Members of a limited liability company ("LLC") are generally not liable for the debts, obligations or other liabilities of the LLC. Section 17703.04 of the California Corporations Code identifies the specific instances in which members may be held liable for LLC debts: common law alter ego liability, a member's participation in tortious conduct, and a member's express agreement to be personally liable for a particular obligation. However, in the recent decision of CB Richard Ellis, Inc. v. Terra Nostra Consultants et al., Cal. Ct. of Appeal Case No. G049803 (Oct. 7, 2014), the members of an LLC found themselves held liable for an obligation of the LLC on another ground.
In CB Richard Ellis, Inc. v. Terra Nostra Consultants, the LLC entered into an exclusive sales listing agreement with CB Richard Ellis, Inc. ("CBRE") for a subject property. An agent for a prospective buyer transmitted a letter of intent directly to the LLC to which the LLC responded directly, advising the agent that the LLC had terminated CBRE because it was not moving the sale along fast enough. Subsequently, the LLC wrote a letter to CBRE asserting that the listing agreement had expired six months from the original listing date. CBRE claimed that the listing agreement was for a one-year term plus possible extensions. The LLC proceeded to close the sale of the property for $11,800,000, without the involvement of CBRE.
At the closing, the buyer's agent was paid a 3% commission and a 3% commission was also paid to an individual who began representing the LLC right around the same time that the buyer submitted its letter of intent to the LLC. On the day following the closing, the LLC received the net proceeds in its bank account and, on the following day, the LLC transferred all but $474.45 out of the account to its members. Seven months later, the LLC was formally dissolved by filing a certificate of cancellation with the California Secretary of State.
Not surprisingly, CBRE brought suit against the LLC and its members for breach of contract seeking its commission under the listing agreement. Corporations Code section 17707.07 (and its predecessor section 17355) permits causes of action to be brought against a dissolved LLC and provides that they may be enforced: (A) against the dissolved LLC to the extent of its undistributed assets and (B) against members of the dissolved LLC, but only to the extent of the assets distributed to them upon dissolution of the LLC.
The LLC members argued that Corporations Code section 17707.01 (and its predecessor section 17350) specifies the events causing dissolution of an LLC, including: the occurrence of an event or specific date in the LLC's articles of organization or operating agreement; the vote of the members to dissolve; or a judicial decree of dissolution, and that none of those events had taken place at the time of the LLC's distribution of the net proceeds from the sale. The Court rejected the contentions of the LLC members that such a procedural or "de jure" dissolution had to occur in order for the LLC members to be held liable for CBRE's commission. Instead, the Court noted that the LLC's sole asset had been the subject property and that it had ceased business operations upon distribution of the sale proceeds. The Court then looked to the purpose of the statutory scheme and found that it 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" and that "[i]f the [LLC members'] interpretation of the statutory scheme were correct, companies (and their members) could avoid the force of former section 17355, subdivision (a)(1)(B), by the simple expedient of transferring assets out of the company the day before voting to dissolve." Accordingly, the Court held that CBRE was permitted to enforce its judgment for the commission due under the listing agreement against each of the members of the dissolved LLC to the extent that each had received its portion of the distribution of the proceeds of sale from the LLC's property.
Members of LLCs that are in the process of winding down would be well advised to determine all fixed and contingent liabilities of the LLCs at the time that they receive liquidating distributions to assure that they will not be subject to the disgorgement remedy suffered by the LLC members in CB Richard Ellis, Inc. v. Terra Nostra Consultants.