Legal Question in Business Law in California

Re: If you owe a debt can your business account be frozen

You do not state whether your company is a sole proprietorship doing business as xyz company or a corporation, LLC, or LLP.

California has a single form of action rule which allows the lender on a home to go after either the property or the owner, but not both, as a rule. If your mortgage is greater than the value of your home, the bank may choose to go after you as an individual if you have substantial assets. You may also be able to protect some of your personal assets by putting them in a revocable trust .

If you are a sole proprietor, even though you have a separate EIN, the bank could potentially go after your business assets eventually. If you have a corporation or LLC the bank would have to "pierce the corporate veil" by showing that you and your company are pretty much one and the same entity. They do this through a lawsuit which has to show that you are not following corporate or LLC formalities, are commingling business and personal assets, etc.

You may want to think about setting your business up as a corporation or LLC to avoid this possibility, or setting up a revocable trust. I do free consultations up to 1/2 hour to determine whether either of these would be a good fit for you and your business. If you proceed, I give Nolo clients a substantial discount.

If this is just a temporary situation, talk to your lender and see if they can add your delinquent payments on to the principal of your loan and either refinance you or do a loan modification.

Good luck.

Re: If you owe a debt can your business account be frozen

Banks do have a lien on customer deposits for money owed the bank from that customer in the course of business. Civil Code section 3054(a). The bank also has a right to offset. This is why it is rather important to know whether your business is a sole proprietorship or a separate entity such as an LLC or corporation. The bank cannot set off money owned it by John Doe with funds taken from the account of John Doe & Co., Inc.

Further, the "one form of action rule" mentioned by Ms. Lewellen (found at Code of Civil Procedure section 726) prevents a real-property lender from doing any of the following:

(1) using more than one judicial action to enforce the obligation;

(2) enforcing a secured obligation by an action other than a judicial foreclosure action; or

(3) recovering first from assets other than those secured by the deed of trust or mortgage. (There is no option, contrary to Ms. Lewellen's statement, for the creditor to choose to go after the property or the owner).

If the bank were to set off your account(s) against the loan obligation, it would NOT violate either (1) or (2), because exercise of a right to set off is NOT an "action" in that one doesn't have to go to court to enforce it. However, the bank would be violating the prohibtion (3) against recovering from assets other than the property securing the mortgage - the so-called "security-first rule."

If the bank does set off, you have substantial (although complicated) rights which may include a sanction preventing the bank from collecting any more from you. Most banks will not succumb to the temptation to set off, but it could and does happen.

OK, here's what I would NOT do. Don't try to hide your money or put it in a revocable trust. Revocable trusts are useless; they are fully attackable by creditors. Also, transferring your money to an irrevocable, offshore or secret trust, or giving it to family, won't work, either. These are fraudulent transfers (Civil Code sections 3439 to 3439.12) and if you get busted both you and the transferee will be in hot soup.