What happens when a company is sued beyond their funds?
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What happens when a company is sued beyond their funds?
I’m wondering a hypothetical here. If
one were to sue a company and win,
however the company can not pay the
amount won in the suit, what happens to
the person’s money? Example I sue
Company A and win in the amount of 27
million. However, Company A is not a
large enough business to sustain that
amount. What happens to my 27 million?
Asked on May 28, 2019 under Business Law, Kentucky
Answers:
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 4 years ago | Contributor
It depends on the following:
1) If the company is a general partnership or sole proprietorship, the owner(s) are personally liable, since legally, there is no distinction between the people and the business in those cases. You can seek the money from the owners--of course, they, too, do not have it, that will not help you. At the end of the day, having a judgment in your favor against a person or business does not make money appear where there is none.
2) If the company is a corporation or LLC, the owners are not personally liable: the company is a separate legal entity and the whole point of the corporate or LLC form is to insulate or protect the owners from personal liability. 99% of the time (rough guestimate) that's it: since you can only get money from the corporation/LLC and the corporation/LLC has no money (or too little money to pay it all), you lose anything the company cannot pay.
Maybe 1% of the time you can "pierce the corporate veil" (which applies to LLCs as well as corporations) and hold the owners personally liable. To do this, you have to essentially show that the corporation or LLC was a "shame"--not that it did not conduct business, but that it had no independent existence and was the alter ego of the owners--or that it was deliberately used to defraud creditors (which would include you as a "judgment creditor," or someone who owes due to a lawsuit).
To do this, you have to show some combination of: the company was undercapitalized and never had enough money to carry on its business; that the company's money and the owners' money was "co-mingled" (same bank accounts; company being used a piggybank to pay owners' expenses & bills; etc.); or that the company transferred out lots of money or assets to its owners when it became aware of what it would owe, in order ot hide those assets from creditors. Be advised this is a very difficult thing to do, since the normal rule and legal presumption is that corporations and LLCs are separate and valid entities; you have to compellingly overturn that presumption. If you can, you can get the money from the owners--if they have it.
Finally, bear in mind that even if you can sue the owners, they may be able to declare bankrutpcy.
All in all, if you sue for more than a person or business has, you are likely to only recover some (at best) of what you win.
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