When a Partnership Dissolution Comes Back to Haunt You

Posted on December 17, 2017 in Disputes

Here, from the Department of Nightmarish Scenarios Thrown at Me Out of the Blue from People who Want Free Legal Advice:

“Marvin” and “Peter” took out a credit line when they were in business together.  Both personally guaranteed the credit line.  A few years later, Marvin and Peter absolutely had to part company.  And finally, they did, after Marvin was forced to commence litigation.  They settled the lawsuit, and Marvin left.  To pursue, he thought, a life free from entanglements with Peter and the unpleasant memories that accompanied it.  But at no point during the litigation did they notify the bank that Marvin was leaving.  [Nor does it seem that Marvin’s attorney mentioned to him that he might want to be removed from his responsibility for the credit line]

Fast forward 10 years, and Peter has maxed out the $100,000.00 line and declared personal bankruptcy.  The bank, none too amused by the situation, looks to the other guarantor of the credit line:  Marvin.  Marvin now finds himself embroiled in an ugly litigation with a bank he has had no contact with for a decade, for money that he never spent.  And given that Peter has declared himself bankrupt, the likelihood of Marvin’s being able to collect from Peter is virtually nil.  After all, if Peter had the wherewithal to pay Marvin, he could pay the bank just as easily.

So what’s the moral of the story?  There was a loose end left open.  And like a cancerous cell, it was left sitting around to potentially fester and cause enormous harm.  So when dissolving a partnership, make a full and complete list of all of the debts and obligations of the business at the time you’re parting company.  Especially if you have commited to providing a personal guaranty.  While it’s possible that, even 10 years ago, the bank might not have let Marvin off the hook (unless the line was paid off in full), Marvin could then have kept the matter on his mental radar.  He might also have worked out particular terms in the settlement agreement to cover Peter’s defaults in payment.  Any of these options would be a lot better than being on the receiving end of a surprise lawsuit 10 years later.

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