I saw a case about how a woman loaned man money. But the man says it was an investment. What law would be applicable in this case. He house flipping houses.
1 Answer from Attorneys
When X gives Y money, the nature of the transaction is determined with reference to all the facts and circumstances. The transaction might be (A) a purchase and sale; (B) a deposit; (C) an equity investment; (D) a loan; (E) a gift; (F) robbery; or (G) something else (???).
When trying to decide whether the transfer of money is (C) an investment or (D) a loan, the important facts and circumstances to be examined are whether there was an expectation of repayment of a determinable sum at a determinable time, or whether the parties intended the "return" to be tied to the success of a business venture or the like. Sometimes it's pretty obvious that the parties' intention was that it be a loan, because there will be an interest rate and a maturity (repayment) date, either expressly or impliedly written into the documentation. Conversely, it may be quite clear that it was an equity investment, not a loan, because of the absence of a repayment date but the presence of other equity-like provisions such as an express or implied ownership interest, a right to vote, a percentage of ownership in the enterprise, or similar provisons showing that the money was an investment and that the investor was to get an equity interest in the business or its profits, but not repayment of the principal at a determinable future time.
Occasionally, it will be truly difficult to figure out what the parties had in mind at the time of making the deal. This can be because the deal is undocumented or very poorly documented, or because it is very complex, or because it has mixed characteristics, e.g., like participating preferred stock, which has some characteristics of both debt and equity.
If cases where there is considerable doubt about whether there was a loan and therefore an obligation to repay, or an investment and therefore no fixed obligation but instead the investor got some ownership in the deal, a court would try to deduce the intention of the parties, particularly the intention of the lender/investor, at the time of the transaction. The judge might consider factors well outside the deal documentation, if necessary because the documentation is unclear or totally deficient or conflicting.
If you have some additional facts to share, send them to me privately, and I'll give you my personal opinion, but I can't guarantee that a court would agree with me.
Related Questions & Answers
I was looking into becoming "note finder" in which I find private... Asked 3/04/13, 3:50 pm in United States California Investment Law