THE client is 48. He owns an “S” corporation that has been operating for 15 years. The corporation provides a service to the public in several shopping malls.
Business has been good for the last 15 years until the virus reared its ugly head. Like every other retail business, the corporation stopped doing business in March when the lockdown occurred. Since then, it has not reopened. Gross receipts from March to July 7, 2020 have been zero.
The client is thinking of reopening but is not sure when their business will be allowed to reopen, and even if it’s allowed to reopen, the client does not know if his clients will come back for the service that the corporation provides. A lot of the corporation’s clients are repeat customers who have been customers for 15 years. Many avail of the services one or twice a week, every week. They’re creatures of habit.
But even in the case of restaurants that have reopened their dining areas to customers, the risk of getting infected by the virus is heightened. There is no question about that. People have to remove their masks to eat. People do sneeze and cough once in a while when eating. That’s what humans do. Customers who cough or sneeze while eating may be asymptomatic so the virus is airborne or droplets go to the server. Air conditioning gives the virus a free ride to infect other customers even if they are six feet apart. You don’t have to be a physics stable genius to figure this out. The virus won’t respond to any kind of presidential or executive order no matter how “strong” the order is. Statues may get protected with a “strong” order, but it appears that the virus is illiterate, or even if they are literate, they just don’t like to read. So, they keep on doing what they do, infect any human within striking distance, and kill the most vulnerable humans. The body count does not depend on testing.
Strong and high walls no match for “Rona”
It appears that even the “strong and high wall” going up along our southern border is no match for “rona.” The executive order says that everyone, including “rona,” must obtain a visa before entering the United States. Unfortunately for us, viruses like these do not carry passports, thus there is no way that the visa can be issued. Looks like this virus doesn’t give a hoot that they’re in America illegally. They are undocumented and illegal.
Our border guards are on the ball but they are just too many of these invisible critters, trillions of them, indeed, gazillions of them, to ferret them out. They can’t be handcuffed. They don’t have hands or feet to be shackled or necks to have a knee placed on. They are, for the time being, invincible it seems. They’re not even afraid that we’ve sucked up most if not all of the production of Remdesivir made by Gilead, this is said to alleviate somewhat the damage caused to the infected human. These critters are, indeed, thugs.
With two leases, landlord offers modification
The corporation that the client owns, he being the single stockholder, signed two commercial leases in the mall where retail services to the public are performed. Together, the corporation owes another $450,000, to the landlord. The problem is that the landlord wants to get paid for the last three months of rent when income was zero. The landlord wants to get paid $60,000 for three months of lease for two mall retail spaces. The landlord has offered to modify the lease contracts provided client personally guarantees the modified lease agreements.
Should he agree to modify the two lease agreements, and execute a personal guarantee for the modified lease agreements?
Is the client personally liable for existing leases?
Let’s examine the existing lease agreements. The tenant is shown as the S corporation, and signed by the client as the owner, for and on behalf of the corporation. On its face, it doesn’t appear that client has personally guaranteed the leases. If he did, then he would be liable for the past due $60,000, and the unpaid $450,000. But can the landlord argue that the client is personally liable on the leases because he signed as the owner?
I don’t think that argument will stick because it appears that the client signed on behalf of the S corporation as its owner. Normally, the client would sign once as the owner on behalf of the corporation, and another signature below, which says that he is signing as an “individual” to have joint and several liabilities on the lease together with the corporation.
Or, it might say that the one single signature is for both the company, and the individual to bind both the corporation and the individual to the landlord. Well, this is a sneaky way of doing it because the client may think that his one signature is just for and on behalf of the corporation.
If it’s clear that the client’s signature was on behalf of the corporation, and does not bind himself to the landlord as an individual, then the client has no personal liability to the landlord. He is not on the hook for $60,000 lease default, or $450,000 future unpaid rent.
If this is the case, then the corporation can just file for Chapter 7 to get rid of the lease problem and to inform all interested parties and creditors that the corporation has decided to stop doing business and liquidate. The landlord will not be able to drag the client as an individual into assuming the lease liability of the corporation because the client did not sign the leases as an individual, nor did he personally guarantee the leases.
An S corporation is a real corporation with its own legal identity
An S corporation is a real corporation. It has its own legal identity under the law. The pass-through income effect that flows its income or loss to the owner in his individual tax return does not detract from existence as a separate legal entity. Whatever actions or transactions the S corporation undertook to pursue its business are its own obligations.
These are not the obligations of the owner of the corporation. Unless the owner signed as a guarantor or signed as an individual to obligate himself personally, the owner is not legally liable for the transactions of the corporation, even if it’s an S corporation.
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Disclaimer: None of the foregoing is considered legal advice. Each case is different.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.
