Stay of Lawsuits & Other Questions

[dvg]

Sorry for the lengthy post..

I guess I would now be considered a creditor so I'm on the other side of the fence compared to most readers of this forum. So I hope this post is ok..

I filed a lawsuit against a former business partner 2 weeks ago for "Negligent Management of Partnership Property", "Defendant's commitment of wrongful acts", "Defendant's Breach of Trust", "Defendant's Breach of Duty to Partner", and "Right to an Account".

We have not received judgment yet, but have received notice the former partner is claiming Chapter 7 and is listing us as a creditor. I've had a lawyer working on this for me for some time now, but had a few questions.

Some background. Around 4 years ago I helped finance the start of a company (LLC) and gave a sum of money to the partner as a seed to open the retail store in exchange for 1/3 partnership. (There were a total of 3 partners) Throughout the 4 years, I have repeatedly attempted to receive a copy of the company financial's which have been ignored. (Only received the schedule K with out any financial's backing the numbers; also no Schedule K was provided for last year)

After having enough of trying to handle this amicably I hired an attorney to go the litigious route early last year. A little while after my attorney pressed for the information I get a certified letter from the state stating the company has not remitted its Sales and Use tax for all prior years. The partner filed the paperwork but never remitted payment. Upon getting this letter, I asked the partner what it was about to which they said it was an accounting error at the state and she would fix the error with them and I shouldn't worry. Few months go by and I receive another letter from the State regarding the taxes which she replies they must have made another mistake and she talked to them and would fax over the statement from the state in 2 weeks after it is processed.

Fast forward to last fall, we continually attempt to get a copy of the company financials through the accountant, which he stated the only assets the company had were around 25k in inventory. At the end of the month without warning the partner closes the business and states there was no money left. Note, throughout the 4 years I never received any payment from the company. So I was just out the initial investment which my lawyer says it was "buyer beware" and its not likely to get back.

Fast forward to February 1st this year. All of my bank accounts are levied by the state in a collections attempt against the company as they are now holding all partners personably liable for the 40k debt. Note that as of today I am still the only partner the State successfully levied money against..

I finally filed suit against the partner 2 weeks ago and recently received the Notice of Chapter 7 Meeting of Creditors & Deadlines today (Form B9A). I have since downloaded all forms etc from PACER regarding their case. Does my lawsuit need to be filed for an objection even though it has not received judgement yet? Will the courts automatically stay the lawsuit until the bankruptcy is over? I know there is another lawsuit that will be objecting as well based on the consumer fraud act. (The partner took 42k from a family and did not provide the contracted service according to the lawsuit linked in PACER)

I just wanted to make sure we are doing everything we should be to try to clear my name. Anyone have any tips/insight?

[PoorGrammyinBK7]

You sound like us as the third partner of an LLC. The one who did all the damage skipped town, along with another partner who filed BK. Wish we could have sued the guy who did this to us but didn't have the kind of money to fund that kind of suit - so guess where we are now...

[dvg]

Yes I am/was the 3rd partner in an LLC. It consisted of myself, another "silent" partner and my now ex-sister in law who was the "managing partner". As you can probably tell I continually received grief from the family anytime I attempted to put pressure on her which is why it went on so long. I also had a full time job in IT with demanding hours that did not allow me to do anything for the business. Unfortunately for me she has not been an honest person and now I'm feeling the hurt of her actions. I was ok with just losing the investment, (hurt but ok), but adding of the tax revenue liabilities which she basically "stole" from the state by collecting and not remitting has been the "last straw". Not to mention what she stole from customers. I have no intention of dropping anything and will be persuing her in any legal way I can until my name is cleared. Hence my post here, I figured someone here would be able to offer any comments/advice.

Are there any limits to the questions that can be asked at the 341 meeting? For example, Could I question where the 25k in company assets went, or where the tax payments went and she'd have to answer under oath?

[keepmine]

A bk filing halts all collection activity until the bk is sorted out. Ypu can ask whatever you like at the 341-at least until the trustee says enough.While you have the right to appear at the 341 meeting and ask your questions-you lose no rights by not doing so. Creditors have 60 days from the 341 to file written objections and request an adverserial proceeding. Since you have a lawyer, I'd get his opinion as to the best course of action.

[momof5]

Creditors have 60 days from the 341 to file written objections and request an adverserial proceeding. Since you have a lawyer, I'd get his opinion as to the best course of action.

Doesnt a creditor have to prove that there is legit reason to believe there was intent to fraud at the time any money was handled before the Trustee moves it to the next step?

[keepmine]

Doesnt a creditor have to prove that there is legit reason to believe there was intent to fraud at the time any money was handled before the Trustee moves it to the next step?

Nope. All the creditor has to do is pay the filing fee and file the motion. The proof comes during the proceeding itself.

[FreshLikeADaisy]

DVG, I'm really sorry that happened -- it sounds horrible.

Keeping in mind that I am not an atty, there was something that occurred to me as I read your post. Basically, all unsecured, dischargeable debt will be discharged in this Ch7. However, taxes are not dischargeable debt: they do survive bk and are pretty much completely untouched by Ch7. And it sounds like the biggest pain that you have is this seizure/levy action based on unpaid taxes.

It seems to me that what you may want to do is consult a TAX attorney. The reason I say this is because you are legally liable for those unpaid taxes, as you know, BUT you may be able to appeal and force the state to go after the partners for unpaid taxes, since you can prove that 1) you did not have anything to do with the financial mgmt of the company on a day-to-day basis; 2) you did due diligence when you learned that taxes were going unpaid; and 3) there was fraudulent intent on the part of your other partners in the business.

Any creditor is going to go after the lowest hanging fruit: my guess is that you are the only stable partner whose assets they could quickly locate, and this is why you are the only one to have been levied. However, that is NOT the end of the story!!! You can deal directly with the state and/or IRS and not have to worry with your partners' Ch7, if the majority of your problem is with unpaid taxes. You can still file a claim (the forms you downloaded) and I would strongly suggest you do so, but before you get caught up in a potentially costly adversarial action in their bk, try to find the very best tax atty you can (word of mouth, or look at the ratings on martindale.com, but stay away from the yellow pages and midnight tv attys!) and see if you can approach it from that direction.

As you noted, you're already out your initial investment, and there's not a lot you can do about that. But this tax debt, man that'll chase you forever. Deal with that directly, if at all possible.

My opinion, anyhow. Good luck to you!!!

[dvg]

Thanks for everyones response. Currently my only problems are the unpaid Sales and Use tax.
Yes I was the "low hanging" fruit from the partners, and am currently the only one they levied. I've been in discussions with the state pretty much weekly and have the ability to file for an abatement which will reduce the liabilities and put myself on a payment plan. Which is my likely future course of action.

The state at this time is holding off collection activities on myself for now as I have been cooperating with them and am in constant communication with them for status updates, etc... They said they would pursue levies on the other 2 partners whose names were on the business prior to coming after me again. 40k debt, with around 12k principle (The rest is interest/penalties) of which they levied almost 7k from me. So the abatement amount for the payment plans would likely have around 5k to pay off over 3 years or approx 140/month if my calculations are correct.

But, I was planning on waiting until the other partners are levied in hopes they come up with the remaining amount and I am no longer the only partner with a suit against her. Right now the other partners are incorrectly assuming they aren't personally liable for the debt as no actions have been taken on them yet.