.  I bring it up here because it’s a great example of how a business owner can be proactive in ensuring the protection of his or her personal assets in the event of any future lawsuits.  Let’s call this client Jim.  When Jim started his business, I helped him set his company up as a Limited Liability Company (LLC).  Many years later, he was sued by a disgruntled employee.  Not only did the employee sue Jim’s LLC, but she also brought suit against Jim himself, trying to get at his personal assets as well as the assets of his business.

Once the lawsuit started, our main focus was to get the personal claims against Jim dropped.  However, the attorney on the other side was very clever and immediately tried to “Pierce the Corporate Veil”.  What does that mean?  It means that the lawyer was trying to show that Jim and his corporation were one and the same. The first thing the lawyer did was ask to see all of the corporate books.  He wanted to review the Operating Agreement, yearly minutes and the financial records of the company.  He was looking for any indication that the company was not being run separately from the individual and was instead just a front being used to hide Jim’s own assets.

 For example, was Jim paying for personal items out of the business account?  Did Jim’s LLC have the required Operating Agreement and yearly company minutes?  By arguing to the court that the company and the person were one-and-the same, it would not have mattered if we got Jim personally dismissed from the lawsuit.  If the Court allowed the “Corporate Veil” to be pierced, all of Jim’s business assets and personal assets would be at risk for all of the claims in the lawsuit.

 Fortunately for Jim, we had been keeping his company books for years.  We also had worked closely with his accountant so everything was squared away. Although the attorney went fishing, he caught nothing.  Jim’s personal assets were safe.

 The take-away lessons from this post are many.  But most importantly I hope that you can see how critical it is that business owners be proactive and prepared.  And that having a good relationship with your lawyer and your accountant will go a long way towards your security and success.

Thanks Rhonda! Thanks for reading - as always, you can get great tax and accounting information at www.skcpas.com.  Frank