Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined

Planned Distribution of Assets to Satisfy Obligations Guaranteed by Management and to Leave Other Creditors Hanging Enjoined

 

            It is not uncommon that when a corporation or other business entity is dissolved that the available assets will not be sufficient to satisfy all of the corporation’s debts.  Recently a North Carolina court was called in to asses a circumstance in which the corporation’s assets were to be used to satisfy only the debts personally guaranteed by members of management, leaving the claim of the other creditors unsatisfied.  The Court issued  a restraining order to preclude that from happening.  Americana Development, Inc. v. Ebius Trading & Distributing Company, No. 13-CVS-7849 (Gen. Ct. of Justice, Sup. Div., County of Wake, N.C  Aug. 28, 2014).

 

            Ebius had suffered an apparent long string of financial set-backs, losing money in each of the recent years.  Recently it had borrowed $200,000 from Wells Fargo; that line of credit was personally guaranteed by Byers and Corley, members of management.  The corporation otherwise owed $2.4 million in trade debt.

            In connection with Edius winding up, Byers and Corley sought to saell certain Ebius intellectual property and to apply the proceeds to the satisfaction of the Wells Fargo obligation, in so doing eliminating Byers’ and Corley’s obligations under the personal guarantees.

            Under North Carolina law it is clear that the directors of an insolvent and dissolving corporation owe a fiduciary obligation to the corporation, which duty is breached if they use their control of the entity for their own benefit at the expense of other creditors. 

            The Court entered a restraining order to the effect that corporation debts could be satisfied only “on a pro rata basis.”