Does forfeited LLC needs to file bankruptcy if its seeking to avoid the law suit?

[Texan1021]

We had a small single owner LLC in Texas. A company in another state filed a lawsuit in federal court Dec 2016. LLC was inactive from June 2016 and taxes were paid in 2017 but it was forfeited in Dec 2017. We could fight the case since their case is not strong but I have no activity or revenues in this LLC for last 3 years. Now the court is telling us that they could win a default judgement. Should I have filed a bankruptcy (7 or 11) to make sure that they don't win a judgement and try to file a case against me personally? The company has very little debt, not revenues and no assets since January 2016.

 

[quincy]

What is the reason for the lawsuit?

 

[Texan1021]

Lawsuit was made because of a purchase order that we consider invalid because of they changed the terms and did not sign it. But they claimed that they made the product and we canceled the contract. We had issue with their product and it did not meet specs. A long story. We have no valid contract and warranty issues so we can win but it will cost me too much. This company was closed later.

 

[quincy]

Lawsuit was made because of a purchase order that we consider invalid because of they changed the terms and did not sign it. But they claimed that they made the product and we canceled the contract. We had issue with their product and it did not meet specs. A long story. We have no valid contract and warranty issues so we can win but it will cost me too much. This company was closed later.

IF your LLC was dissolved properly, and IF your LLC was properly set up and operated to protect your personal assets from a suit filed against your LLC, and IF your LLC has no assets (undistributed or distributed), you might not have to consider bankruptcy at all. Any judgment awarded against your dissolved LLC will be uncollectable.

You will want all facts personally reviewed by an attorney in your area to determine if allowing the company to get a default judgment is a wise course of action. Usually it isn't - but it might not be a problem for you given the facts you present here.

We have a bankruptcy attorney who contributes to this forum who can add additional information. And I definitely recommend a personal review by an attorney in your area to make sure your personal assets are not at risk.

 

[Taxing Matters]

They must be asserting damages exceeding $75,000 because that's the only way a contract dispute would be filed in federal court. For that kind of money at stake you definitely want to consult an attorney in your state familiar with both litigation in federal court and your state's laws regarding piercing the corporate veil to determine your risk that the plaintiffs might be able to proceed against you personally. Note that for your LLC to defend against the action it would have to be revived.

 

[quincy]

The LLC should have set aside any of its assets to cover debts and the lawsuit that was filed prior to the LLC's dissolution - if the LLC actually had the money/assets to do so.

If the plaintiff company is successful in their suit against the LLC or gets a default judgment, the company can seek to satisfy the judgment by suing Texas1021 for any amounts distributed by the LLC to him.

Bankruptcy is always an option but, again, it might not be necessary. The attorney he sees can advise him.

Texas1021, you can look for a post by despritfreya, a bankruptcy attorney who contributes to this forum.

 

[despritfreya]

Generally, if a corporation (LLC) is going to file bk it will be a Chapter 11. Chapter 7 is typically a waste of time and money since the entity will not get a discharge. Chapter 11 is used if the entity wishes to remain in operation and reorganize.

IMHO Texas1021 needs to determine if he/she has any personal liability for the debt/default judgment. If there is personal exposure then maybe a personal bk will be needed. If liability is only with the entity and the entity is dead then maybe nothing needs to be done (who cares if a dead person is being sued). Regardless, OP needs to consult with a local attny.

Des.

 

[Texan1021]

Thank you all for some valuable feedback. One reason for not wanting to file a bankruptcy is that I also have a lawsuit against an international customer. This is potentially much larger value (10x of lawsuit against me) that will be worth fighting and keeping. I guess its not confirmed that not doing anything and forfeiting the LLC is sufficient to protect other assets and potential gains from my lawsuit. I will have an attorney review all the details and decide. Once again, thanks for everyone's input.

 

[despritfreya]

One reason for not wanting to file a bankruptcy is that I also have a lawsuit against an international customer. . . I guess its not confirmed that not doing anything and forfeiting the LLC is sufficient to protect other assets. . .

If, by "I also have a lawsuit against an international customer" you really mean that "the LLC has a lawsuit against an international customer" it is "confirmed" that doing nothing to defend the pending suit against the LLC is a problem. The entity has an asset. A creditor of the entity that obtains a judgment against the entity can take steps under state law to garnish/seize/levy entity assets in an effort to satisfy the judgment.

