Think Your LLC Guarantees Limited Liability? Think Again!Posted August 21, 2015
INDIVIDUALS CREATE LIMITED LIABILITY COMPANIES (“LLC’s”), same with corporations, for ownership and investment purposes primarily to enjoy limited liability. The idea is that if you invest $10,000 in an LLC, and someone successfully sues the LLC and obtains a huge judgment, the most you could lose is your investment–$10,000. The judgment creditor would not be able to come after you personally to collect the balance of their judgment.
However, not all LLC’s or corporations have assets from which a judgment may be collected. San Francisco Bay area business and real estate attorneys are occasionally asked by clients with judgments what can be done to go after the members, managers, directors or shareholders of an LLC or corporation.
As one group of LLC members recently discovered, if the LLC’s distributions to them leaves the LLC penniless and essentially dissolved, the creditor may collect from the members.
In CB Richard Ellis, Inc. v. Terra Nostra Consultants (2014) (“Ellis v. Terra Nova”), the real estate broker was seeking commission on the sale of 38 acres in Murrieta for $11.8 million. While the broker had the property listed, the buyer made an offer. Before closing, either the listing ended, or the LLC which owned the property fired the broker, it was not clear which. The sale closed. A few days after the cash went from escrow to the seller LLC’s bank account, it all left the account and was distributed to the members, without the broker having been paid his fee.
The broker arbitrated the fee dispute with the LLC (because there was an arbitration provision in the listing agreement) and obtained a judgment against the LLC. But, of course, the LLC had no money!
The broker then filed suit against all 25 of the LLC members. His argument was based on the California Corporations Code, which provides for liability in the event the LLC entity has been dissolved. Applicable was the old Section 17350, which was since replaced by the equivalent Section 17707.07. They provide that claims against a dissolved LLC, whether arising before or after dissolution, may be enforced against members of the dissolved LLC “to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.”
The result in Terra Nova? The broker obtained an enforceable judgment against all 25 individual members of the LLC for the broker’s half of the commission, interest and attorney’s fees of $960,649!