Summary
The Appellate Division, First Department, unanimously affirmed dismissal of claims against Kenneth Tolley arising from an operating agreement, a guarantee, and a convertible promissory note. The court held that Tolley was not a proper defendant for certain claims, was not personally liable for the LLC's obligations, and that the note and guarantee were void because the note was criminally usurious; it also upheld dismissal of the unjust enrichment claim.
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Practice areas
Questions Presented
- Whether Tolley was a proper individual defendant in plaintiff's claim seeking a declaration that plaintiff was a member of KST2 Properties LLC.
- Whether Tolley could be held personally liable for KST2's obligations under the operating agreement despite the operating agreement's liability disclaimer and Limited Liability Company Law § 609(a).
- Whether the convertible promissory note was civilly and criminally usurious on its face and therefore void ab initio, including whether the guarantee was likewise void.
- Whether the note's conversion feature or characterization of the maximum return as an equity investment avoided application of the usury laws.
- Whether plaintiff could maintain an unjust enrichment claim where written agreements governed the parties' relationship and the underlying agreement was void for criminal usury.
Holdings
- A member of an LLC is not a proper party to a proceeding by or against the LLC unless the proceeding seeks to enforce the member's right against, or liability to, the LLC; therefore, Tolley was properly dismissed individually from the claim seeking a declaration that plaintiff was a member of KST2.
- Tolley could not be held individually liable for KST2's debts, obligations, or liabilities based merely on his status as a member or his individual signature on the operating agreement, where the agreement expressly disclaimed member liability except to the extent of an individual capital contribution.
- The $850,000 convertible promissory note was civilly and criminally usurious on its face because its $306,000 maximum return over one year reflected a 36% interest rate, exceeding New York's 16% civil-usury rate and 25% criminal-usury rate; the note and Tolley's guarantee were therefore void ab initio.
- The note was not enforceable merely because the $306,000 return was characterized as a preferred-equity return or because the note permitted conversion into preferred equity; conversion into an equity interest does not preclude application of the usury laws.
- A usurious interest rate cannot be salvaged by language stating that the parties intended to collect only the highest lawful rate, and the note remains void regardless of which party drafted it.
- Plaintiff could not maintain its unjust enrichment claim because the parties' written agreements governed the subject matter, and an equitable claim cannot be used to resuscitate an agreement void for criminal usury.
Key quotations
“The motion court properly found that because the promissory note was civilly and criminally usurious on its face, it, and by extension Tolley's guarantee, were void ab initio” ([*1])
“The court correctly determined that the $306,000 maximum return reflected an interest rate of 36%, well above the civil and criminal usury rates of 16% and 25%, respectively” ([*1])
“While plaintiff maintains it should be permitted to plead unjust enrichment in the alternative, this Court has found that an equitable claim is not available to resuscitate an agreement found to be void based on criminal usury” ([*1])
Factual background
Plaintiff sought a declaration that it was a member of KST2 Properties LLC and asserted claims against Kenneth Tolley individually for breach of the operating agreement, breach of a guarantee, and unjust enrichment. Plaintiff's claims arose from an $850,000 convertible promissory note providing for a maximum return of $306,000 over one year and permitting conversion into preferred equity. The note and Tolley's guarantee were challenged as criminally usurious, and KST2's operating agreement disclaimed individual member liability except for capital contributions.
Procedural history
Supreme Court, New York County, granted Tolley's motion to dismiss the specified causes of action against him. The Appellate Division, First Department, unanimously affirmed the order with costs.