LLC business loan question

[Sw3tflower]

California
When the owners take out a business loan for their near bankrupt LLC, is the owner's spouse (who has no interest in the LLC) required to sign a personal income/asset document that lists community property (our house in particular)?
What are the consequences?
Thank you

 

[tranquility]

Banks rarely loan LLC's money without a personal guarantee from the owner. This is so there are more assets to go after in case of a default.

If the LLC is community property, while the bank would prefer both spouses sign a guarantee it probably wouldn't make that much difference (except for a possible argument in court later on) if only one signed. If the LLC is separate property, the personal guarantee of the owner when the spouse does not make the same guarantee is problematic. I would have to look up case law to see if the community is entirely liable for the loan repayment as well. In the end, it would not make much difference as the bank would try to collect the from the entire community and it would cost a great deal in legal costs to work out the amount of the community assets which are at risk.

Info edit:
I thought your name looked familiar. I just looked up past posts. Here is the bottom line, your husband can screw up the community's finances enough for you to lose your house. It is not going to require you to sign anything. It is not going to require you to agree to anything. He can do it all on his own. You will not be able to do anything to stop that from happening while you are still married.

 

[JETX]

When the owners take out a business loan for their near bankrupt LLC, is the owner's spouse (who has no interest in the LLC) required to sign a personal income/asset document that lists community property (our house in particular)?

Depends entirely on the lenders requirements but it would be very common to do so. It is very common for a lender to require personal guarantors for a loan to any business, especially one with little or bad credit.

What are the consequences?

The consequences are if the signers breach their repayment agreement, the lender has the legal right to pursue their losses against the guarantors (co-signers).

 

[Sw3tflower]

Darn

I am NOT listed on the LLC and it is not community property, or so I was told.
I refused to sign the 'spousal' document stating I understood and agreed that any and all of my personal assets and community assets, once invested into the LLC, were no longer mine and I had no claim over them.
I was told all LLC finances were separate from personal finances and did not want any of my assets used.
I counted on Calif being a community property state with half of everything being mine unless I said otherwise. Obviously I was wrong.
So, divorce is the only answer??? And I am probably too late for that to make a difference now.
I have no guts....I am too scared to leave.
Thanks for the info. I really do appreciate it.

 

[tranquility]

The debts of the LLC (separate property) are the debts of the LLC and the creditors must stop there. The debts guaranteed by a person in the marriage during the marriage has the general rule that community property is liable for all debts of a spouse. The thing I don't know is what happens when the spouse is guaranteeing the debts used for his separate property.

If we follow the general rule, the community is liable. But, this seems different. In equity, we would argue the debt is really separate property debt and the LLC is liable. But what of the guarantee? Can it only be used against the separate property of the guarantor? Or, can it also be used against the guarantor's share of the community property? I don't know the answer without searching case law and I can't do that without developing the facts. Things like what the exact wording of the guarantee is and many other factors which are not within our ability on the forum.

My point was, that even if the bank in default could not take the guarantee after all the money in the community, they are going to try. They are going to include everyone and everything they can into the lawsuit to collect. The accountant preparing the tax returns, the taxi driver who brought the husband to the bank--everyone and everything. The cost to defend this will be great as the law is not clearly in your favor, you will have to make an argument in equity which will be very fact based. Your attorney will charge a lot for this argument. Also, the bank will probably have a clause which will charge the loser of any suit to enforce the loan the legal costs of the winner. There is no way the community can split and pay the husband's share of the costs and yet maintain the house. (And, that's if the argument flys!)

You need to discuss with your husband why he thinks this time the money is going to make a difference. If you believe him, go for it and both should work your tails off to make it happen. If not, decide what you want to do. Clearly he is protecting himself by trying to keep all the benefits from the LLC with you taking 1/2 of the risks. There is nothing you can do to protect your portion of the community assets without a separation or divorce. How you deal with that situaion depends on your values, hopes, relationship and other factors regarding your future with your husband.

 

[divgradcurl]

Community property can always be used to satisfy the separate property debts of one of the members of the community. If the debt is a community debt, that means that the seperate property of each member of the community can also be used to satisfy the community debt; however, if the debt is a separate debt, then the member who "owns" the debt that person's separate property can also be used to satisfy the community debt, but the "other" party's separate property is protected.

 

[JETX]

The debts of the LLC (separate property) are the debts of the LLC and the creditors must stop there.

