Can an LLC Member be Forced to Contribute to the LLC’s Debts?
Members of an LLC are required to pitch in equally for the LLC’s expenses and debts, right?
Generally, no.
In a recent unpublished opinion filed by California’s Fourth District Court of Appeal — Alikhani v. Azartash — the court provided a reminder that under California’s governing LLC statutory scheme, members are generally presumed to have no personal liability for the entity’s debts, liabilities, or expenses.
(While unpublished opinions have no precedential value, they can provide useful guideposts.)
Facts: restaurant LLC fails; one member pays most of the windup expenses and sues the other for “contribution”
The following facts were alleged in the complaint:
Plaintiff Abbas Alikhani formed Toscana, LLC, an entity that owned and operated La Bella Vita restaurant in Temecula. Alikhani signed a guaranty for the restaurant’s lease.
Defendant Majid Azartash worked as the prime contractor for the LLC’s tenant improvement construction prior to the restaurant opening. After Azartash contributed to some of the costs, he was admitted to the LLC as a 20% member.
The restaurant opened for business in early 2013 “to persistent financial pressure.” Sales were insufficient to pay expenses, including for payroll and food.
By 2015, the restaurant closed and the LLC ceased conducting business.
Alikhani wound up the LLC’s affairs by liquidating its assets and paying third party creditors. Alikhani paid over $82,000 for sales taxes and interest after an audit, over $22,000 to the former landlord, over $15,000 to the IRS, and $55,000 in miscellaneous expenses. At some point, Alikhani was sued on the lease guaranty by the restaurant’s successor landlord, which resulted in a judgment against Alikhani that he later settled by paying $300,000.
Alikhani requested that Azartash contribute funds to help Alikhani pay the windup expenses of the LLC, but Azartash refused.
Alikhani sued Azartash, alleging a single claim for contribution, citing to Civil Code section 1432 and Corporations Code section 17701.07.
Trial court: demurrer sustained; no right to contribution
The trial court sustained Azartash’s demurrer and dismissed Alikhani’s complaint. Under the facts alleged, the court held, Alikhani could not prove a right to contribution from Azartash.
Court of Appeal: affirmed
The Court of Appeal affirmed the trial court’s ruling.
The court first noted that under Civil Code section 1432, the doctrine of equitable contribution applies to “joint” obligors or guarantors. Here, the court found, the doctrine did not apply since Azartash was not a joint obligor or guarantor.
Quoting from Corporations Code section 17703.04(a)(1), the court stated that unless an exception applied, an LLC’s debts, obligations, or other liabilities “are solely” the responsibility of the LLC. “They do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager” for the LLC.
That rule has several exceptions, but Alikhani’s complaint did not allege any of those exceptions applied. For example, there were no allegations that Azartash: (1) was an “alter ego” of the LLC, (2) engaged in any tortious conduct, (3) signed any guaranty of the LLC’s obligations, (4) agreed in the LLC’s articles or operating agreement to be personally obligated for the LLC’s debts, or (5) undertook any personal responsibility relating to the LLC’s unemployment fund or tax obligations.
While Alikhani alleged Azartash made an oral agreement to contribute to the LLC’s expenses, the court held that under section 17703.04, a written agreement was required to overcome the statutory presumption of no personal liability for the LLC’s expenses. While Alikhani signed a guaranty for the LLC’s lease, Azartash did not.
Accordingly, the trial court’s dismissal of Alikhani’s complaint was proper.
Lesson
Under the holding of the unpublished Alikhani opinion and the language of Corporations Code section 17703.04, unless an exception applies an LLC member is not responsible for the LLC’s debts, obligations, or other liabilities.