Wednesday, October 8, 2014
Panel Upholds Ruling in Suit Based on ‘De Facto’ Dissolution
Court Finds Investors in Limited Liability Company Took Money That Should Have Gone to Creditor
By KENNETH OFGANG, Staff Writer
The trier of fact in an action by creditors of a limited liability company, accusing investors of having received dissolution distributions in preference to the plaintiff, may find that the company was dissolved in fact, prior to its formal dissolution, the Fourth District Court of Appeal ruled yesterday.
Div. Three affirmed the award of more than $350,000 in favor of real estate broker CB Richard Ellis against 25 defendants who invested in Jefferson 38, LLC and sent the case back to the trial court with instructions to add attorney fees to be added to the award.
The broker, sometimes known as CBRE, said the defendants received improper distributions when the LLC dissolved without paying a commission for CBRE’s contribution to the sale of a 38-acre parcel in Murrieta.
The property in question, Jefferson’s only substantial asset, was listed for sale in March 2004. In September of that year, an agent representing a developer transmitted an $11 million offer directly to Jefferson.
Jefferson made a counteroffer of $12 million. An assignee of the developer eventually purchased the property for $11.8 million, but the transaction did not close until July 2005.
At the time of closing, a 6 percent commission was divided between the buyer’s agent and a broker unrelated to CBRE that employed one of the Jefferson investors. Net proceeds of more than $11 million were distributed to Jefferson, with all but $500 disbursed to the investors and others by the next day.
When CBRE demanded its commission, Jefferson claimed that the listing agreement had expired before any offer had been received. CBRE argued otherwise and demanded arbitration.
The arbitration proceeded without Jefferson, which said it could not pay the required deposits. The arbitrator awarded CBRE nearly $1 million, consisting of the full 6 percent commission plus interest, attorney fees, and costs.
CBRE subsequently sued the Jefferson investors under Corporations Code §17355—the section has since been renumbered, with little substantive change—the relevant portion of which permits the creditor of a dissolved limited liability company to recover “distributions” received by the members, up to the amount of the debt.
The primary issues at trial were whether CBRE was due a commission, and whether Jefferson had been dissolved. While none of the three statutory triggers for dissolution—the occurrence of a condition precedent set forth in the governing documents, a vote of the members, or a judicial decree—had occurred, CBRE argued that there had been a “de facto” dissolution of the LLC when the sale of the property closed.
De Facto Dissolution
Riverside Superior Court Judge Jacqueline Jackson agreed with the plaintiff that a de facto dissolution may occur, rendering distributees liable to creditors, without a statutory trigger, and so instructed the jury over the defendants’ objection.
The instruction allowed jurors to find that Jefferson had dissolved if it had “ceased business,” taking into consideration “the ordinary business of the limited liability company, the assets of the limited liability company both before and after a distribution, the continuation of the ordinary business and the cessation of its ordinary business activities.”
The jury returned a special verdict finding that Jefferson owed the plaintiff $354,000—3 percent of the sale price—and that Jefferson had dissolved and made distributions, in specified amounts, to the defendants. The judge denied the defendants’ motions for new trial and JNOV, denied the plaintiff’s motions for attorney fees and prejudgment interest, and ordered entry of judgment for plaintiff, holding the defendants jointly and severally liable for the amount of the jury award, with each defendant’s liability limited to the amount received by that defendant in distributions, as found by the jury.
Justice Raymond Ikola, writing for the Court of Appeal, said the trial judge correctly instructed the jury on de facto dissolution.
The relevant statute, the justice said, contains no language suggesting that the events listed there are the exclusive means by which a corporation may legally dissolve. Nor would such an interpretation be consistent with the statutory purpose of preventing an LLC from avoiding payment of debts by distributing assets to its members once it has ceased doing business.
“If defendants’ 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,” he said.
With respect to CBRE’s cross-appeal, the justice concluded that the trial judge erred in not awarding attorney fees.
Because causes of action against a dissolved LLC may be “enforced against” members of the LLC to the extent of any distributions they may have received, Ikola explained, “Jefferson’s members are deemed to be statutory parties to the contract with CBRE by reason of the jury’s findings pertaining to Jefferson’s dissolution,” and thus have the same liability for attorney fees that the LLC has, provided that no member is held liable for a total that exceeds the amount the member received in distributions.
The case is CB Richard Ellis, Inc. v. Terra Nostra Consultants, Inc., 14 S.O.S. 4453.
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