No personal guarantee, but named in suit

[apsp560]

As a home builder we have endured 2 years of financial devastation. My company is organized as an LLC and I am a Member. I have tried to pay off all my subcontractors but have finally run out of cash, both in the business and personally. I have one vendor who has enlisted the aid of an Attorney to attempt to collect about $6000. I did not personally guarantee payment for the services provided by this vendor on the property, which was owned by the LLC. Their Attorney sent me a letter stating that if I didn't sign the enclosed cognovit note (both for the company and personally) he was going to file a lawsuit, a copy of which was also enclosed. The lawsuit names the LLC and myself personally. I have asked them to produce a sales contract that shows I would personally guarantee this debt, knowing full well they can't. I have told this Attorney that there is no personal guarantee, and I think he knows that's a fact. Can he include me personally in a lawsuit knowing that he has no more of a case against me personally than he does with The Pope.

[PoorGrammyinBK7]

Are there other members of the LLC?

If not, he may have a case.

[BigJohn]

I believe cognovit notes are illegal in most States. I think what the creditor's lawyer is trying to do is make a case against you when no case exist. I would not sign the document, but then that is me.

By signing, you probably will be admitting the debt and outline what relief the creditor can take to get paid.

[PoorGrammyinBK7]

I had no idea what a cognovit was, so I looked it up:

COGNOVIT - A written confession of an action by a defendant, subscribed but not sealed, and authorizing the plaintiff to sign judgment and issue execution, usually for a sum named.


Definitely would not sign it.

[apsp560]

I have a business partner who is also a member of the LLC. I am not sure how that would make any difference. Can you explain why if I was the only member he may have a case.

I know that I shouldn't sign the cognovit note. Why would I, as it would than make me liable for that note when right now, as far as I can tell, I have no legal liability for the debt of the LLC.

I call it "Blackmale", maybe their Attorney thinks I'm a sucker.

[HHM]

Keep in mind, having an LLC only provides a layer of protection.

You CAN be sued personally for business debts, the burden is on you to raise the affirmative defense that there is no personal guarantee or that you are otherwise protected by the corporate viel. Moreover, you can also be sued personally as a "trustee in assets" of the corporation, meaning, if the company goes under, you, as an owner, are by law a trustee of the assets of the business in favor of the creditors. In essence, you have a duty, as the owner, to properly wrap up the business (sell assets, pay creditors based on priority, etc); if you fail in that regard, the plaintiff can pierce the corporate Vail and go after you personally to the extent of the assets or proceeds you improperly disposed of.

You may not be liable for the underlying debt, but you are still going to have to defend the lawsuit as to you personally.

[apsp560]

Keep in mind, having an LLC only provides a layer of protection.

You CAN be sued personally for business debts, the burden is on you to raise the affirmative defense that there is no personal guarantee. Moreover, you can also be sued personally as a "trustee in assets" of the corporation, meaning, if the company goes under, you, as an owner, are by law a trustee of the assets of the business in favor of the creditors. In essence, you have a duty, as the owner, to properly wrap up the business (sell assets, pay creditors based on priority, etc); if you fail in that regard, the plaintiff can pierce the corporate Vail and go after you personally to the extent of the assets or proceeds you improperly disposed of.

You may not be liable for the underlying debt, but you are still going to have to defend the lawsuit as to you personally.

Thanks, There are no assets and we do not plan on continue in this business.

[apsp560]

By the time you hire an attorney to defend against this and with a not so solid defense, I think I would try to work out a settlement or just tell the attorney flat out take this much $..... or I file BK as soon as you serve me.

Also, depending on who the other partners where, give those names to the attorney to add to his list of people to sue so the it gets spread around and not just stuck on you. I think you can require they amend the suit to include all the other partners also.

Thanks for the input, but what do you mean by a "not so solid defense" I think we have a solid defense, and I also realize the real intent is to negotiate a settlement. The whole legal process is economically inefficient and they know it is in my best interest to settle. When this house sold it was a short sale plus I lost all the cash I already had invested in the project. Like I said I my 1st post, I have paid as much as I can to all my suppliers and now I'm broke. I did pay this particular subcontractor $2000 toward the $8000that was originally owed.

