Most businesses have been in the situation where a customer has been extended credit beyond its means to timely pay and owes several thousand dollars. Below is a fairly common scenario. Your company is owed $200,000 from a company that is not doing well. The owner explains the financial dire straits of the company to you and why he cannot pay the owed to your company and in making the point reveals that his own father loaned the company $500,000 from his retirement funds and the owner was only able to pay him half that money back so how can he pay your company? The owner’s revelation to you has just provided valuable evidence of a second source to get paid; his father.
New Hampshire has adopted the Uniform Fraudulent Transfer Act which is law uniform in many states across the nation and aimed at protecting creditors. The provisions of that Act, RSA 545-A:5(II) along with RSA 545-A:7, allow you a right to proceed against the father of the owner of the company to collect your debt from him to the extent of the payment to him by the company so long as your lawsuit against the father is within one year of when the company made the payment to the owner’s father. Basically, RSA 545-A:5 makes a transfer by a debtor voidable as to a creditor whose claim arose before the transfer if: (a) the transfer was made to an insider for an antecedent debt; (b) the debtor was insolvent at the time and the insider had reasonable cause to believe that the debtor was insolvent; (c) the insider did not give new value to the debtor after transfer; (d) payment was not made in the ordinary course of business or financial affairs of the debtor and the insider; (e) nor was the payment in a good faith effort to rehabilitate the debtor with the transfer securing present value for that purposes as well as an antecedent debt of the debtor.
If the chief executive officer, president, and majority shareholder of a corporation realizes he does not have the ability to pay the corporation’s debts when they become due because of its financial condition yet decides to pay as much as he can to his father on the monies his father legitimately loaned to the company and you within one year of that transfer sue his father, you have a decent chance of recovering repayment of that legitimate debt from the father up to the amount that you were owed thereby trumping the payment to the owner’s father. In the case of payment to an insider, there can be a payment of a legitimate debt to that insider, yet the non-insider creditor can trump that transfer as long as he brings a lawsuit within one year of the transfer against both the company that owes the debt and the insider; in this example it is the father of the decision maker of the company. This approach can be an effective means to enhance the collection of indebtedness owed by an insolvent company.
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@example.com.