Court Rules That A Conversion May Be Actionable As Conversion

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Allen Matkins

The California Revised Uniform Limited Liability Company Act authorizes the conversion of a limited liability company into various other types of entities, including a corporation.  Cal. Corp. Code § 17710.02.  Following conversion, the succeeding entity is for all purposes (with certain exceptions under the Revenue & Taxation Code) "the same entity that existed before the conversion and the conversion shall not be deemed a transfer of property".  Cal. Corp. Code § 17710.09(a).  If there is no transfer of property, could there nonetheless be a "theft" of property?

In Holistic Supplements, L.L.C. v. Stark, 2021 Cal. App. LEXIS 176, the defendant allegedly transferred his membership interest in a California limited liability company to the plaintiff but notwithstanding the alleged transfer later converted the limited liability company into a corporation.  The defendant persuaded the trial court that the plaintiff had no direct claim and lacked standing to bring derivative claims.  The Court of Appeal disagreed, holding that the plaintiff may pursue direct claims for the "theft" of her membership interest apart from any injury to the limited liability company. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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