In general, members of a limited liability company (LLC) are not personally liable for the debts or obligations of the LLC. However, in CB Richard Ellis, Inc. v. Terra Nostra Consultants, a California appeals court ruled that members of the defendant LLC were personally liable for an obligation to the plaintiff.
Terra Nostra entered into an exclusive sales listing agreement with CB Richard Ellis (CBRE) for a property owned by the LLC. A prospective buyer’s agent provided a letter of intent directly to the LLC, to which they responded that the company had terminated the agreement with CBRE. Terra Nostra then notified CBRE that the listing agreement had expired six months from the listing date. CBRE asserted that the agreement was for one year, with potential extensions. Terra Nostra eventually closed the sale without CBRE’s involvement.
Following the closing, the purchasing party’s agent received a 3% commission. In addition, a 3% commission was paid to another person who had represented Terra Nostra in the sale. Once Terra Nostra received the proceeds from the sale, it distributed almost all the money to its members. Approximately seven months following the sale, Terra Nostra was formally dissolved via a certificate of cancellation filed with the California Secretary of State.
CBRE brought suit against the LLC and its members for breach of contract, arguing that California Corporations Code section 17707.07 allows for a cause of action to be brought against a dissolved LLC and that a cause of action may be enforced against the dissolved LLC for undistributed assets and against dissolved LLC members to the extent of the assets distributed upon the dissolution of the LLC..
The LLC contended that California Corporations Code section 17707.01 contains specific events causing an LLC’s dissolution, including a triggering event or date in the LLC’s operating agreement or articles of organization, a membership vote to dissolve, or dissolution by judicial decree. The LLC argued that none of those events had occurred when the net proceeds from the sale were distributed to LLC members.
The court rejected the LLC’s argument that specific dissolution events had to occur for LLC members to be held liable by CBRE for its commission. In its finding for the plaintiff, the court noted that the sold property was the sole asset of the LLC and that the LLC had ceased to operate once the proceeds from the sale were distributed to members.
The court further stated that the intent of the statute was “designed to prevent the unjust enrichment of members of limited liability companies, when such members have received assets the dissolved company needs to pay creditors.” The court ruled that CBRE was entitled to enforce its judgment for the commission against LLC members to the extent of what each member had received in the distribution from the sale of the LLC-owned property.
The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to email@example.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.