Legal Question in Business Law in California

A couple of years ago, my husband started an LLC. He worked with many different investors to raise money. Some of the money raised was in the form of a loan/note. Towards the end of last year when the market went south, new investors that my husband had identified changed their minds and decided not to make the investment. Without this money, there was not enough to keep the struggling business alive. During this same period, some of the notes became due and the company was not able to pay them back. One of the note holders was an officer of the company and decided to tell all the other investors that my husband and I defrauded the company, taking money that did not belong to us. The reason why my name was included is that when we were paid, the checks went into my account, as I too worked for the company and had a salary.

Due to the struggles the company had, sometimes we got paid and sometimes we did not. So the company would pay us back in lump sums. Company expenses were paid via my checking account at times and were paid back to me by the company. All these were recorded as such as were backed up with receipts.

The debt holders are blaming my husband for the fall of the company and now want to sue us for monies due. The problem that we have is that this business devastated our finances and we do not have any money at all. With the loss of jobs for both us, we are now struggling to pay our bills. Our question is that during all these accusations none of the note holders have asked to see the company�s books. On what grounds do they have to sue us and do we stand a chance to fight back? As far as I can tell, we may have not run the most financially stable company, but we were honest with the money that was issued for our salaries.

Please help�.they are in the midst of bullying me right now and I want to know what my recourse is before I move on any negotiations with them. I have done nothing wrong and feel that they are angry that they lost their money and will do whatever it takes to get it back. They know we have no money at this point to fight back.


Asked on 9/30/09, 2:14 pm

1 Answer from Attorneys
Cathy Cowin Law Offices of Cathy Cowin

You've asked what grounds the investors have to sue you and what chance you have to fight back; however, you have answered your own question: they have threatened to sue for fraud but you have dealt with them honestly and can defend on that ground. They are likely to request a court accounting and may try to get alter ego liability (i.e. be able to sue you personally despite the LLC protection and will use the fact that you "co-mingled" funds in your personal account as a fact against you). The bottom line here is that a lawsuit can be filed against someone that did nothing wrong and, yes, it is expensive to defend. An attorney can help you evaluate what your best defensive strategy is at this point. Should the LLC be placed into a bankruptcy? (Probably yes, but I can't make a recommendation based solely on this post) Should you push for mediation? (Again, probably yes because this is a less expensive means to a resolution. The BBB often provides mediators for free; however, if a lawsuit is unavoidable, you may be best off to have an attorney representing you earlier rather than later). Should you hire an attorney and what kind? (Whether you truly don't have money to hire counsel probably depends on what personal assets you have that you may be protecting. Also, there is a question of whether you need business and/or bankruptcy counsel) As the opposing parties seem to be very aggressive and angry, it would be in your best interest to get an attorney between you and them as soon as possible to control communications and hopefully de-escalate the situation as quickly as possible.

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Answered on 10/01/09, 1:21 pm


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