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LLC Does Not Have to Pay Expelled Member’s Salary While Suit Is Pending: Garcia v Garcia

Posted in Breach of Contract, Breach of Fiduciary Duty, Conversion, Industry: real estate

In a December 6, 2011 decision by Justice Schmidt, the court vacated a prior order requiring two limited liability companies to pay a member his distributions while the action was pending. The Court also denied that same member’s motion seeking to enjoin his expulsion from the LLCs. The litigation stemmed from the management of a number of limited liability companies that owned real property in Brooklyn, New York. Two of the LLC members found out that the third member (Peter Garcia), who was responsible for paying distributions, paid himself more money than he was entitled to receive. Those two members brought suit sounding in, among other things, breach of contract, breach of fiduciary duty, fraud and conversion.

Earlier in the suit, Peter Garcia agreed to be barred from participating in the LLCs’ operations, so long as he was paid his full distributions until December 2010. In January 2011, after expiration of that agreement, Peter Garcia was granted a preliminary injunction requiring the LLCs to continue making the payments through the pendency of the litigation, but such payments were to be considered loans to Peter Garcia secured by his ownership interest in the LLCs. 

In September 2011, Peter Garcia conceded that he took excess distributions, but in an amount less than alleged. Based on that concession, and other issues, the two other LLC members held meetings where they voted and agreed to expel Peter Garcia from the LLCs. Peter Garcia argued that those resolutions were ineffective because one of the other members had retired from the LLCs, so he was not entitled to a vote. The court reviewed the relevant limited liability company agreements, and the Limited Liability Company Law, and determined that neither of the remaining members had retired from the LLCs. The court further found that there was good cause to expel Peter Garcia. The court also determined that because Peter Garcia’s membership in the LLCs was likely worth less than the amount he may owe to the LLCs, it was inappropriate to continue to require the LLCs to make distributions to Peter Garcia, even if such payments were secured by Peter Garcia’s membership interest.

Garcia v Garcia, Sup Ct, Kings County, Kings County, December 6, 2011, Schmidt, J., Index No. 24618/10.