LLC Member Not Liable for LLC’s Debts and Usury

Under Limited Liability Company Law §  609(a), a member or manager of a limited liability company is not personally liable for the LLC’s debts, obligations, or liabilities solely by reason of being a member or acting in that capacity. Applying this rule, the courts in 27-21 27th St. Sponsors, LLC v. Kanta, 2026 N.Y. Slip Op. 01273 (1st Dept. Mar. 05, 2026), held that a minority member of an LLC could not be sued individually for the LLC’s obligations, as the operating agreement likewise disclaimed member liability. The courts further found the promissory note at issue was criminally usurious on its face: its capped $306,000 return on an $850,000 principal reflected a 36% interest rate, exceeding New York’s civil and criminal usury limits. Because a criminally usurious instrument is void ab initio, both the note and the minority member’s guarantee were unenforceable. Equitable claims, including unjust enrichment, were also dismissed as precluded.

27-21 27th St. arose out of plaintiff’s investment in the construction of a condominium building via a convertible promissory note (the “Note”) given by defendant KST2 Properties, LLC (“KST2”) and guaranteed by defendant Kenneth Tolley (“KT”) and defendant Janos Kanta (“JK”) (“Defendants”). The latter was the managing member, and the former the minority member, of KST2 at the time the Note was given. 

The Note provided that it would accrue interest at “the highest rate permissible by law per annum, accruing monthly in a separate capital account created by [plaintiff], and payable during the term in a maximum capped payment of [$306,000.00].” The same cap applied to the guarantee. The Note further provided that it was subject “to the express condition that at no time shall [KST2] be required to pay interest at a rate which may be deemed usurious, and if any interest charged hereunder is deemed to be in excess of the maximum legal rate, then the interest rate hereunder shall immediately be reduced to the maximum legal rate.”

Plaintiff commenced the action to recover under the Note and guarantee, as well as recover its share of the profits of the sale of the condominium building, and a declaratory judgment that it was a member of KST2. 

The first and fourth causes of action asserted against Defendants arose out of the KST2 operating agreement. Generally, “a member of a limited liability company . . . is [not] liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent or acting (or omitting to act) in such capacities or participating (as an employee, consultant, contractor or otherwise) in the conduct of the business of the limited liability company.”[1] Similar to the LLCL, the KST2 operating agreement provided that “no Member shall be personally liable for any debt, losses or obligations of the Company by virtue of being a Member.” In the fourth cause of action, plaintiff sought to enforce KST2’s obligation to distribute the profits of the condominium sale.

The motion court held that with respect to the first cause of action for a declaratory judgment, it was properly brought against the company, rather than against the members directly, such as KT.  Thus, plaintiff’s claim against KT was improper. 

Turning to the sixth cause of action for breach of the guarantee, the motion court addressed KT’s argument that the Note was usurious. KT argued that, as a guarantor of the Note,[2] the Note’s maximum accrued interest of $306,000.00 on the principal amount of $850,000 over one year, which into an interest rate of 36%, well in excess of the civil and criminal usury rates of 16% and 25%, respectively.[3] 

Under New York law, usury applies to a “loan or forbearance of any money, goods or things in action.”[4]  “[I]t must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender.”[5] Notably, “[t]he court will not assume that the parties entered into an unlawful agreement.”[6] “[W]hen the terms of the agreement are in issue, and the evidence is conflicting, the lender is entitled to a presumption that he did not make a loan at a usurious rate”[7]However, “[i]f usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law.”[8] 

The motion court held that the Note was criminally usurious on its face. The motion court explained that the Note provided that interest would accrue at “the highest rate permissible by law per annum . . . payable during the term in a maximum capped payment of [$306,000.00].” The highest rate permissible by law, noted the motion court, is 16%, as set by the General Obligations Law and the Banking Law. Interest of 16% on the $850,000 principal yields interest of $136,000, rather than the maximum capped payment of $306,000. 

