Legal Hypothetical - Opening a Gym (Not Really Going to Happen)

Started by alfred russel, December 16, 2019, 02:02:18 PM

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alfred russel

Climbing has exploded in popularity, and gyms are getting absurdly crowded. At the same time, their insurance costs are supposedly obnoxiously high and going up (gyms are increasing prices, and attributing it to this, though I suspect it is more supply and demand).

My radical solution: open a gym without insurance. How it would work: establish three companies.

Company A: Owns the land and building.
Company B: Owns the climbing equipment.
Company C: Leases the land and building from company A and climbing equipment from company B to run the climbing gym.

All the leases are not especially long term - say 1 year.

If there is a significant lawsuit, Company A should not be at fault, and Company B likely won't be (there could be an issue with the climbing equipment, but accidents are generally human error). If Company C stays thinly capitalized, it can go bankrupt without significant losses to the owners.

In the event third parties take over Company C, Company A and B can simply refuse to renew the leases and operations can resume with a new company with the previous ownership in no more than a year (if the leases were no more than a year).

My friends think that I am a deluded madman. What says languish?
They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

There's a fine line between salvation and drinking poison in the jungle.

I'm embarrassed. I've been making the mistake of associating with you. It won't happen again. :)
-garbon, February 23, 2014

mongers

Quote from: alfred russel on December 16, 2019, 02:02:18 PM
Climbing has exploded in popularity, and gyms are getting absurdly crowded. At the same time, their insurance costs are supposedly obnoxiously high and going up (gyms are increasing prices, and attributing it to this, though I suspect it is more supply and demand).

My radical solution: open a gym without insurance. How it would work: establish three companies.

Company A: Owns the land and building.
Company B: Owns the climbing equipment.
Company C: Leases the land and building from company A and climbing equipment from company B to run the climbing gym.

All the leases are not especially long term - say 1 year.

If there is a significant lawsuit, Company A should not be at fault, and Company B likely won't be (there could be an issue with the climbing equipment, but accidents are generally human error). If Company C stays thinly capitalized, it can go bankrupt without significant losses to the owners.

In the event third parties take over Company C, Company A and B can simply refuse to renew the leases and operations can resume with a new company with the previous ownership in no more than a year (if the leases were no more than a year).

My friends think that I am a deluded madman. What says languish?

:hmm:
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Barrister

1. I am not licensed to practice law in Georgia.

2. Generally though, you should google the phrase "piercing the corporate veil".  It can be done, although there is much litigation on the topic.  And even if you ultimately win, you have a potentially lengthy court battle to fight.

3. That's one of the advantages to having insurance.  If you do get sued, it's your insurer who pays for and retains your lawyers.  Insurance is just as much about protecting you from legal bills as it is from liability.
Posts here are my own private opinions.  I do not speak for my employer.

The Minsky Moment

#4
Limited liability is a mostly reliable shield against debts (contract liability) assuming properly formalities are maintained.  It is not always reliable shield against tort liability however. If there is an accident then Company C may not be the only defendant - the individuals and agents responsible for the decision making or conduct that led to the accident (i.e. you) may be named as defendants as well. That's basic common law principles - but then you have to deal with state and local laws and regulations that address consumer-facing businesses generally and health and fitness facilities specifically. Even if local and state law permits operation of such a business without insurance, it may be considered a fraudulent or negligent act to fail to inform consumers of the uninsured status of the facility.

Bottom line - plan seems very dubious, I wouldn't consider without careful consultation with counsel and planning, and even then I would be skeptical.

EDIT: Re BB comment above your risk is not so much veil piercing - which is tough for a plaintiff to pull off - as the possibility that a negligent or responsible individual can be sued directly in tort.
The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.
--Joan Robinson

The Minsky Moment

Quote from: alfred russel on December 16, 2019, 02:02:18 PM
(there could be an issue with the climbing equipment, but accidents are generally human error).

