MCA Lawsuit Against a Dissolved LLC: 6 Questions About the Company and Its Owners

Closing up shop isn’t enough to stop a lawsuit. The lawsuit is still allowed to happen. The MCA company can still sue your LLC for the debt, and if there’s enough left in the business to cover the judgment, the creditor can get it. If you signed personally or got assets from the LLC, you may be personally exposed.

As for pending lawsuits against the company, creditors and litigants can still sue the company and obtain a judgment if they win the case in court. The same thing goes for a lawsuit filed after dissolution.

Per New York law, people wrapping up a dissolved LLC can still sue in the LLC’s name, and defend suits brought against it. Delaware law says the same until a “Certificate of Cancellation” is filed. If you ignore the case, the creditor can get a default judgment against you, which makes collecting the debt far easier.

The MCA debt isn’t dead when the business dies. Obtaining an MCA is usually not taking out a loan. Rather, the creditor bought an anticipated revenue stream by getting the right to a steady slice of all your business’s receivables. But the contract controls that question. A lien on your business assets and receivables often goes hand in hand with such a contract. And the UCC lien on your business assets and receivables doesn’t necessarily disappear either. Read your contract.

Personal Guarantee

By default, New York doesn’t impute liability for company debts to the members personally, just for being a member, even if the LLC is closing. But that protection doesn’t shield an owner who personally guaranteed the MCA contract. Even dissolving the LLC probably won’t stop a personal guarantee from remaining enforceable. The key question: is there a personal guarantee?

Just because someone told you no personal guarantee was needed doesn’t mean the contract reflected that; federal regulators cracked down on MCA companies that went around saying no personal guarantee was required, when it was required on paper. The exact wording of the contract, whether it was for a sole proprietorship or another business form, what you did and what state law says matters.

Fraudulent or Voidable Transfer

Dissolving an LLC doesn’t let the remaining members or officers grab the assets for themselves, for family, or for a new business they started. In Delaware, a company dissolving must first pay off known creditors, and set aside enough money for likely creditor claims in the coming ten years. By statute, New Jersey says that an LLC closing its doors must allocate the cash and other assets to the creditors first. Its reason: avoid cutting out unpaid creditors.

If you move money to your own bank account, sell equipment for much less than its fair market value, give property to family members, or shift your customers to a new company you run, these events can get you accused of committing a fraudulent or voidable transfer. A creditor might be able to challenge these actions, or bring a lawsuit to collect those profits or assets, even after the company is done. Because every business is different, it depends on the circumstances and the law of the state in question.

Rushing to move assets or money around right after a lawsuit started could look suspect. On the other hand, not every transfer after a lawsuit is improper. Your business sold stuff before, so making a sale afterward doesn’t automatically mean a fraudulent conveyance. The question is whether the transaction was legitimate, and that depends on all the facts.

Some states have special rules that protect and limit the exposure of owners in a dissolution. Delaware lets a member keep distributions made in dissolution unless sued within three years and a court finds them liable. And Minnesota says anyone receiving a distribution owes an unknown claimant only if the claimant sues within five years of published notice of the dissolution, and then only for the lesser of the member’s share of the claim, or the amount they got paid after the company stopped doing business.

You might think that the MCA company will go away once you close, because a dead business has no prospects for revenue. But just the opposite may happen: it can push much harder for a lawsuit or collecting on a guarantee or seizing the lien collateral. Because the MCA creditor knows the members’ names, the guarantors, and have all the bank accounts on file, for them it may be easier to chase down the assets. And if the creditor wins in court, the business staying closed doesn’t shield you from that, either.

Legal Defenses You Might Have

Have an attorney review the suit, the MCA agreement, the UCC filings, the terms of your guarantee (if you have one) and the events over the life of the agreement for legal defenses you might have. Even if the suit is pending, the parties can still talk about settlement. Sometimes settling for a pre-agreed amount makes sense instead of drawn-out litigation.

You may be able to challenge the MCA contract itself. New York courts usually weigh three key factors to decide whether a deal was really a loan, not an advance against future sales. The factors are:

• a reconciliation clause;
• a fixed term; and
• recourse if the merchant goes bankrupt.

But these courts still try to understand the deal as a whole.

You may be thinking that with the LLC closing, you’ll file bankruptcy. But, a Chapter 7 discharge is only for people, not a company. So the LLC itself can’t wipe out debts this way. A business bankruptcy doesn’t automatically wipe out a personal guarantee either. Talk to bankruptcy counsel for advice tailored to your situation.

If the business truly has to close, then the SBA recommends a plan of action to achieve that:

• figure out which debts remain;
• file paperwork to make the closing official; and
• take care of taxes owed, if any.

Keep your business records somewhere for the future. Handle employees and contracts too. And this plan is different from just walking away from a business.

Stopping an unprofitable business can be perfectly legitimate. It all depends on how you wrap things up. Try to deal with the MCA claim against your closed LLC first. Read the contract and terms of your guarantee closely. Take stock of all your company’s assets. The goal is not to hide the money from the MCA company; but to pay creditors what the law requires you to pay.