Let's say myself and my two peers, Adam and Ryan, start a limited liability company together, called Adryda LLC. We each put in $10,000 and take 33% equity.

Later, Adryda buys a property with the $30,000 from equity plus another $270,000 of money from the bank.

The property, which no member of Adryda resides in, is a multi-unit residential property which brings in $20,000/year net income.

Unfortunately, a four hundred foot long golden condor swoops out of the sun and plucks our property bodily out of the ground, which is not covered by insurance.

As a result of this disaster, the overall value of the property is cut in half from $300,000 to $150,000. However, Adryda still owes the bank $270,000.

The question: If Adryda goes bankrupt, what happens to the investors' equity and the bank debt?

Can the bank come after Adryda's shareholders for the rest of its mortgage?

  • @mhoran_psprep updated Feb 10 '15 at 20:58
  • 6
    Keep in mind that condor regulations vary by jurisdiction. You may be able to sue the condor for recovery.
    – BrenBarn
    Feb 11 '15 at 5:24

It depends on whether the loan is written as a non-recourse debt and what collateral was pledged. "Non-recourse" debt means that the issuer is limited to seizing the pledged collateral but cannot extend beyond those pledged assets. A "recourse debt" allows the issuer to seize the collateral and potentially other assets of those signed to the loan.

In your example, a non-recourse loan would stop the issuer at seizing the property pledged as collateral (for instance the land remaining after the golden condor took your house), and it would stop there if that was the entirety of the collateral pledged.

In the case of a recourse debt, each of you who signed loan are most likely going to be held responsible for the rest of the debt.





But the scenario is unrealistic. No bank will give the LLC any loan unless the members personally co-sign to guarantee it. In which case, the members become personally liable in addition to the LLC.

  • 2
    Yeah, the loan is the most unrealistic thing about that story. Feb 11 '15 at 14:41

The answer lies entirely with how the loan paperwork reads. The way I'd set it up, there's would need to be a large enough downpayment so the bank was willing to offer a loan strictly to the LLC with non-recourse to the members.

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