Are majority shareholders in a closely held LLC jointly and severally liable to pay minority members for the same value of illegal constructive dividends taken by majority members?

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Are majority shareholders in a closely held LLC jointly and severally liable to pay minority members for the same value of illegal constructive dividends taken by majority members?

Majority Member A who holds a 36% ownership and is managing member of the LLC used company funds to pay personal expenses and diverted corporate opportunities from the LLC into his separate competitive businesses. The amounts spent and diverted by member A resulted in the LLC being left insolvent. This was done with full knowledge and awareness of Majority Member B who manages the books and tax matters of the LLC and who holds a 33% ownership in the LLC, and is also family related to member A. Minority Member C who holds a 31% ownership and is a non-managing member of the LLC wants same financial benefit as was approved and received by Member A. However, based on diversion of corporate opportunities, draining the LLC bank account to pay personal and competitive expenses, the LLC does not have the funds available to now make that equal distribution/dividend payment to Member C according to his ownership. Are the majority members in this closely held LLC in CA jointly

severally liable to pay member C for the same value of illegal constructive dividends taken by member A, which was approved by member B?

What remedies are available to member C?

Asked on October 29, 2018 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 2 years ago | Contributor

The majority members are not personally liable simply by dint of being majority members: the entire point of a limited liability company or LLC is to insulate members (majority or otherwise) from personal liability for company actions and debts.
However, members do have a "fiduciary duty" to the LLC and other members: a law-imposed obligation to act with care and honesty regarding the company money/assets and the impact on other members. Violating this duty can impose liability on them, such as in the case of members diverting LLC funds to personal expenses. Therefore, you may have a viable lawsuit against member A (who took the money) and B (who either knowingly facilitated it or was unreasonably carelessi n managing the books) for breach of fiduciary duty. Speak to an attorney in detail about the situation to evaluate the strength of the case and whether it would be economically worthwhile (likely recover more money than the cost of the suit) to pursue.


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