Can one party to a loan just decide to turn it into an equity stake?

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Can one party to a loan just decide to turn it into an equity stake?

My ex-girlfriend loaned me the money to become a truck owner-operator. Now she will not take back the money calling it an investment. She bullied me and my co-partner in the business into signing an agreement stating each is a 1/3 owner; this is not notarized. This is 1 truck and 2 of us drive as owner-operators. The 2 of us earn the money and pay all the bills with our pay. Does she have any claim to money? She wants bank statements; she says that she has a right to them. Do we have a way to get her out? If we dissolve the company, and re-name it can she sue? What is our best option? We have tried and are willing to pay her back. Does she have any legal standing?

Asked on October 21, 2010 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

You need to consult with an attorney, bringing with you all paperwork and correspondence relating to the loan, to the agreement making each 1/3 owners, etc., since this is a complex situation and there  is no easy answer--it will depend on the exact circumstances and documentation/agreements and will likely involve negotiationa and litigation. The short answer: one party to a loan may NOT simply turn the loan into an equity stake in a business. However, you say that you and your co-partner signed an agreement giving her that stake. It may be the case that you will be bound to that agreement; even though you say she "bullied you" into signing it,  you could have simply refused to do so--she cannot literally force you to do it (even if she threatened to sue, for example, you always have the choice of letting her sue and then defending the action). Once you sign an agreement, the law usually holds you to it. In addition, if there was any confusion over the terms when you first took the money, that will be a factor, too--for example, did she legitimately, with some basis in fact  think that the money was  an equity investment, not a loan, and that was why she gave it to you in the first place? If she did and she has some facts on her side, the law might support that the money was in fact an investment.

You definitely need to consult with an attorney on this one.


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