My Business Was Sued by a Lender. Why Are They Also Suing Me Personally?
When a lender sues a business, many business owners are surprised to discover that they are also being sued personally. This article explains why lenders may pursue both a business and its owner, including the role of personal guarantees, guaranties of performance, and other provisions contained in financing agreements. It also explains why being named personally does not necessarily mean the lender will prevail and highlights the importance of reviewing the financing documents, understanding the claims being made, and responding to the lawsuit within the required deadlines.
By Thomas Tramaglini, Chief Operations Officer
Finding out that your business has been sued by a lender is stressful enough. But many business owners are surprised when they discover that they are also named personally in the lawsuit.
If you signed financing documents for your business, there are several reasons why a lender may pursue both the company and its owner. Understanding the difference between your business's obligations and your personal obligations is an important first step in determining how to respond.
Your Business May Not Be the Only Party Responsible for the Debt
When a business obtains financing, the agreement may include more than just the business's promise to repay. Depending on the type of financing, the lender may require the owner to sign a personal guarantee or personal guaranty.
A personal guaranty generally means that the individual signing it may become personally responsible for certain obligations of the business if the business defaults.
For example, a financing agreement might identify:
The business as the borrower or funding recipient
The owner as a personal guarantor
The lender or funding company as the creditor
Additional individuals or entities as guarantors or obligors
If the business stops making payments, the lender may claim that both the company and the individual guarantor are responsible for the amount allegedly owed.
What Is a Personal Guarantee?
A personal guarantee is a contractual promise made by an individual concerning the obligations of another party, such as a corporation or LLC.
Business owners sometimes assume that forming an LLC or corporation automatically protects them from personal liability. While a properly structured business entity can provide important liability protection, that protection does not necessarily prevent an owner from voluntarily assuming personal liability through a contract.
If you personally guaranteed the financing, the lender may argue that the company's limited-liability status does not prevent the lender from pursuing you under the guaranty.
The exact language of the agreement matters.
Why Would a Lender Sue Both the Business and the Owner?
There are several common reasons.
1. You signed a personal guaranty
This is one of the most common explanations.
If you signed a personal guaranty, the lender may allege that you agreed to be personally responsible for some or all of the company's obligations if certain events occurred.
The lender may therefore name both the business and the guarantor in the lawsuit.
2. The lender claims the business defaulted
The lawsuit may allege that the business failed to comply with the financing agreement.
Depending on the contract, a default could involve:
Missed payments
Insufficient funds
Breach of financial obligations
Closure of the business
Bankruptcy or insolvency
Violation of representations or covenants
Other events specifically identified in the agreement
Whether a particular event actually constitutes a default is a legal question that depends on the contract and the circumstances.
3. The lender is seeking to enforce the guaranty
The lender may be making two related claims: one against the business under the primary agreement and another against you under the guaranty.
That distinction can be important.
The fact that the business allegedly owes money does not automatically establish that the individual owner owes the same amount personally. The lender generally must establish the basis for the individual's liability under the applicable agreement and law.
4. The agreement may contain additional personal obligations
Not every provision signed by an owner is necessarily a traditional "personal guarantee."
Some financing documents contain provisions concerning:
Personal guaranties
Guaranties of payment
Guaranties of performance
Representations and warranties
Covenants
Indemnification
Confessions of judgment, where legally enforceable
Security interests
UCC filings
These provisions can have different legal effects.
That's why simply looking at the first page of the financing agreement may not tell you the entire story.
Being Sued Personally Does Not Necessarily Mean the Lender Automatically Wins
Receiving a lawsuit does not mean that the lender's allegations have been established.
A complaint is the lender's statement of what it claims happened and what it believes it is entitled to recover. The defendant generally has an opportunity to respond and raise applicable defenses or other claims.
Depending on the circumstances, issues may include:
Whether the agreement is enforceable
Whether the correct parties were sued
Whether a valid personal guaranty exists
Whether the guaranty covers the obligation being claimed
Whether the business actually defaulted
Whether the lender properly calculated the amount allegedly owed
Whether required notices were provided
Whether payments were properly credited
Whether contractual conditions were satisfied
Whether the lawsuit was filed in the proper jurisdiction
Whether applicable statutes or other legal requirements affect the claim
The answer will depend heavily on the specific documents and facts involved.
Don't Ignore the Lawsuit
One of the biggest mistakes a business owner can make is assuming that the lawsuit will somehow resolve itself.
Court documents typically contain deadlines for responding. Failing to respond appropriately can result in a default judgment, depending on the jurisdiction and circumstances.
A judgment against a business and a judgment against an individual can have very different consequences.
If you are personally named, it is therefore important to understand exactly what claims are being made against you rather than assuming that the lawsuit is simply "against the company."
Look at the Documents Before Making Decisions
If your business has been sued and you have also been named individually, gather the complete financing file.
That may include:
The original financing agreement
Any personal guaranty
Amendments or modifications
Payment history
Notices of default
Demand letters
UCC filings
Prior settlement or restructuring agreements
The lawsuit and accompanying documents
Correspondence between you and the lender
The precise language of these documents can make a significant difference.
What Should a Business Owner Do Next?
The first step is to determine why you were named personally.
Don't assume that the lender can automatically pursue your personal assets simply because you own the company. At the same time, don't assume that your LLC or corporation automatically protects you from a contractual personal obligation.
A business owner facing this situation should consider having the lawsuit and underlying financing documents reviewed by an attorney who handles business-finance litigation.
Depending on the circumstances, potential strategies can include defending the lawsuit, negotiating with the lender, challenging particular claims, restructuring the obligation, or pursuing another resolution.
The Bottom Line
If your business was sued by a lender and you were also sued personally, the most likely reason is that the lender believes you assumed some form of personal responsibility for the business's obligations.
But being named personally is not the same thing as automatically being personally liable for everything the lender claims is owed.
The answer depends on the documents you signed, the nature of the financing, the alleged default, the lender's claims, and the law that applies to the dispute.
Before making payments, agreeing to a settlement, or ignoring the lawsuit, understand exactly what the lender is claiming against your business and what it is claiming against you personally.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini serves as Director of Operations and Negotiation at Beacon Client Solutions, an award-winning business consultancy that supports small business owners in a variety of areas, with a particular focus on business debt and financial challenges. Thomas has been a small business owner for many years and has held leadership positions across multiple organizations and companies. He holds a B.A. in History, as well as master’s and doctoral degrees in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer
Beacon Client Solutions is a business consulting firm, not a law firm or accounting firm. While Beacon works closely with experienced attorneys, accountants, and other qualified professionals, Beacon does not provide legal, accounting, or tax advice. Our work is performed in coordination with appropriately licensed professionals when legal, accounting, or tax expertise is required. Beacon has extensive experience working with small business owners facing merchant cash advance (MCA) and other business-financing challenges and understands the issues that can arise when a business experiences financial distress or faces collection activity.
Beacon Client Solutions serves small business owners throughout all 50 states, as well as Puerto Rico, Mexico, and Canada.
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