The New Tort Reform:

Should Asset Protection Be Illegal?

By Robert J. Mintz, Esq.

It appears certain now that advocates of tort reform, seeking to limit lawsuits and cap negligence  awards, have lost the battle in Congress and no substantive improvements appear anywhere on the political horizon. The trial lawyers are breathing easier and in this, more favorable political climate, a wish list for reshaping the tort system is being circulated and is gaining traction in legal and political circles. And as might be expected this New Tort Reform, seeks to make lawsuit filing and judgment collection easier and more efficient. Too many lawsuits are discouraged, they argue, because legal asset protection measures makes collecting awards difficult or impossible. The solution they propose is to restrict or eliminate asset protection strategies to allow more successful lawsuits. Let’s consider why they want to get rid of asset protection and what will happen if they win.

Not enough lawsuits

As presented in a recent law review article by a leading scholar in the field, the tort system is indeed broken and specific remedies are proposed (See, Stephen G. Gilles, “The Judgment-Proof Society”(2006). The goals of deterring and punishing wrongdoers (both intentional and negligent) and providing compensation for injured victims are not being met under our current law. The reason, he argues, is too many potential defendants or “wrongdoers” are effectively “judgment-proof” because their assets are legally shielded and therefore unreachable from a successful claim. As a result, the deterrent impact of tort law is nullified, there is no compensation for the “victim” and lawyers are discouraged from taking these cases.

What leads to the conclusion that most Americans are judgment-proof? According to the author, although most individuals have sufficient assets or income to pay some claims they are effectively insulated by exemption laws and available asset protection strategies.  He states,  “…These legal rules enable huge numbers of working-class, middle-class, and affluent  people to be (or become) judgment-proof despite the fact that they have decent incomes and significant assets that could be used to satisfy a tort judgment.”

The exemption laws referred to are state homestead laws which protect a portion or even all of the equity in a home, the complete protection afforded most retirement plans, social security payments and the exclusion of 75% of wages from garnishment. Since those with assets above the exemption amount often employ additional asset protection strategies (See Asset Protection for Physicians; www.rjmintz.com), the practical result is that most potential defendants are comfortably excluded from the liability system.

Creating more deep-pockets

The proposed remedy for this perceived injustice is simply to remove all barriers to judgment collection. Under this plan, no meaningful assets could be protected from a judgment. Exemptions would be reduced or eliminated and asset protection strategies would be illegal or restricted to non-tort judgments.  “For example, federal law could forbid Americans to enter into OAPTs (Offshore Asset Protection Trusts) unless the trust provides that tort claimants shall have effective remedies against the trust proceeds, and unless the foreign jurisdiction actually enforces those provisions.” (Gilles)

Do lawsuits deter negligence?

The argument that asset protected or judgment-proof individuals are more likely to commit wrongful acts is a theory which well serves the author’s purpose but lacks evidence and opposes common sense. Automobile accidents account for the vast majority of all tort claims. Would an increased threat of losing assets make drivers more careful? If rational self-interest in avoiding death or serious injury doesn’t make a driver cautious, the threat of a lawsuit isn’t likely to have much additional impact.

Similarly, in the context of malpractice cases, getting sued usually has more to do with bad luck, circumstances and deep-pocket economics rather than any wrongful behavior. The threat of lawsuit loss doesn’t improve the quality of patient care. By all accounts it drives up expenses, inhibits needed treatment, and reduces available care for those in the most “risky” categories.   For intentional and reckless behavior the criminal laws are obviously important in regulating conduct, but lawsuit liability probably has a minimal role in curbing most form of legal negligence.

Who wants more lawsuits?

If the tort system has little practical role in deterrence, it is not apparent what social good would be achieved by eliminating asset protection for individuals. It seems that most of the benefits of this plan would really accrue to the trial lawyers whose financial leverage would increase even beyond the broad powers currently available. Every lawyer knows that those with unprotected assets are easy potential targets.  The mere threat of a lawsuit, no matter how baseless, can force a potential defendant to settle-simply to avoid steep defense costs and the uncertainty of the outcome. There are plenty of “deep pocket” defendants now -primarily the affluent with property above the exemption amounts and without other asset protection. To expose the weakest members of society -those living on their pensions and social security and with some minimal home equity- to jeopardy and hazard as potential lawsuit targets, is no benefit to anyone besides those in the litigation business.

Conclusion

It’s difficult to predict whether the movement to expand the “litigation explosion” to create an even larger pool of potential defendants and make all assets reachable will be successful. Trial lawyers are a powerful political force but popular opinion these days clearly favors relief from lawsuits and greater, not less protection, from business risks and frivolous claims. Will political money and influence overcome significant popular opposition? We’re likely to see the results of this conflict played out in Congress over the coming years and we all have a significant stake in the outcome.

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