The motion court rejected plaintiff’s argument that because $306,000 was merely the maximum payment of interest possible, the reference to the maximum allowable legal rate acted as a savings clause, effectively preventing any usurious interest rate from actually applying. The motion court also rejected plaintiff’s argument that a provision of the Note, in effect, acted to reform the Note if KST2 was ever charged a usurious rate of interest. In rejecting the arguments, the motion court held that such language did not preserve an agreement that was usurious on its face.[9] 

The motion court also rejected plaintiff’s argument that because KST2 drafted the language at issue, plaintiff should be relieved of the consequences of lending at usurious rates.[10] 

Moreover, the motion court rejected plaintiff’s argument that KT owed plaintiff a fiduciary duty as a member of KST2. The motion court explained that plaintiff did not join KST2 until several months after the Note and guarantee were executed. Thus, the transaction was at arm’s length and did not give rise to equitable estoppel.[11]

Further, the motion court dismissed the eleventh cause of action seeking relief for unjust enrichment. Plaintiff claimed that KT had been unjustly enriched at plaintiff’s expense by the failure to repay under the guarantee and to receive its share of the profits from the sale of the condominium. The motion court noted that those obligations were covered by the Note and the KST2 operating agreement, respectively. Given “[t]he existence of a valid and enforceable written contract governing a particular subject matter,” explained the motion court, plaintiff’s was precluded from “recovery in quasi contract for events arising out of the same subject matter.”[12] 

Finally, noted the motion court, plaintiff could not recover in quasi contract because a lender that has charged criminally usurious interest may not recover on an equitable claim such as unjust enrichment.[13] 

On appeal, the Appellate Division, First Department, unanimously affirmed.

The Court held that “the motion court properly dismissed the first and fourth claims for declaratory relief and breach of the operating agreement against [KT] individually.”[14] First, said the Court, KT “was not properly named in the cause of action for a declaration that plaintiff is a member of KST2 because ‘[a] member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object is to enforce a member's right against or liability to the limited liability company.’”[15] 

The Court found “[p]laintiff’s attempt to hold [KT] personally liable for KST2’s acts unavailing because ‘[n]either a member of a limited liability company, a manager of a limited liability company managed by a manager or managers nor an agent of a limited liability company . . . is liable for any debts, obligations or liabilities of the limited liability company or each other.’”[16]  The Court further found that “nothing in the operating agreement suggest[ed] that [KT] intended to be personally liable for KST2’s acts.”[17] Pointing to the operating agreement, the Court noted that the agreement expressly disclaimed the liability of members “for any debt, losses or obligations” of KST2, consistent with LLCL § 609(a), except to the extent of members’ individual capital contribution.[18] “This language, said the Court, “negate[d] any inference of liability arising from [KT’s] having signed the operating agreement in his individual capacity for anything other than a claim related to his capital contribution, warranting dismissal of the fourth cause of action as against him.”[19]

The Court also held that the “motion court properly found that because the promissory note was civilly and criminally usurious on its face, it, and by extension [KT’s] guarantee, were void ab initio.”[20] The Court noted that “[a]lthough corporations and their guarantors may not raise the defense of civil usury, that prohibition [did] not apply to criminal usury.”[21] 

The Court held that the motion 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.”[22] “Based on the language in the [N]ote,” said the Court, the motion “court properly rejected plaintiff’s contention that the [N]ote was enforceable because the $306,000 was intended to be a return on a preferred equity investment rather than interest, as the conversion to an equity interest would not preclude the application of the usury laws.”[23]

The Court further held that the motion court “properly found that a usurious interest rate [could not] be salvaged by language providing that the intent is to collect the highest legal maximum interest rate.”[24] 

“Because an instrument seeking a criminally usurious interest rate is void,” concluded the Court, “the guarantee [was], too.”[25] 

Addressing plaintiff’s argument that it was KST2’s managing member and personnel who drafted the note, the Court held that “a note with a usurious interest rate is void, irrespective of which party drafted it.”[26] Although the Court has recognized a limited exception to the foregoing rule where “[a] borrower, who, because of a fiduciary or other like relationship of trust with the lender, is under a duty to speak and . . . fails to disclose the illegality of the rate of interest he proposes,”[27] the Court held that plaintiff failed “to plead facts sufficient for this exception to apply, as the usurious note was not signed by [KT], and there [were] no allegations that [KT] participated in its drafting or proposed the interest rate.”[28]

