Monday, April 22, 2019

New York Court Rejects Effort To Hold LLC’s Members Liable For LLC’s Debt

New York Court Rejects Effort To Hold LLC’s Members Liable For LLC’s Debt
      In in this case, the trade creditors of a bankrupt LLC sought to hold the members thereof liable for the LLCs debts and obligations. Those efforts were rejected. Lynn v. Maida, 2019 N.Y. Slip Op. 02268, ___ N.Y. S.3d ___, 2019 WL 1338347 (App. Div. 1st Dept. March 26, 2019).
      The LLC at issue was named 1+1 Management LLC. Being in bankruptcy, is was not a party to this action. The defendant were the members of the LLC, while the plaintiffs were certain trade creditors thereof.
      Certain unspecified claims based upon fraud against one of the LLC’s members were allowed to proceed on the basis that they had been, when combined with certain affidavits from plaintiffs, sufficiently pled. The resolution of those claims await further action.
      It appears that the plaintiffs’ alleged against the defendants a claim for conversion; exactly what is here being addressed is unclear.
      Most important, the plaintiffs alleged that they were owed fiduciary duty pursuant to the “trust fund doctrine.” The court rejected this claim. Assuming that the trust fund doctrine is applicable in the context of an LLC (rather than is traditional application in the law of corporations), it was held that, under New York law “a simple contract creditor may not invoke the doctrine to reach transferred assets before exhausting legal remedies by obtaining judgment on the debt and having execution returned unsatisfied.” 2019 WL 1338347, *2 (Citations omitted).
       The court as well rejected fiduciary duties based upon a “special relationships.” Rather, the relationship between the plaintiffs and the LLC were defined by contract, contracts that specified that neither was the “agent, co-venturer, or representative” of the other. The agreements as well contained merger/integration clauses. The court rejected the notion that the fact that the plaintiffs and defendants were friends created a fiduciary relationship.

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