[BigJohn]

I have a business partner who is also a member of the LLC. I am not sure how that would make any difference. Can you explain why if I was the only member he may have a case.

I know that I shouldn't sign the cognovit note. Why would I, as it would than make me liable for that note when right now, as far as I can tell, I have no legal liability for the debt of the LLC.

I call it "Blackmale", maybe their Attorney thinks I'm a sucker.

It looks like they have only your name. Otherwords, they probably are on a fishing expedition. I took a business to small claims that was a LLC. There defense was their business was no longer in business. They had apparently done all the paperwork neessary to close the business.

[apsp560]

My defense isn't that I'm broke, my defense is I did not personally guarantee the payment of this debt. The LLC is a whole different entity.

My point of saying I am broke is because I am. BK may be one possibility, that is why I am on this forum. I'm trying to figure out the best course of action. This is really the last bit of money owed to anyone, so I don't know if BK makes much sense either. It's kind of like playing poker. The other guys Attorney is hopefully telling his client the same thing, that for this amount of money the court system is economically inefficient. He already got 25% of what was owed.

As for closing out the LLC, the final transaction (house sale) just occured several weeks ago so we are starting the shut down process right now. Keep in mind, the LLC doesn't, and never real had any assets aside from the houses we were building. The last 3 house sales were all at a loss with the final being a $50,000 short sale. There was no cash from the sale to pay off any final debt.

[HHM]

My defense isn't that I'm broke, my defense is I did not personally guarantee the payment of this debt. The LLC is a whole different entity.

My point of saying I am broke is because I am. BK may be one possibility, that is why I am on this forum. I'm trying to figure out the best course of action. This is really the last bit of money owed to anyone, so I don't know if BK makes much sense either. It's kind of like playing poker. The other guys Attorney is hopefully telling his client the same thing, that for this amount of money the court system is economically inefficient. He already got 25% of what was owed.

As for closing out the LLC, the final transaction (house sale) just occured several weeks ago so we are starting the shut down process right now. Keep in mind, the LLC doesn't, and never real had any assets aside from the houses we were building. The last 3 house sales were all at a loss with the final being a $50,000 short sale. There was no cash from the sale to pay off any final debt.

Big picture, you are probably not going to have too big a problem with this debt. The point of my post was to simply inform you that YOU need to take the steps in court to assert that you are not personally liable.

[apsp560]

Thanks HHM, If I do get named personally and the Plaintiff has no proof that I personally guaranteed this debt, is there an easy way to get myself dismissed from the suit?

Could I demand my costs if it was determined that the Plantiff had no justification to include me personally?

[HHM]

Thanks HHM, If I do get named personally and the Plaintiff has no proof that I personally guaranteed this debt, is there an easy way to get myself dismissed from the suit?

Could I demand my costs if it was determined that the Plaintiff had no justification to include me personally?

This is the crappy part of your situation.

1. As to your personal liability, the LLC is your affirmative defense, hence the burden is on YOU to prove that you are not liable in order to get out of the lawsuit.
2. All the plaintiff need do is assert some theory of liability for you personally and create enough of a question of fact to keep the case going (this is a very low burden).
3. As for what you need to do; you would file a Motion to Dismiss the case as to your personally, and generally no, you won't get your fees reimbursed.

Basically, here is how this goes.
-Complaint if filed naming the business and its owners as defendants, and the various parties are served.
-You answer the complaint, and in that Answer, you raise the defense
-Then you file a Motion to Dismiss you personally from the case. That motion will need to be supported by some evidence, probably a sworn affidavit.
-The Plaintiff will respond and they will have to present some evidence to support their theory of your personal liability.
-A hearing is held, and the judge will make a decision.

And generally speaking, you will not be reimbursed for legal fees for these types of inter-case proceedings.