No Conflict in Election of Remedies Between Single-Member LLC and Sole Member

No Conflict in Election of Remedies Between Single-Member LLC and Sole Member

A recent decision from California, Orozco v. WPV San Jose, LLC, 36 Cal. App. 5^th 375, 248 Cal. Rptr. 3d 623 (2019) involved a lease entered into by an LLC and a guaranty of the lease signed by the sole member. When litigation arose, the LLC elected to affirm the lease (even though the landlord had engaged in fraudulent conduct at the time it was entered into) even as the sole member sought rescission. While the trial court held that they could not elect differing remedies, the Court of Appeals reversed and held that they could.

Orozco, on behalf of his LLC, entered into the lease for the operation of a gourmet hotdog stand in what was apparently a popular strip mall featuring a number of restaurants. In response to his inquiries, he received repeated assurances that the landlord was not looking to bring on any potential competitors. In fact discussions with a competitor were ongoing, and by the time Orozco signed the lease on the LLC’s behalf the landlord had in its pocket a signed lease from a competitor. Orozco, individually, signed a guaranty of the lease. While the restaurant was an initial success, once the competitor opened its doors approximately six months after its opening, the sales at his restaurant declined to the point it ultimately closed.

In the suit brought by the LLC and Orozco against the landlord, the LLC, rather than seeking rescission of the lease, sought damages including for lost profits. Orozco, individually, sought to rescind his guaranty of the lease. Under California law, a claim for damages and a claim for rescission are mutually exclusive and a party to a lawsuit must elect which they will seek. In this case, because the LLC had elected a claim for damages, and on the basis that the lease and the guaranty were intertwined, the trial court held that Orozco could not seek rescission of his guaranty.

Reversing the trial court, the California Court of Appeal said that the focus is not on the degree to which the agreements are interrelated, but first upon “whether Orozco and [his LLC] are legally separate entities.” From the answer to that question, it being “yes,” and as the agreements gave rise to distinct obligations, the court held that Orozco could seek rescission even while his wholly-owned LLC could seek damages.

On that basis the matter was returned to the trial court for further rulings. Also, finding that Orozco could seek rescission of the guaranty, there was returned to the trial court the determination of whether he would, under the guaranty agreement, be entitled to attorney fees.