Commercial Division Blog

Posted: February 26, 2015 / Categories Commercial, Business Divorce

Absent Agreement on Treatment, Member's Payments to LLC are Loans, Not Capital Contributions

On February 18, 2015, the Second Department issued a decision in Chiu v. Chiu, 2015 NY Slip Op. 01427, holding that funds paid by a member to an LLC should be treated as loans, rather than contributions to capital, in the absence of evidence that the parties intended them to be capital contributions.

In Chiu, two members of an LLC litigated their respective ownership shares and the value of those shares. Reversing a trial court decision after trial that one of the members had only a 10 percent ownership interest, the Second Department explained:

After a joint nonjury trial, the Supreme Court issued a decision finding that although Winston Chiu initially had a 25% membership interest in the LLC, subsequent capital contributions by Man Choi Chiu had the effect of reducing Winston Chiu's membership interest to 10% and increasing Man Choi Chiu's membership interest to 90%. . . . Here, the Supreme Court properly determined that the LLC's records, which included the LLC's tax returns for the years 1999 and 2000, established that Winston Chiu's initial membership interest was 25%. Although Man Choi Chiu contends that the LLC's records were incorrect, he cannot subsequently take a position contrary to that taken in the income tax returns which he admitted that he signed. However, the Supreme Court incorrectly determined that the subsequent contributions by Man Choi Chiu should be treated as capital contributions, and not as loans, as the record was bereft of any evidence of an agreement between the members to such treatment. Accordingly, on the date of his withdrawal, Winston Chiu's membership interest remained at 25%.

(Internal quotations and citations omitted) (emphasis added).

NOTE: Schlam Stone & Dolan LLP was counsel for Winston Chiu at trial and on appeal.