The Seventh Circuit reversed a Ruling by the District Court granting Summary Judgment in favor of the Plaintiff relating to a breach of contract action based on a subordination agreement. The District Court held in favor of the Plaintiff, because there were funds that were transferred from the Individual Defendant to the Corporation.
However, the Corporation had accepted the funds and returned them to the Defendant. But, the Corporation had noted that the funds were received from the Defendant and listed them on its corporate books. Moreover, there was some evidence of use of the funds provided to the Corporation to pay some of the Corporation’s liabilities prior to return of the funds to the Defendant.
As a result, there was a triable issue of fact relating to whether the loan from the Defendant to the Corporation amounted to a breach of the subordination agreement–the Defendant entered into with the Plaintiff. Based on this Ruling Creditors or Lenders should ensure that the subordination agreement proscribes transfers of funds or loans from an individual debtor to a company that he or she creates. Thus, the funds loaned by the Creditor are not siphoned into a corporation that is not liable to repay the funds to the Creditor.
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