And of course that is NOT correct... as exampled here.
Any responsible lender, upon application by a low- or no-credit LLC (or any other business or person) is going to ask for a co-signer. In the case of a business, they are looking for a personal guarantor.
That is what is happening in this case.... the lender is looking for a member (or members) of the LLC to guarantee repayment. Since this is in California, the spouse is also liable independently (due to community property laws), it is very common for the lender to require the spouse signature also... to minimize the legal issues of pursuit against the spouse on default of the loan.

 

[tranquility]

JetX wrote in regards to, "The debts of the LLC (separate property) are the debts of the LLC and the creditors must stop there."

And of course that is NOT correct... as exampled here.

Actually, my statement is correct. It is the guarantee of the person, which is usually had in such situation but is not in the facts, which *may* change things. While Section 910 of the Family Code certainly makes it seem as though the debts of a party in the community has the community liable, the facts are more suspect. The husband is getting a loan for a separate property LLC. He, as we all assume and have written about, will give a personal guarantee for the money. That guarantee gives no benefit to the community. The only real asset (from other thread) is the house they live in. The house started as separate property, but the community probably has a substantial interest in it at this time. The house is solely in the name of the wife who is not going to sign the guarantee.

But, let's look at Family Code Section 910:

910. (a) Except as otherwise expressly provided by statute, the
community estate is liable for a debt incurred by either spouse
before or during marriage, regardless of which spouse has the
management and control of the property and regardless of whether one
or both spouses are parties to the debt or to a judgment for the
debt.

Seems clear, but if we review a different statute, Family Code Section 1100 (c)

A spouse may not sell, convey, or encumber community personal
property used as the family dwelling, or the furniture, furnishings,
or fittings of the home, or the clothing or wearing apparel of the
other spouse or minor children which is community personal property,
without the written consent of the other spouse.

If we look at some older cases, ones before the law change to section 910 in 1985, we would find the main consideration to be management and control of the property to be the property within the reach of creditors. Since, in 1975, the law changed to where both spouses had management and control of community property, this meant that *generally* the debts of one spouse were now reachable by creditors to the community. However, that law change included the statement by the legislature, "the liability of community property for the debts of the spouses has been co-extensive with the right to manage and control community property and should remain so * * *". The OP is the sole person on title of the only real asset which is partially owned by the community, the family residence, giving her custody and control of the asset.

So, while we would still have to slog uphill, the facts in this case are such that it very well may not be true that the bank can reach all of the community's assets in case of default. Of course, that's if we go beyond reading the statute and try to understand the law.

 

[Sw3tflower]

Reply

It was indeed Family Code Section 1100c I had counted on.
After 25 years of marriage, the house is undoubtedly considered community property.
A business loan is not going to change the financial situation, the LLC needs a change in how it is run and he's not going to change.
It appears to be a 'lose, lose' situation at this point.
Attorneys are expensive but well worth the price...if only I hadn't waited so long to assert myself and protect my financial future.
I can see you earn your money! Law is (or can become, as in my case) so complicated.

 

[JETX]

The husband is getting a loan for a separate property LLC. He, as we all assume and have written about, will give a personal guarantee for the money. That guarantee gives no benefit to the community.

And see.... here is where I would argue that the 'community' does get benefit from the LLC... in the distribution and/or 'paycheck' from the LLC to the spouse goes to the benefit OF the community. Wanna bet that my argument would win in court??

 

[tranquility]

A "paycheck" is compensation for the work of a person. "Paychecks" come no matter how well the business is doing until the paycheck no longer comes. Work done at the LLC gives a benefit from the community. However, the LLC is separate property. Any profit of the LLC belongs to the owner of the LLC as separate property.

I haven't looked up the case law yet. I don't think there is enough time for LLC's to be in appellate law much, but closely-held S-corps would be. I'll take your bet. Define the question and let's choose an amount and charity to pay off to.

 

[Sw3tflower]

Meeting with LLC Attorney


I am meeting with my husband, his LLC partner and their LLC attorney next week.
With everyone so up-to-date on LLC and personal, community property.....as the spouse I need your advice.
What questions should I ask?
What documents should I request to see?
Is there something in particular I need to be aware of (like what happens upon death or termination of LLC)?
Any legal 'language' I need to be cautious of?
Thanks for any advice you can give me. I want to be prepared and not leave the meeting with a false sense of well being....