Has the LLC already filed suit against the international customer? Has the international customer been properly served under the appropriate Treaty?

Des.

 

[Texan1021]

Yes, the international customer has been served and now the case has been assigned a judge but the process is very slow. Having a judgement against my old LLC is not good. I am looking for a way to have the case dropped because the LLC is forfeited or under bankruptcy. I could fight the domestic case or settle it if I win the international case. However, these international cases because of the country could take forever and its only 50/50 that something may come out. The cost of fighting this international case on contingency is very small but the cost of fighting a nonsense case in another state against the supplier in US is very high. That's why I need to do something on this dead LLC. I was always under the impression that since the LLC is inactive for 3 years and I forfeited last year, there could not be a judgement but now I have a notice that they will pass a default judgement.

 

[RichardDolan]

Interesting info,thanks

 

[justalayman]

Yes, the international customer has been served and now the case has been assigned a judge but the process is very slow. Having a judgement against my old LLC is not good. I am looking for a way to have the case dropped because the LLC is forfeited or under bankruptcy. I could fight the domestic case or settle it if I win the international case. However, these international cases because of the country could take forever and its only 50/50 that something may come out. The cost of fighting this international case on contingency is very small but the cost of fighting a nonsense case in another state against the supplier in US is very high. That's why I need to do something on this dead LLC. I was always under the impression that since the LLC is inactive for 3 years and I forfeited last year, there could not be a judgement but now I have a notice that they will pass a default judgement.

Who is the plaintiff on this larger suit? You have not provided that info. If it is the old LLC (is there a new LLC and if so, how are they the plaintiffs ina suit that originated under the old LLC?), then how do you propose chasing the one suit while trying to ignore the smaller suit.

It’s stsrting to sound like you are trying to scam the entity suing you while chasing this larger suit. As is often said; you can’t have it both ways. Either the old LLC can participate in legal actions or it can’t. If the LLC files bankruptcy, the suit against the foreign entity will be considered when the trustee determines the resolution of the Bk case.


Your understanding of the dormancy of the LLC as being a protection is wrong. Dormant is dormant. It is not disssolved. If dormant, It can often be revived and in some states it’s as simple as paying some money and updating information. Only a fully dissolved llc is safe as it is, well, dissolved.

 

[Texan1021]

No, its not like this. LLC is the plaintiff in the international case but the case was filed a year before LLC was dragged into a case that is based on a void contract. I am pretty sure that we can win the domestic case. There is no new LLC. I am a part of corporation with other partners now but its still a startup. Fully dissolved is an option but I am being told that dissolving a LLC means that you individually can be liable since this is 100% owned LLC. If plaintiff in domestic case can still pursue the case against a dissolved LLC and get the judgement then it won't be a good option! I have no problem if I have to show the international case as an asset during bankruptcy because its not worth anything right now and cost of fighting the case is minimal. I just don't have resources and time to fight the domestic case and plaintiff has not shown me any proof on my offer to settle. I don't know why they believe that the LLC has bunch of assets and when bankruptcy shows them no assets or recovery, it would be different. I just don't know how to achieve the same result without filing the bankruptcy! I have had the LLC inactive, forfeited and closed for 3 years now but they keep pushing their case for last 2 years and now judge is threatening to give a default judgement if we don't have representation.

 

[justalayman]

You say it’s a void contract. Part of your problem is you do not get to determine if it is a void contact. That is a legal conclusion that requires a court to make.


As to LLC assets; apparently you believe it is possible it may due over $750,000.

I don’t see an issue with them continuing the suit if only for the action of drawing their claim to a legal conclusion before the statute of limitations expires.


And you still show your intent to claim the LLC is no longer a legal entity yet you wish to continue to pursue the larger suit where your LLC is plaintiff. Life doesn’t work like that.

Fully dissolved is an option but I am being told that dissolving a LLC means that you individually can be liable since this is 100% owned LLC. ]/QUOTE]

An LLC affords it’s members protections from liability IF the members didn’t screw up and pierce the corporate veil. That is what would allow you to be held personally liable. That is also why you need an attorney to review the facts of the matter.


You realize that if you dissolve the LLC, it can no longer pursue the international suit, right!