Geting sued by creditor of my defunct LLC...Am I Liable?

[considering7]

I owned an LLC that went out of business in late 2010.The business had some debt that I personally guaranteed. To get out from the debt load, I filed Chapter 7 and was discharged in 2011. After the discharge I I dissolved the LLC with the state in late 2011.

This week I received noticed that a Civil Complaint was filed in court against my now defunct LLC by a creditor (Credit Card company) looking to recover the outstanding balance.

Has anyone had any experience with a lawsuit against your defunct LLC? Do I ignore it, let them get a default judgement? I figure the default judgement is worthless to them anyway since the LLC doesn't exist and has no assets for them to collect on. And the Chapter 7 protects me from the creditor trying to get at my assets.

Thanks for any advice!

[lillymarlene]

Was this debt listed in your bankruptcy? I could be wrong, but if the debt was on your matrix, I don't see how the creditor could collect on it.

[HHM]

A couple issues.

1. You are not liable for the "personal guarantee," that debt was discharged in your bankruptcy (assuming you listed it).
2. Even a dissolved company can be sued for events that occurred while it existed.
3. If the dissolution was handled improperly, YES, you could be personally liable under what is called "a trustee in assets of the company."

Once a company entity becomes insolvent, the owners or other responsible parties have a fiduciary duty to that companies creditors. So, if you dissolve a company, you must liquidate the assets, pay priority expenses, and pay creditors. So, hypothetically, let's say the business had $10,000 of assets. If all you did was dissolve the company, and simply took possession of those assets, then you could be personal liable, to the extent of the value of those assets, since you did not "buy" those assets from the company and pay the proceeds to company creditors. You absconded with the assets.

So, the credit card company can, and probably will, get a judgment against the LLC. It is unlikely they will take it much further. Generally, only local creditors or trade related creditors (vendors, suppliers) try to go after all possible avenues of collection.

[SWConsultant]

This is great information HHM and completely correct. However there are other factors that should be considered when determining how to respond to this situation.

In my experience working with clients of failed businesses, simply sending the articles of dissolution to the creditor will be enough to stop the action. There are very few creditors (especially credit card companies) who are willing to pursue a defunct entity simply because the judgement they obtain has no immediate value to them. A defunct LLC is not likely to have any remaining assets which means that now the creditor has to prove that you did not properly dissolve the entity - this is often a difficult process to complete. Even if they get that far, they would then need to challenge the transactions of how the assets of the entity were removed from the defunct entity, and in the end they get a judgement against the owner for the specific challenged transaction... Its a lot of legal work with often very few results.

There are however factors to consider:
1. the size of the credit card debt - a $100,000 debt will obviously be handled with more vigor than a $5,000 debt
2. was the llc dissolved appropriately - how were the remaining assets handled and where did the cash go?
3. were there any priority debts that the entity owed
4. are you personally a judgment proof debtor

I have had clients with defunct LLCs and corporations be collected upon by organizations as large and aggressive as the Small Business Administration and the Department of Treasury due to outstanding commercial debts and guarantees. Even with creditor of this magnitude, when they are shown the llc no longer exists and has been dissolved, the legal action stops. If it does persist, it normally stops once the creditor receives a judgement against the defunct llc.... I have never seen a creditor take it any further