Legal Question in Business Law in California

Re: Partner taking funds without authorization

The answer to your first question regarding whether taking business money for personal use is a criminal act is probably yes based on the facts stated in your question, however the facts may dictate otherwise. The act would probably be considered embezzlement of company funds. If you wish to pursue this criminally then you should make a police report and report to the District Attorneys Office for investigation.

Your next question is what ramifications do the other partners have. The "partners" (members) may be able 1) to terminate the membership interest of a member from the LLC depending on the operating agreement and 2) may seek reimbursement of the business funds used by the member for personal use in a civil action.

The first thing to do would be to examine your LLC operating agreement closely to determine if there is anything regarding Operating Members Duties and Liabilities or other similar language. Next examine the agreement and determine how an LLC membership interest may be terminated.

An LLC's operating agreement may provide for termination in whole or part of membership interests and economic interests. If an economic interest is so terminated, the member is entitled to demand and receive a return of that interest (Corp. Code � 17100(c)).

Next regarding reimbursement of the funds, a civil action under tort and contract theories is possible and recovery, based on the facts as indicated, likely. The contract actions would depend on the language of the operating agreement. Tort causes of action would be based on a breach of a fiduciary duty theory. The most applicable to this situation is 1) Breach of the Duty of Care, and 2) Breach of the Duty of Loyalty.

Duty of Care- Directors (Members of an LLC) are vested with the duty to manage the corporation (LLC) to the best of their ability; they are not insurers of

success, but rather required to discharge their duties:

1. In good faith;

2. With the care that an ordinary prudent person in that position would exercise; and

3. In a manner that is in the best interest of the corporation (LLC).

Duty of Loyalty- A director (member of an LLC) owes a duty of loyalty to the corporation (LLC). Duty of loyalty problems arise when there is self dealing (as in this case) or if there is conflict of interests between the director and corporation. Along those lines a director (LLC member) may not self deal by making disbursements to himself unless the transaction is 1) fair and 2) approved by the other directors (LLC members) after full disclosure.

Along those lines, a member or assignee of a member of an LLC is personally obligated to return an improper distribution from an LLC to the extent that the member or assignee had actual knowledge of facts indicating the impropriety of the distribution (Corp. Code � 17254(e)).

I hope that this answer helped with your question. Please do not hesitate to call me if you need further assistance or wish to pursue this legally.

Re: Partner taking funds without authorization

From the limited facts given thus far, the injured partners could sue in civil court for damages herein, under a breach of contract or tortious fraud legal theory. Our Law Firm can provide you affordable and invaluable civil assistance here upon reqest. This act may also constitute embezzlement, or another theft crime by statute, however, you should either report it and refrain from any type of disparaging remarks to or about this partner at issue, to make sure you avoid any type of civil liability yourself.

Re: Partner taking funds without authorization

(1) It's commonplace (and OK) to refer to fellow members of an LLC as "partners," but legally you are not partners and there's a huge difference in the liability consequences, so I would suggest not using the term "partner" as it may convey the wrong message. By the way, the organizational document of an LLC is referred to as an "operating agreement" in the statutes, reserving "bylaws" for corporations.

(2) Taking the money without authorization is probably embezzlement unless he has a defense that isn't apparent from the facts you've stated. Criminal cases are initiated by DAs, usually after a referral from the police, so the starting point would be to make a police report to the white-collar crimes unit. If he's convicted, the LLC might be entitled to restitution.

(3) More important to your company and you, perhaps, is that you have several theories for recovering from him in a civil lawsuit, if necessary. The legal theories or "causes of action" as they are called could include torts (such as conversion and breach of fiduciary duty) and contract-based causes of action (breach of contract). The choice may depend upon strength of proof, whether attorney fees can be recovered, possible punitive damages, a difference in the statute of limitations, and so on. Most attorneys would sue on all reasonably likely theories.

(4) Avoiding a slander suit is a good idea, not because you are highly likely to lose, but because defense would be time-consuming and a distrction from the real problem. Remember that truth of the statement is always a defense to slander, and the last thing this guy should be wanting is a trial where the main issue is whether he is a criminal.