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Does an insolvent customer have a legal duty to pay you?

If a customer owes you money but is going under, who does it have to pay first: you…or its owners? This is a significant issue in a recession. A key test case in Wisconsin was supposed to provide a clearer answer, but the Wisconsin Supreme Court split 3-3 and couldn’t make a decision.

The case involved a company that made stereo speaker parts. The company (the largest employer in the county) defaulted on its loans and went into receivership owing more than $1 million to suppliers and banks. The receiver then filed a lawsuit against the two owners of the company. The lawsuit claimed that the owners bled the company of $10 million over the years through a variety of techniques including high salaries, management fees, bonuses, dividends, and charging excessive rates to lease equipment from other entities they controlled.

The result was that dozens of people lost their jobs and suppliers and lenders went unpaid.

A jury awarded a $6.5 million verdict against the owners.

But the owners appealed, claiming that they did nothing wrong. It was their company, they said, and they had a right to manage it as they saw fit. They claimed they did nothing illegal and all their financial arrangements were transparent and fully disclosed.

So the question was, once a company becomes insolvent and can’t pay its bills, do the owners still have a right to manage it entirely for their benefit, or do they have a legal duty to try to repay lenders and suppliers?

For now, the answer is often still unclear, but we’re sure this won’t be the last time the question comes up.

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