Calling all lawyers/law students?

[dbk]

So my friend owns a business and he hasn't paid rent on it for 2 months. Now the owner has threathened to sue him if he doesn't pay the balance due in 10 days. My friend really wants to move his business somewhere else where the rent is cheaper. However, he signed a 5 year contract 3 years ago. So he's tied up by it.

Now, he says after he gets sued, he'll just tell the judge that the business just doesn't have the money to pay the rent. This is basically declaring a bankruptcy right? He'd also registered his business as a corporation so he tells me that protects his personal assets (his house). He's hoping to get out of the contract and restart his business by having his wife be the new owner of the business since she's not involved in the current one.

I don't think it's that easy and I fear he's gonna be in some deep sh!t. Any advices on how he should handle this situation? Sorry for the semi-long read.

 

he'll just tell the judge that the business just doesn't have the money to pay the rent.

Your friend is an idiot. Declaring bankruptcy is more than just telling someone you don't have money. It's an involved process and there are dedicated bankruptcy courts.

Lemme guess; your friend owns a cell phone store? I've found those store owners are usually the smartest of any entrepreneurs. :roll:

 

[Eli]

Your friend is going to end up pennyless in the streets.

And he is going to have to pay his owed rent.

 

[kranky]

First thing he ought to do is start negotiating with the owner of the property to get out of the lease. Just because he signed a 5 year lease that doesn't mean he can't work a deal to get out of it sooner. If the business gets sued for not paying rent and loses, who knows what the judge might do.

If his corporation has the lease, he might be OK. But if he personally guaranteed the lease, well, that's bad.

 

[Turkish]

Originally posted by: Eli
Your friend is going to end up pennyless in the streets.

And he is going to have to pay his owed rent.

 

[tk149]

Good advice so far. But your friend needs to get his own lawyer for proper legal advice. He really should try to negotiate his way out of his lease (I bet there's a buyout clause in there somewhere), or get a lawyer to help him find grounds for breaking the lease, or help him declare bankruptcy.

IF your friend has maintained proper corporate records, he might be OK. If he's run a sham corporation (i.e. one that the judge determines is not really a corporation, but a sole proprietorship or partnership), he's doomed. Try googling "piercing the corporate veil."

 

[Spencer278]

For that plan to even have a chance at working he would have to have formed his corperation before signing the lease and had the corperation sign the lease.

 

[dbk]

Thanks for the great advice guys. Hopefully my friend will heed them.

 

[KK]

Or he could just burn the place down.

KK

 

[CptObvious]

Whose name is on the lease? Any smart owner would require one/some of the officers in the corporation to be personally liable in case the lease was breached. If that's the case I would get a lawyer

 

[Double Trouble]

I'm neither a lawyer nor a law student, but I did stay at a Holliday Inn last night

The question boils down to the lease agreement. If the agreement is between the corporation and the owner, and your friend did not put himself down as a guarantor for the debts of the corporation, then the business can simply close its doors. Any creditors still owed money can try to sue to get the money they are owed from the sale of the remaining assets of the corporation. The form of incorporation also makes a difference, but in such a scenario, I think your friend should be OK. The business basically is terminated, and it leaves the property owner (along with any other creditors) to sue the corporation for breach of contract etc to try to recover their money. Your friend should not be personally liable. For this reason, most banks or property owners require you to be personally liable as well when you sign such a deal for a small business.

There is one major caveat to be aware of. There is a concept known as "piercing the veil" that can come into play here. Piercing the veil is basically holding the owner (your friend) personally liable for the debts of the corportation despite the fact that it's a corporation. Judges usually do that when they feel the corporation was created to defraud someone, or to fraudulently shield the owner/operator.

Of course, as always with these kinds of things, your friend needs to consult a lawyer to determine the best course of action. Simply going by what he thinks he knows about how these things work is a stupid idea. There's thousands of laws and statutes governing these things, and a good lawyer will help him make sure he stays in the clear.