Q: One of the parties joining our LLC appears to have secured an FSA loan with LLC crops and acreage. Is this legal?

One of the three partners was responsible for securing operating funds and was the former tenant of the acreage involved. He applied for and was approved for an FSA microloan prior the formation of the LLC. He invested part of the FSA sourced funds back into the LLC farm but at a reduced stake in the company (30%) several weeks after the FSA loan had been approved. I know from speaking with the FSA that the LLC was never communicated to the FSA. Due to qualified losses, the NAP program paid for losses incurred by the LLC. The partner in question is now claiming the insurance has nothing to do with the LLC. I am the managing member of the LLC. Is there any action that needs to be taken to protect the interest of the LLC. Additionally, would using collateral twice (once with FSA and again with the LLC) constitute fraud and would any other members be liable if this scenario was communicated to the FSA?

2 Lawyer Answers
Barry E. Janay
Barry E. Janay pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Livingston, NJ
  • Licensed in New York

A: You are right to be worried since based on the facts you've given it does appear that a violation of the terms of the loan took place at best and it may be fraud at worst. All of this can affect the LLC if a lawsuit is filed or if property owned by the LLC becomes the subject of the litigation. Some of the actions that the LLC can take would be to suspend the member who took out the loan using the LLC's assets as collateral and demand that he produce all records concerning the loans so that you can do an investigation. Finally the NAP and the FSA should potentially be contacted if indeed a fraud or violation occurred so that settlement can be reached with them.

Donovan A Rodriques
Donovan A Rodriques
  • New York, NY
  • Licensed in New York

A: You should speak with a qualified business lawyer regarding the facts of your particular matter. The LLC can become liable for repayment of the loan if it adopted the loan agreement entered into by by the three partners. If an asset that was used to secure the loan subsequently was assigned to the LLC, that assignment may be a breach of the loan agreement, and the lender may have a superior interest in that asset and can foreclose on it to satisfy the debt. Whether or not you can use a collateral twice depends on the terms of the first lender loan agreement and/or the terms of the LLC operating agreement. The facts would need to be carefully reviewed to determine if there was any conduct on the part of the partners which could satisfy any element of fraud. Normally, the members of an LLC are not personally liable for the debts of the LLC, except for the members who made personal guarantees for the loan.

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