Owning a business exposes you to all kinds of risks -- and when things don't go right, those risks can turn into a lawsuit. Even the most ethical business can find themselves on the wrong side of a legal dispute -- a company is a natural target for those who believe the way to settle differences is in a court of law.
If you should find that your business is named in a lawsuit, what is the best way to proceed?
1. First, Get the Details
The first documents you receive should contain both a "caption" and "service information". It's important to confirm that these properly list the entity or person associated with the issue in question.
- The caption contains the name, address, and phone number of the attorney and the person(s) represented as well as the court name, title of the case, case number, and title of the documents, such as accusation or answer.
- The service information or service process is the procedure that those who are bringing suit uses to provide you with the appropriate notice of initial legal action.
2. Call Your Attorney
If the caption and service information is correct, review the allegations (what you are being accused of) with your attorney and place a litigation hold on all records pertaining to the issue.
From this point on, all communication must take place between your attorney and the plaintiff’s attorney. The communication will refer to you as the defendant and the party bringing suit as the plaintiff.
Do not speak directly with the individual or entity bringing the suit; anything you say can be used against you. And do not ignore the lawsuit; you will summarily lose the case.
3. Inform Your Insurance Provider
Your business insurance may cover your company in case of a lawsuit, depending on the issue. Most providers require that you forward any lawsuit documents to them immediately upon receipt to preserve your business's coverage. If the suit is covered, the insurer will provide counsel to defend you.
However, do not assume you are covered. If the lawsuit is not covered by the policy, consult your corporate attorney or a defense lawyer.
4. Proceed in the Best Interests of Your Business
Sometimes, it is more cost-effective to settle out of court, even though you may not be in the wrong. Litigation (legal action) is expensive. A quick settlement may cost your business less than a lengthy court trial.
Throughout the process, continue to be diligent and prompt in your dealings with the attorneys and court. Do not attempt to hide anything. Keep calm and carry on. If there is a danger of copycat suits (others bringing similar suits to you), put policies in place to mitigate the risk.
5. If You Lose the Lawsuit...
Depending on the issue and how your business is organized, you may or may not be personally liable for any financial judgment against you.
- General Partnership - All partners are equally and personally liable for any debts against the business. You have no asset protection.
- Corporations and LLCs - You are not personally liable for most debts against your business as long as you have not forfeited your personal asset protection.
For members of corporations and LLCs, take notice of the phrase “as long as you have not forfeited your personal asset protection.”
If you have personally guaranteed a business loan, using personal property, a personal credit card, or personal loan, you will not receive personal asset protection for that specific debt. The same is true if you sign a purchase order or service contract in your name instead of in the name of the company.
For example, if you guarantee a business loan using personal property as collateral, you are personally liable for that business loan; you forfeit your corporate asset protection for that particular debt. If your company defaults on this specific loan, you become personally responsible for it because you offered personal property for collateral.
6. If You Cannot Pay
If you cannot pay your business liability from the lawsuit, you have the option of filing for bankruptcy if you meet the requirements. Filing for Chapter 13 bankruptcy gives you time to straighten out your affairs and put together a payment plan to propose to the court.
If you choose, instead, to go out of business, your company can file for Chapter 7 bankruptcy and liquidate all eligible property to satisfy the debt. As long as you did not lose your personal asset protection, you are not personally held liable for the debt. If you somehow waived your personal asset protection, your only choice may be to file for personal bankruptcy if you do not have sufficient liquid assets (cash and liquid securities) to pay your liability.
This guest post is compliments of Vethan Law Firm P.C. VLF has delivered top-tier legal counsel to private businesses and professional practices of all sizes for over 20 years. VLF’s team of experienced business attorneys have helped clients in Texas and beyond navigate their most serious legal challenges. VLF delivers results by focusing on the unique needs of each business client, bringing to bear its commercial litigation experience and corporate planning expertise.