Those who manage Limited Liability Companies (LLC’s) have many responsibilities. It’s up to them to run a business and make a profit while living up to their responsibilities to fellow company members. Most managing partners, if their businesses aren’t making record profits, at least managed honestly and ethically. James Ha was not one of those managers.
Members of LLC’s owe duties of care and loyalty (called fiduciary duties) to the LLC and its members. Mr. Ha was the managing member of the 139 S. Occidental Blvd., LLC, which was started in 2005 to purchase a building in Los Angeles, tear it down, build condos and sell them. The project was abandoned.
He was sued by the LLC in 2006 for breach of contract, fraud and breach of fiduciary duties. A trial court found in the plaintiff’s favor and an appellate court affirmed the decision. 139 S. Occidental Blvd., LLC, v. Ha, 2013 WL 2421073
According to the appellate decision,
- Ha was responsible for real property ownership, management and proposed development.
- He made a $34,120 commission from the sale of the property which wasn’t reported to fellow LLC members.
- Ha opened a bank account in the name of the LLC with an initial deposit of $150,000, which was provided by members other than Ha and member Nam Kyung Cho. The bank account, as well as the LLC operating agreement, required that any check over $10,000 be signed by both Ha and member Hyon Mi Yi.
- Soon after the account was set up, Ma withdrew several checks for less than $10,000 for a total of $60,000 to supposedly pay back a loan to the LLC by Cho. There was no such loan agreement produced during the trial and there was no explanation as to what happened to the extra $10,000.
- Cho paid Ha $216,065.29 for a 12.5% interest in the proposed building. Ha deposited the money into his personal account.
- In 2006 members of the LLC voted Ha out as managing member and sued Ha and Cho.
This case shows what a managing member should NOT do when managing a business. From the appellate decision it looks like Ha didn’t take much care to move the project forward and given how funds were misused, didn’t feel much loyalty to other LLC members. It appears from the decision that even though others had invested in the project, Ha had treated it as his own, co-mingling business and personal funds and using LLC funds as his own.
If you’re involved in an LLC and have questions about your responsibilities or feel another member may not be living up to his or her obligations, call my office at (714) 415-2007.