Website Heading

CALIFORNIA CORPORATE & SECURITIES LAW

Court Declines To Impose Alter Ego Liability On LLC’s President

In general, the debts, obligations, or other liabilities of a California limited liability company 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.  Cal. Corp. Code § 17703.04(a).  An important exception to this general principle, however, is that a member is subject to liability under the common law governing alter ego liability.  Cal. Corp. Code § 17703.04(b).  A member is also  personally liable under a judgment of a court or for any debt, obligation, or liability of the LLC, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation.  Id.  However, the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings is not to be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the LLC when the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers.   Id.

In a recent ruling U.S. District Court Judge Otis D. Wright, II applied the above statutory scheme to the president of an LLC.  Board of Trustees of the So. Cal. Local 831 Employer Health Fund v. Show Ready, LLC, U.S. Dist. Ct. Case No. 2:16-cv-8627-ODW (SSx) (July 10, 2017).  The plaintiffs, union trust funds, had sued the LLC and its president for delinquent contributions under collective bargaining agreements entered into between the LLC and the union.  When neither the LLC nor its president filed a timely response and the plaintiffs filed a motion for default judgment.  Judge Wright ruled that the president was not personally liable under § 17703.04:

However, the Trust Funds present no evidence or even an allegation that Murphy is a member of Show Ready; they merely allege that he is the “President” of Show Ready. (Compl. ¶ 6.)  Thus, this statute [§ 17703.04] does not establish Murphy’s personal liability for Show Ready’s debts.

Judge Wright also noted that the plaintiffs made no allegations and submitted no evidence that the president of the LLC had used the LLC to wrongfully escape liability.

While I agree with Judge Wright’s interpretation of the statute, Section 17703.04(a) is one of many bizarre provisions in California’s new Revised Uniform Limited Liability Company Act.  See What Exactly Was The Legislature Trying To Say?

Share on:

ANY QUESTIONS REGARDING CALIFORNIA CORPORATE AND SECURITIES LAW? CONTACT US DIRECTLY

We offer expert advice with the intricacies of California law.

Our years of experience and expertise allow us to help clients navigate the business laws in California.

CONTACT US

Get the latest news and analysis about California Corporate & Securities law. Subscribe to our newsletter today!

Related Articles