If you’re the majority member of a New York limited liability company (LLC), and either you have no written operating agreement, or you have one but it’s silent on the issue, repeat after me: I cannot make a compulsory capital call; I cannot make a compulsory capital call; I cannot make a compulsory capital call.
Alternatively, you can read a recent decision by Kings County Commercial Division Justice David I. Schmidt in Georgi v. Polanski, Decision and Order, Index No. 10406/10 (Sup Ct Kings County Sept. 22, 2010), where the court denied a preliminary injunction application by a purported majority member of an LLC who sought to expel the minority member after he failed to comply with the majority member’s unauthorized capital call.
The facts in Georgi are relatively straightforward. In 2004, Tina Georgi and Andrew Polanski as 50-50 members formed A&T Partners, LLC to own and operate commercial realty at 60 Pulaski Street in Brooklyn. According to Georgi, she and Polanski made initial capital contributions of $40,000 and $90,000, respectively, plus they obtained a $200,000 mortgage loan secured by an adjoining property also co-owned by the two of them. In 2008, Georgi obtained on A&T’s behalf a $640,000 construction loan which she alone personally guaranteed. That same year Georgi caused A&T to return $40,000 to Polanski who by that time was unemployed.
As of year-end 2009, according to Georgi, she had contributed over $140,000 to the project while Polanski contibuted only about $52,000. Georgi maintained that the disproportionate contributions entitled her to a 73% allocation of A&T’s profits and 73% voting power versus Polanski’s 27%. On December 24, 2009, Georgi issued a capital call to Polanski in which she, on behalf of A&T, demanded that he contribute approximately $189,000 to A&T’s capital fund in order to service A&T’s outstanding loans and to complete necessary renovations to the property.
Polanski did not comply with the demand. In April 2010, Georgi filed a complaint and moved by Order to Show Cause for a preliminary injunction against Polanski, seeking a judgment that he is not entitled to any interest in A&T and restraining him from acting on behalf of A&T or purporting to be a member of A&T. Georgi contended that, under their Operating Agreement, Polanski’s failure to make the contribution authorized his expulsion as a member at the option of a majority in interest of the remaining members. She explained that she needed to bring in a new member willing to contribute the necessary capital to complete the project, which was impossible so long as Polanski purported to hold a 50% membership interest.
Polanski argued that, until he lost his job, he contributed more funds into A&T than Georgi; that since then the two have been deadlocked as to what to do with the property; and that because Georgi was able to contribute funds, he was marginalized by her regarding the management of the project. Polanski denied that Georgi, as 50% member, had authority to issue a capital call. Polanski also pointed to the petition he filed in May 2010 for involuntary dissolution of A&T on grounds of deadlock.
Justice Schmidt’s analysis centers on Section 502(c) of the LLC Law, under which an operating agreement may provide for consequences of a member’s failure to make a required capital contribution including but not limited to forfeiture of the defaulting member’s interest. A&T’s Operating Agreement contained language mimicking Section 502(c)’s, but it also provided that each member shall contribute the amount set forth in the company’s books and records as “the sole capital contribution to be made by him [or her] (italics added).” Given Georgi’s own recitation of the funds contributed by the two of them, Justice Schmidt concluded,
Under the circumstances, Georgi was not authorized to call for a capital contribution under the Operating Agreement once Polanski made the initial contribution. . . . Since Georgi could not require any additional capital contribution from Polanski without his consent, she is unable to demonstrate a likelihood of success on the merits. Therefore, her motion [for preliminary injunction] is denied.
Georgi is not the first case of its kind. In Cooperstown Capital, LLC v. Patton, 60 AD3d 1251 (3d Dept 2009) (read here my post on Cooperstown), the court enjoined a capital call devised by the controlling membership faction which purported to require additional capital contribution by the non-controlling member alone, in conflict with the operating agreement’s provision for pro rata contributions by all the members. Contrast Georgi and Cooperstown with Fuiaxis v. 111 Huron Street, LLC, 58 AD3d 798 (2d Dept 2009) (read here my post on Fuiaxis), where the court upheld a compulsory capital call issued over the minority member’s dissent based on language in the operating agreement stating that “[f]rom time to time, Members will be required to make cash contributions to the Company for purposes as determined by the [Managing] Committee.”
The common thread in all these cases is the operating agreement. Without one, or without language in one expressly authorizing additional capital contributions and specifying the consequences of failing to make the contribution, Section 502 offers no help to the controlling member regardless of motive to promote the LLC’s welfare or squeeze out a minority member.