Hamblett & Kerrigan | Attorneys At Law

Providing Legal Services For More Than 125 Years

Insider Debt Repayment

On Behalf of | Apr 14, 2017 | Business Disputes

The law provides outside creditors the right under certain circumstances to get paid before insider creditors.  New Hampshire has adopted the Uniform Fraudulent Transfer Act, RSA 545-A.  In general, that Act allows creditors to obtain a recovery against recipients of transfers made, or obligations incurred, by the debtor when they are insolvent.  For example, if Sam owes Jack money and Sam transfers his vacation home on the lake to his brother-in-law, John, for less than reasonable equivalent value while he owes money, Jack may generally sue John in an attempt to lien the property to force John to pay Jack the difference in the price that he paid for the lake house and the actual market price for the lake house up to the extent necessary to pay off Jack’s debt owed by Sam.  In such a circumstance, the statute provides that Jack has four years to bring such a claim.

What happens when money is owed by a corporation and one of the officers pays back a legitimate debt to himself from the corporation before the outside creditor is paid?  The Uniform Fraudulent Transfer Act addresses that as well.  Pursuant to RSA 545-A:5(II) the outside creditor can sue the insider officer to get that payment unless the officer can show he provided either new value to the corporation which he was not otherwise protected with a security interest, the payment was made in the ordinary course of business or financial affairs of the corporation, or the debt repayment was a good faith effort to rehabilitate the debtor and transfer secured present value given for that purpose as well as the debt of the corporation to the officer.  For example  ABC Corp. owes money to your company for supplies it purchased in the amount of $100,000.  No officer signed a personal guaranty so you can only look to the company for recovery and the company is unable to pay its bills on time.  In doing your due diligence you speak with Sam who is the sole shareholder and president of the company and he explains how difficult business has been and tells you that he himself loaned $500,000 from his own retirement funds and barely recovered half of that back.  Therefore he tells you he is out $250,000 and appreciates that you are out $100,000.  While Sam as a shareholder generally would not be liable to pay your debt Sam just gave you a direct reason to sue him for disgorgement of up $100,000 of what he re-paid himself.  However, you only have one year from when he made that loan repayment unlike the lake house example above so you need to contact an attorney and move on it fast.  Even though had a legitimate loan, if Sam paid himself outside the ordinary course of business when the company was insolvent and he did it to mitigate his losses from the overall losses he took, an outside creditor may have the ability to have him disgorge up to the full $100,000 owed it.

In summary, if you are owed money by a corporation or another legal entity like a legal liability company, that company is not paying you, and you believe that it may have paid back a legitimate debt to the individuals that control who gets paid,. you should speak with an attorney quickly in that you may have only a one-year period in which to pursue a claim against those individuals who were repaid while your debt remained outstanding.  Also, if you find out the corporation shareholders or limited liability company members of are paying themselves distributions or dividends while not paying you, you also may have a claim against those owners and should, likewise, speak with an attorney.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].