The Bamberger Blog » limited liability companies

Multiple Guarantors of a Single Debt

kjewell — Tue, 08 Mar 2011 13:30:32 +0000

Virtually all business is transacted these days in some form of limited liability entity, such as a corporation or LLC. One of the primary purposes of these entities is to shield the owners of the entity from personal liability for the debts and obligations of the entity. This is particularly useful in the event of business failure or when all of the trade accounts cannot be paid, or in the event of a catastrophic, uninsured personal injury loss or the like. However, as anyone who has tried to do otherwise has learned, the banks providing the financing for these entities (except in very rare circumstances) require personal guaranties from the owners so that they do become personally liable for the bank debt in the event that the entity cannot pay.

One frequent misunderstanding among owners of these entities has to do with the extent of their liability on this guaranteed debt. If an entity has four equal owners, often times those four equal owners will assume that they each are personally liable for one-fourth of the company’s debt. That is usually not the case. Ordinarily, each one of the guarantors is responsible for 100% of the corporate debt. When trouble comes, the bank will sue all of the owners on the debt, but it will collect the debt against whoever is the easiest target. If, therefore, one owner is substantially better off financially than the others, that owner should expect the bank to chase him/her for the entire debt.

In some cases, it may be possible to negotiate with the bank at the time the loan is made to limit the exposure of each of the owners to his ownership percentage of the debt. It is the rare case when the bank will agree to do this, particularly if there are financially strong and financially weak owners, though it is worth talking to the banker about when the loan is made – after default, it is too late to have this discussion.

One footnote. If the guaranteed debt payment falls disproportionately on one or two of the shareholders, law generally allows those shareholders to seek contribution from the other guarantor-shareholders to equalize the burden. If those financially weaker owners have assets, this remedy may be available, but by the time the business goes south, it is frequently too late for this remedy to be effective. The key is for the shareholders to know at the time the guaranties are signed that each is likely going to be responsible for the entire debt. It may be possible for one owner-guarantor to provide some personal security to the others to secure his/her duty to contribute, but the time to know all this is up front, not once the entity has failed.

Author: Frederick R. Folz (bio)
Phone: 812.452.3504
email: ffolz@bamberger.com

Location of Filing Financing Statements for Registered Organization

kjewell — Wed, 03 Mar 2010 14:01:34 +0000

Revised Article 9 makes it clear that financing statements are to be filed at the “location” of the debtor. A debtor’s “location” is dependent upon the type of debtor. One type of debtor is entities that are registered organizations under the laws of a particular state. Examples of registered organizations are corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, and limited partnerships. Generally speaking, partnerships do not have to register with states in order to be formed and therefore are not registered organizations under Revised Article 9.

If the debtor is a registered organization, filing is to be done in the state of registration. This can be different from the principal office of the business. For example, if the borrower has its headquarters in the state of Kentucky but is organized under the laws of the state of Delaware, Delaware is generally the proper location to file. This will require bankers to collect information regarding the state of organi-zation of its borrowers in order to be able to be assured that new financing statements and continuations are filed in the appropriate locations.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Authorized Signators for LLC’s

kjewell — Fri, 28 Aug 2009 15:43:04 +0000

Limited liability companies are no longer a new concept to most in the business world. A document known as the operating agreement sets out the corporate governance for LLC’s. It is generally either set forth that the limited liability company is to be managed by its members, or an individual or company has been designated as a “manager.”

Creditors have become accustomed to looking for these designations for purposes of determining who may sign documents on behalf of the LLC. However, it is becoming more and more common for LLC operating agreements to provide for an LLC to have officers.

This results in individuals sometimes signing as a president, vice-president, or other officer of an LLC. This is acceptable so long as the operating agreement provides for such positions in the LLC. A creditor should still obtain a certificate of resolution, a part of which designates the authorized signator. The creditor should just keep in mind that such signators can be officers, even for an LLC if the operating agreement creates such positions.

Author: Lori Young (bio)
Phone: 812.452.3560
email: lyoung@bamberger.com