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Are You Liable for Business Credit Card Debt?

The Perils of Personal Liability: Why Business Credit Card Agreements Still Bind Entrepreneurs

11 years later, the core contractual principles from an old court case still apply today. As a business person in 2023, you can easily fall into the trap of assuming that incorporating your business automatically protects your personal assets. But it may not be true.

This blog expands upon an older blog that examined this personal liability study.

In 2012, New York County Supreme Court ruled in Creditone, LLC v Feldman that the president of an incorporated business was personally liable for $26,380 of credit card debt racked up in the company's name. The key facts of the case still resonate over a decade later.

The Root of the Problem: Unclear Boundaries

In 2003, Feldman applied for a Chase business credit card for her company, Ancient and Classic, Inc. She used the card for business expenses from 2003 to 2005 before dissolving the company in 2008. Understandably, Feldman assumed that she was not personally responsible for the card once she incorporated the business.

However, when Ancient and Classic defaulted, Creditone (Chase's assignee) successfully sued Feldman personally for the $26,380 balance. The court pointed to language in the original cardholder agreement that bound both the business and any "persons responsible for complying with this agreement." This expansive definition trumped Feldman's lack of a personal guarantee.

Key Takeaways for Entrepreneurs

While today's business landscape looks very different from the early 2000s, the court's underlying logic still applies:

  • Incorporation does not inherently protect entrepreneurs from personal liability
  • Vague credit card agreements can still create individual liability
  • Using a business credit card constitutes accepting personal responsibility

As an entrepreneur, this case emphasizes the need to scrutinize all business agreements that might encroach on your personal finances or assets. Being an incorporated entity does not guarantee your protection. You must still proactively define and defend your business/personal boundaries via clear contractual language.

Part Two: The Original 2012 Blog

[The original blog post from 2012 provides a detailed account of the Creditone, LLC v Fang Mei Feldman case, offering a direct insight into the legal proceedings and the court's rationale. This historical perspective serves as a valuable foundation for understanding the principles discussed above and their ongoing relevance in today's business world.]
If your incorporated business defaults on a credit card, can you be held personally liable? A recent New York County Supreme Court decision says the answer is yes, when the credit card agreement contains plain language expansively defining who will be bound by use of the card.

In the case, called Creditone, LLC v Fang Mei Feldman, the defendant Ms. Feldman, as president of Ancient and Classic, Inc., had applied over the phone in 2003 for a business credit card for Ancient and Classic. She used the card from 2003 through 2005; Ancient and Classic was dissolved in 2008.

Plaintiff Creditone (assignee of Chase, which had issued the card) moved for summary judgment against Ms. Feldman, who opposed the motion for summary judgment, and moved to dismiss Creditone's complaint in its entirety, citing lack of jurisdiction.

Ms. Feldman argued that, while the plaintiff's affidavit of service claimed service by "nail and mail," she had received a copy of the summons and complaint by mail only. The court rejected this jurisdictional argument because it was not timely. Under New York CPLR 3211(e), a motion to dismiss must be made within 60 days of the date the answer (which must include lack of jurisdiction as a defense) was served. Ms. Feldman had waived her right to seek dismissal of the case by not filing her motion to dismiss within 60 days of her answer.

Ms. Feldman's argument on summary judgment was that because she had not signed a personal guarantee, she could not be personally liable for the charges on a business card. The court rejected this argument by stating that "a personal guarantee is not necessary as the issuance of a credit card constitutes an offer of credit, and acceptance of the offer is the use of the card by the holder."

Further, the agreement itself included the following language: "You will be bound by this account if you or anyone authorized by you uses your account for any purpose… The words "you," "your" and "yours" mean all persons responsible for complying with this agreement, including the person who applied for the account and the person to whom we address billing statements." Thus, concluded the court, Ms. Feldman's use of the card was her consent to be bound by the agreement. Accordingly, the court granted Creditone's motion for summary judgment.

As is often the case where a sizable debt is concerned (here the amount sought was $26,380), the debt collector actually had some evidence – it presented proof of ownership of the debt, the agreement, and statements sent in the name of both the business and the individual.

The take away? When applying for a business card, be aware of the fine print. Do not assume that incorporating automatically insulates you from personal liability from all debts of the business – we can see from this case that it does not. And keep in mind that the larger the debt, the more likely the creditor is to fight harder – and come to court with better proof.

--Sheril Stanford