Business Chapter 11 and personal liability of principals

[publius]

What is the name of your state (only U.S. law)? CA

Two individuals are the members of a LLC which operates a business. The individuals take out loans for the business, but the loans are in their individual names (the LLC is not mentioned anywhere in the notes or deeds of trust) and are secured by deeds of trust on their homes rather than the business property. Payments on the loans are made by personal check. The individuals stop making payments and the LLC files for Chapter 11 bankruptcy.

Does the Chapter 11 filing have any impact on efforts to collect on the loans? Are the loans covered by the automatic stay because they were made for the benefit of the business?

 

[book_daddy]

What is the name of your state (only U.S. law)? CA

Two individuals are the members of a LLC which operates a business. The individuals take out loans for the business, but the loans are in their individual names (the LLC is not mentioned anywhere in the notes or deeds of trust) and are secured by deeds of trust on their homes rather than the business property. Payments on the loans are made by personal check. The individuals stop making payments and the LLC files for Chapter 11 bankruptcy.

Does the Chapter 11 filing have any impact on efforts to collect on the loans? Are the loans covered by the automatic stay because they were made Wan LLC files for bankruptcy any individuals such as you refer to that operate or own the LLC are not directly affected as you are concerned. It will not put a stay on their defaulted personal loans. That's pretty much the whole reason to form an LLC. So you can do business in the LLC's name and not have to worry about losing your home if the company fails.

If the loans were for the benefit of the business they should have been aqcuired correctly as different rules apply to different types of loans. I'm guessing they were not done as business loans so you might actually get yourself in a bigger hole if you decide to inform your bank that personal loans were made with the intent of using them for business investment and now your business is failing and in bankruptcy so you can't pay those loans. The increased likelyhood of this in business is exactly why different rules apply to business loans then do to personal loans. Your desire to circumvent loan rules and fees may now stick you with the debt for those loans even though you filed for bankruptcy protection. Personal bankruptcy may now also be in your future.

 

[publius]

If the loans were for the benefit of the business they should have been aqcuired correctly as different rules apply to different types of loans. I'm guessing they were not done as business loans so you might actually get yourself in a bigger hole if you decide to inform your bank that personal loans were made with the intent of using them for business investment and now your business is failing and in bankruptcy so you can't pay those loans. The increased likelyhood of this in business is exactly why different rules apply to business loans then do to personal loans. Your desire to circumvent loan rules and fees may now stick you with the debt for those loans even though you filed for bankruptcy protection. Personal bankruptcy may now also be in your future.

The loans were acquired to use for business purposes and the lender knew about it. A larger loan on the business property was taken out at the same time (same loan broker, different source of funds) with the individuals as guarantors. The smaller loans, instead of going the guarantor route, were just made directly to the individuals rather than to the business, and only the individuals are named on the loan docs. I'm trying to find out whether the fact that the lender knew from the beginning of the deal that the loans were being obtained for a business purpose means that they count as a business debt (at least to the extent that attempting to collect on them from the individuals violates the automatic stay in the LLC's Chapter 11), or whether the names on the notes and trust deeds absolutely controls for stay purposes.

 

[book_daddy]

The loans were acquired to use for business purposes and the lender knew about it. A larger loan on the business property was taken out at the same time (same loan broker, different source of funds) with the individuals as guarantors. The smaller loans, instead of going the guarantor route, were just made directly to the individuals rather than to the business, and only the individuals are named on the loan docs. I'm trying to find out whether the fact that the lender knew from the beginning of the deal that the loans were being obtained for a business purpose means that they count as a business debt (at least to the extent that attempting to collect on them from the individuals violates the automatic stay in the LLC's Chapter 11), or whether the names on the notes and trust deeds absolutely controls for stay purposes.

That is a bit more of a grey area that you will need to consult a lawyer on. From my limited understanding of corporate bankruptcy law I believe the name on the loan is what absolutely controls the loan as far as any Stay Order is concerned. I think this would be viewed as the individuals taking a loan that they decided to invest in to a business, something you could do wether you owned that business or not and therefore wether you were involved in the business bankruptcy as either a creditor or a debtor. That's my interpretation of standard law. You could always file a motion with the court to include these in the stay order and maybe the judge will view it your way.

A lawyer would be very helpful as this is not a very standard issue.

 

[megabux]

Depending on what you can show, you've possibly put yourself in the position of a creditor of the LLC. Hope you can collect.