See there is the problem.  Human error => human defendant.
The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.
--Joan Robinson

The Brain

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Admiral Yi

I'm guessing as part of the licensing process you have to show insurance.

alfred russel

Quote from: The Minsky Moment on December 16, 2019, 02:30:34 PM
Limited liability is a mostly reliable shield against debts (contract liability) assuming properly formalities are maintained.  It is not always reliable shield against tort liability however. If there is an accident then Company C may not be the only defendant - the individuals and agents responsible for the decision making or conduct that led to the accident (i.e. you) may be named as defendants as well. That's basic common law principles - but then you have to deal with state and local laws and regulations that address consumer-facing businesses generally and health and fitness facilities specifically. Even if local and state law permits operation of such a business without insurance, it may be considered a fraudulent or negligent act to fail to inform consumers of the uninsured status of the facility.

Bottom line - plan seems very dubious, I wouldn't consider without careful consultation with counsel and planning, and even then I would be skeptical.

EDIT: Re BB comment above your risk is not so much veil piercing - which is tough for a plaintiff to pull off - as the possibility that a negligent or responsible individual can be sued directly in tort.

My uninvolved brother would need to own company b and c...I'd of course need to hit any legally required insurance needs (I don't think they exist in Georgia beyond worker's comp) and I'd add to the significant waiver that everyone has to sign before using climbing gyms that they understand the gym does not have adequate insurance - disclosing that just seems like good business anyway to discourage lawsuits. I doubt anyone undeterred by the standard liability waiver you sign in a climbing gym will suddenly be deterred by that.
They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

There's a fine line between salvation and drinking poison in the jungle.

I'm embarrassed. I've been making the mistake of associating with you. It won't happen again. :)
-garbon, February 23, 2014

crazy canuck

Quote from: Barrister on December 16, 2019, 02:24:38 PM
1. I am not licensed to practice law in Georgia.

2. Generally though, you should google the phrase "piercing the corporate veil".  It can be done, although there is much litigation on the topic.  And even if you ultimately win, you have a potentially lengthy court battle to fight.

3. That's one of the advantages to having insurance.  If you do get sued, it's your insurer who pays for and retains your lawyers.  Insurance is just as much about protecting you from legal bills as it is from liability.

Not really the problem under the proposed scheme.  His problem is going to be one of personal liability as the tortfeasor who acted negligently and so his shares in A are likely going to be attached anyway.  Also B and C are likely direct defendants.  There is a good business reason to be adequately insured.

Quote from: alfred russel on December 16, 2019, 03:12:18 PM

My uninvolved brother would need to own company b and c...I'd of course need to hit any legally required insurance needs (I don't think they exist in Georgia beyond worker's comp) and I'd add to the significant waiver that everyone has to sign before using climbing gyms that they understand the gym does not have adequate insurance - disclosing that just seems like good business anyway to discourage lawsuits. I doubt anyone undeterred by the standard liability waiver you sign in a climbing gym will suddenly be deterred by that.

Not sure that is going to help you as an individual defendant.

alfred russel

Quote from: Admiral Yi on December 16, 2019, 03:09:17 PM
I'm guessing as part of the licensing process you have to show insurance.

Google seems to say only worker's comp in Georgia (which is required with 3 or more employees).
They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

There's a fine line between salvation and drinking poison in the jungle.

I'm embarrassed. I've been making the mistake of associating with you. It won't happen again. :)
-garbon, February 23, 2014

alfred russel

They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

There's a fine line between salvation and drinking poison in the jungle.

I'm embarrassed. I've been making the mistake of associating with you. It won't happen again. :)
-garbon, February 23, 2014

Sheilbh

Under English law there's an emerging doubt over whether group companies can limit tortious liability. And I also think for health and safety specifically parent company's can be liable for negligence by subsidiaries.

Also a consumer or quasi-consumer v a corporate is likely to get more generous and creative interpretation by the courts.

But this is nowhere near an area I know anything about.
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