THE landlord of the warehouse leased by the client’s company has filed a lawsuit to collect $300,000 of unpaid rent from the company.
The question that immediately comes to mind is whether or not the client, as in an individual person, is liable also for the unpaid $300,000 lease of the company.
It looks like the landlord has sued both the client as an individual person, and the client’s company, which operated the warehouse, although I have not actually seen the lawsuit.
Therefore, the first matter to dissect is who is actually legally liable on the unpaid lease, is it the individual owner of the company that operated the warehouse, the company that operated the warehouse, or both of them.
This is a simple enough analysis. Look at the commercial lease contract itself. Who is shown as the lessee or renter of the warehouse? And who signed as lessee or renter of the warehouse? And is there a personal guarantee anywhere in the contract that binds the individual owner of the company to pay for the lease?
If the contract states in the beginning clause that the renter or lessee is just the company and nobody else, then it looks like only the company itself is liable on the lease. But look further down to the last page. On the signature page at the bottom of the contract, does the signature portion look like this: name of company, by: Mr. X, president or CEO, and nothing else appears after, then it’s quite sure that only the company itself is legally liable on the lease.
However, it there something else below, let’s say Mr. CEO signed twice, once as CEO of the company renter, and second as an individual in his personal capacity, then both the company and the CEO as an individual person are on the hook. Here, the CEO first signed to bind the company on the lease, and signed a second time, to bind himself as an individual in his personal capacity. That’s quite brave but a really dumb and stupid move on his part.
The third scenario is where the company itself is already bound on the lease, but there is a separate clause that the individual executes a personal guarantee that states he guarantees the payment of the lease, if the company does not pay the lease. This is equally brave but a really dumb and stupid move on his part as well. If this is the case, the landlord will sue the company first to collect the unpaid lease. After the landlord wins the judgment against the company, the landlord will then file another lawsuit to sue the guarantor to enforce the personal guaranty. The second lawsuit will tell the court that the company has not paid the lease, so the landlord is now suing to collect on the personal guaranty to collect the unpaid lease.
In this client’s case, he has explained to me that he has not guaranteed the lease as an individual, and he has not signed the lease contract to personally bind himself as the renter. So all is well and good then, it looks like only the company is liable on the unpaid $300,000 rent of the warehouse. However, I still have to make sure that this is the correct conclusion by examining the actual lease contract as signed.
Aside from the $300,000 lease, the company owes credit lines and suppliers totaling another $400K. Thus, the total owed is $700K. The company still has some inventory and receivables. The question is can the company pay expenses while the Chapter 7 has not yet been filed? Yes, of course, for certain kinds of expenses. For instance, it can continue to pay payroll, even salaries owed to management, including the CEO. Let’s say the CEO is owed $10,000 for unpaid back salaries. That can be paid.
However, money lent to the company by insiders cannot be repaid at this time. For example, CEO lent the company $100,000 in loans from his own pocket by refinancing his house, the company cannot at this time repay that $100,000 or even part of that back to the CEO.
If this repayment is done, the Chapter 7 trustee will file an adversary case to recover the payment under his avoiding powers. The money will be recovered and that will be part of the assets of the bankruptcy estate of the debtor company.
What about the inventory? That belongs to the bankruptcy estate and the trustee will attempt to auction off the inventory for cash. The matter of inventory is a sensitive one of course. The current state of the inventory must make accounting sense.
What do I mean by this? If the inventory value based on the 2019 tax returns was $1 million as of December 31, 2019, and only $40,000 is left right now, then the trustee will ask for an explanation and breakdown of what happened to the $1 million that is shown in the 2019 tax returns. In other words, what happened to the $960,000 of inventory? Well of course so much got sold and the sale proceeds were used to pay expenses etc. etc.
Whatever the explanation is, it has to be true and correct. You don’t want a situation where there’s a smaller warehouse where $960,000 of inventory is still being stored. That would be lying through your teeth making you subject to perjury and nobody wants that to happen.
It is more than advisable to keep accurate documentary records that clearly explain how the inventory was used up. This brings to mind a former client who borrowed $30 million from the banks using his phantom inventory as collateral. He had a big warehouse with lots of inventory. But when the banks conducted an audit, the inventory was short $40 million. Well, that creates a huge problem does it not? Of course, it does. So we don’t want a situation where the inventory just sort of disappeared into thin air.
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DISCLAIMER: NONE OF THE FOREGOING IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.