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I purchased a business along with my friend. His father graciously

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gave us 1.4 million to...
I purchased a business along with my friend. His father graciously gave us 1.4 million to invest in the business after his accountant did a spot audit on the books and received an approval. We went to the closing and his father then wired the monies for the business. The business had 2 partners that would retain 49% and then myself and his son Ryan would maintain 51%. we closed on the transaction with a verbal contract to pay the funds back in 2 years at a reasonable interest rate not to exceed 6%.

His son was recently admitted to a drug rehab center for the next 3 to 5 months. He now has asked me to sign documents allowing him to have complete control of the board as well as the previous partners. He says he needs more assuridy that he will get this note paid that was an uncollateralized loan given to his son for the business.

When his son was admitted he asked to hold my stock for collateral and asked me to sign a note. I agreed to do so. However, now he is asking me to sign an agreement making him president of the corp and being controlling board member without sharing this information with my original partners.

The are now saying they will call the note due. This loan had no recourse to begin with but I have told him I would sign a note personally but I can't sign a note in behalf of my new partners since this was not the agreement. We purchased 51% for 1.4 million and it is my responsibility. He is now threatening lawsuit because I will only sign the note and not a new shareholder agreement allowing him complete control. I have made the payments for three months as originally agreed.

How does an unsecured loan work in this instance if the lender then changes his mind and now wants all his money back. He never had any stock in the company or held any position although we did invite him to our board meetings and he has been attending and up until his son was hospitalized has been very excited about our company.
Submitted: 7 years ago.Category: Business Law
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Answered in 6 hours by:
1/1/2011
Business Lawyer: Lucy, Esq., Attorney replied 7 years ago
Lucy, Esq.
Lucy, Esq., Attorney
Category: Business Law
Satisfied Customers: 30,991
Experience: Attorney
Verified
Hi,

My name is XXXXX XXXXX I'd be happy to answer your questions today.

An agreement that, by its terms, cannot be performed in one year must be in a signed writing under the Statute of Frauds. Otherwise, it's unenforceable. He will have to show that the funds were a loan and not an investment - an investment doesn't have to be repaid. It's unsecured. Sometimes people get returns on their investments and sometimes they don't. The law doesn't protect people against making bad investments.

However, putting that aside, if you can show that the agreement was that you would repay him in two years, and that you've been making payments, he can't now demand the money back. He also can't demand a share of the partnership or a seat on the board. Even if he could, as a minority owner, you have no ability to give it to him.

On top of all that, you didn't say what type of business it is, but you should not sign a note making yourself personally liable on an investment to the business. It is the business that got the money and the business that would repay him. Even in a partnership, where the partners remain liable for business debts, the debt would be shared among all the partners, and not shifted onto just one person.
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Customer reply replied 7 years ago

I sent you another email describing the situation and how he is now trying to say that he didn't know the details of the transaction when he sent the wire and now he is threatening to stop our business.

Business Lawyer: Lucy, Esq., Attorney replied 7 years ago
I'm sorry - I didn't receive a message earlier. If there's anything else you think I need to know, I hope you don't mind retyping it for me.

He can't stop your business - he has no grounds whatsoever for doing that. He either loaned the business money, which means that he needs to allow you to repay it. In that case, if the loan was just for the business, he has no say over how it's used. Or, he made an investment, and he has no right to demand returns. You've been paying them, which is good, but a person can't just demand that a business be successful and that high dividends be paid. It would be nice, but it doesn't work that way.

If it comes to court, you'll be able to call his accountant to testify that he went over all the books and reviewed everything before the transaction went through. That will make his claim that he didn't know what he was doing highly suspicious.

Edited by Lucy, Esq. on 1/2/2011 at 1:26 AM EST
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Customer reply replied 7 years ago

Can he put some kind of injunction on the business until they clear it up. THey are certainly going to say I misrepresented the business somehow but I didn't. It will be us against them and his own son was there all the time and all of us expected he would share anything if there was a concern. He comes up and goes through our plant and we even show him our earnings. We have worked with complete transparency.

 

I just worry about their threats that they will come in and have the courts assign someone to intervene. We are in the Linen and Dry cleaning business and work with the biggest and most prestigious hotels in the world such at the St. Regis, Marriott, Waldorf Astoria and The Montage. This would be devistating to us.

 

Kelly

Business Lawyer: Lucy, Esq., Attorney replied 7 years ago
They cannot. An injunction is only appropriate where a person cannot be made whole through monetary damages. Since he's basically alleging fraud and misrepresentation, if he wins, money damages will be sufficient.

Typically, an injunction is appropriate where, say, a house is going to be sold (all real estate is considered unique), a person's reputation is being harmed, or something of that nature.

I can certainly understand your concerns, but you haven't said anything to make me think that he has a valid suit against you.
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Customer reply replied 7 years ago

He didn't use his attorney when we signed the documents because his accountant said it was a good business and because he thought his attorney would take too long.

 

The only misrepresentation he is claiming is that all the debt was not paid off at closing as was originally disclosed. The reason it was not was because he shorted the funding 220k and there was not sufficient monies to pay it off. We put it in escrow and then later signed an agreement with his knowledge that we would use the money to buy a new piece of equipment. It will all come down to what he lies about and what was actually the truth but I feel there are sufficient people who know what happened and he was there the day the decision was made. He simply forgot or his is lying.

 

Kelly

Business Lawyer: Lucy, Esq., Attorney replied 7 years ago
If he didn't give you enough money to pay off the debt, then you couldn't, and that's his fault - that's not misrepresentation. It would only be misrepresentation if he had evidence that you never intended to use the money for the stated purpose and you just said it to get him to give you the money.

Hopefully, it'll blow over. It sounds like this really has to do with the fact that his son is no longer capable of working for the business. You may want to sit down with a local attorney to go over all the facts and see if it would help to send this guy a letter from a lawyer.

Good luck with everything.
Lucy, Esq.
Lucy, Esq., Attorney
Category: Business Law
Satisfied Customers: 30,991
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