Friday, August 16, 2013

Unconventional Legalizing

Did you ever agree to help a friend and later regret it? Herein lies the origin of the phrase, "No good deed goes unpunished."

Consider the possibilities. A friend who owns a few residential rental properties in Louisville decides to move out of state and needs someone to mow the grass, pay the utility bills and collect the rents. Things start off easy. It is Fall and there is no grass to mow. Just collect the rents and pay the utility bills. Then there are apartment vacancies that need to be filled. Still, fairly standard and expected chores. We do things the way they were done before by our friend, without much question.

Then, about ten months into the project we become curious and read the Uniform Residential Landlord and Tenant Act (URLTA).

Notes on Kentucky's URLTA - Security Deposits

Oh shit. We have been doing it wrong.
"All landlords of residential property requiring security deposits prior to occupancy shall be required to deposit all tenants' security deposits in an account used only for that purpose, in any bank or other lending institution subject to regulation by the Commonwealth of Kentucky or any agency of the United States government. Prospective tenants shall be informed of the location of the separate account and the account number."  
K.R.S. §383.580(1)

With a little cajoling, we persuade our friend to put a dollar amount equal to all outstanding tenant security deposits into a savings account used for nothing else.

Just as we are patting ourselves on the back, disaster strikes.

Foreclosure! Commissioner's Auction! Deficiency Judgment! Oh, my!

This tectonic shift in circumstances puts our friend's bank accounts at risk of garnishment by the deficiency judgment creditor, and the risk extends to the tenants' security deposit money. Fending off a garnishment of the tenants' money held by a landlord is no big deal in theory, but in actual practice it would be a monumental pain in the ass.

Again. Shit! What to do?

The top of my list of Bright Ideas, is to quickly form a Kentucky non-profit corporation for the sole purpose of opening a savings account in which to hold the tenants' security deposits. We do not want the money in our friend's name. We do not want the money in our name. We do not want to hold the money as cash. And, we would like to be in compliance with the URLTA.

Think about it.

K.R.S. §273.167, the "purpose" section of Kentucky's "Nonstock, Nonprofit Corporations" statute, provides:
"Corporations may be organized under KRS 273.161 to 273.390 for any lawful purpose or purposes, including, without being limited to, any one or more of the following purposes: charitable; benevolent; eleemosynary; educational; civic; patriotic; political; governmental; religious; social; recreational; fraternal; literary; cultural; athletic; scientific; agricultural; horticultural; animal husbandry; and professional, commercial, industrial or trade association; but labor unions, cooperative organizations, and organizations subject to any of the provisions of the insurance laws or banking laws of this state may not be organized under KRS 273.161 to 273.390" [emphasis added]
Sure, it's not a charity or any of those other things commonly thought of as being non-profit, but;
  1. It's not a labor union;
  2. It's not an insurance company;
  3. It's not a bank, and;
  4. Complying with K.R.S. §383.580(1) of the URLTA is clearly a lawful purpose.
Looking further, at K.R.S. §273.161(4) defines "Nonprofit corporation" to mean:
". . . . a corporation no part of the income or profit of which is distributable to its members, directors or officers."
Thinking about that, security deposits either go back to the tenants or they go to the landlord, so neither can be members, directors or officers of the corporation. The security deposits are not income or profits anyway, but there's no good reason to cloud the issue.

This is not a problem.

Forming a Kentucky nonprofit corporation and getting a Federal Employer Identification Number (EIN) is quick, cheap and easy, so there is not a lot of work or expense involved.

Bank savings accounts are paying only about one-tenth of a percent interest these days, so filing tax returns for the corporation probably would not be necessary,

So, why not? I like the idea of doing something nobody has ever done before. The main downside is that bureaucrats really detest things that have never been done before.

I'll talk it over with my old friend Mr. Bourbon later on this evening and see how it looks from a slightly different perspective.