Finally, the Court held that “the motion court properly dismissed the unjust enrichment claim as precluded by the parties’ written agreements.”[29] The Court explained that “an equitable claim is not available to resuscitate an agreement found to be void based on criminal usury.”[30]

Takeaway

27-21 27th St. reinforces the protection from liability afforded to LLC members under New York law. Section 609(a) of the LLCL establishes that members and managers are not personally liable for the debts or obligations of the LLC merely because of their status, and the courts in 27-21 27th St. applied that rule strictly. The operating agreement for KST2 mirrored this statutory protection, and nothing in the agreement suggested that the minority member assumed personal liability for the Note. Consequently, both the motion court and the First Department held that defendant could not be sued individually for obligations arising from KST2’s contracts or its internal profit‑distribution duties.

27-21 27th St. also reaffirms the law on usury. The Note’s capped $306,000 return on an $850,000 investment translated to an interest rate of 36%, making the note criminally usurious on its face. Under New York law, a criminally usurious instrument is void ab initio, and because the guarantee stands or falls with the note, the minority member’s guarantee was void as well. The motion court and the First Department rejected plaintiff’s arguments that savings‑clause language or the characterization of the investment as “preferred equity” could salvage the agreement.

Finally, 27-21 27th St. underscores that equitable claims cannot be used to revive rights under a void usurious contract. Because valid written agreements governed the parties’ relationship, and because usury bars equitable recovery, the unjust‑enrichment claim failed.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions and not on matters handled by the firm.

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[1] Limited Liability Company Law (“LLCL”) § 609(a).

[2]  A guarantor of the note may raise the usury defense belonging to the principal debtor. Fred Schutzman Co. v. Park Slope Advanced Med., PLLC, 128 A.D.3d 1007, 1008 (2d Dept. 2015).

[3] General Obligations Law (“GOL”) § 5-501; Banking Law § 14-a; Penal Law § 190.40).

[4] GOL § 5-501; Donatelli v. Siskind, 170 A.D.2d 433, 434 (2d Dept. 1991).

[5] Donatelli, 170 A.D.2d at 434.

[6] Giventer v. Arnow, 37 N.Y.2d 305, 309 (1975).

[7] Id.

[8] Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc., 105 A.D.3d 178, 183 (1st Dept. 2013).

[9] Bakhash v. Winston, 134 A.D.3d 468, 469 (1st Dept. 2015); Simsbury Fund, Inc. v. New St. Louis Assocs., 204 A.D.2d 182, 182 (1st Dept. 1994).

[10] Bakhash, 134 A.D.3d at 469.

[11] Kingsize Entertainment, LLC v. Martino, 155 A.D.3d 856, 857 (2d Dept. 2017).

[12] Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 N.Y.2d 382, 388 (1987).

[13] Blue Wolf Capital, 105 A.D.3d at 184.

[14] Slip Op. at *1.

[15] Id. (citing LLCL § 610).

[16] Id. (quoting LLCL § 609(a).

[17] Id.

[18] Id.

[19] Id.

[20] Id. (citing Blue Wolf Capital, 105 A.D.3d at 183).

[21] Id. (citing GOL § 5-521(1), (3)).

[22] Id. (citing GOL § 5-501(2); Banking Law § 14-a(1); Penal Law § 190.40).

[23] Id. (citing Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320337 (2021)).

[24] Id. (citing Bakhash v .Winston, 134 A.D.3d 468, 469 (1st Dept. 2015)).

[25] Id. (citing Blue Wolf Capital Fund, 105 A.D.3d at 184).

[26] Id. (citing Bakhash, 134 A.D.3d at 469).

[27] Pemper v. Reifer, 264 A.D.2d 625, 626 (1st Dept. 1999).

[28] Id.

[29] Id.

[30] Id. (citing Blue Wolf Capital, 105 A.D.3d at 184; Sorenson v. Winston & Strawn, LLP, 162 A.D.3d 593, 593 (1st Dept. 2018)).