You own 25 percent of a California LLC. The two managing members now pay themselves large “management fees” and have stopped distributions, yet your K-1 still reports profit. You sue. Weeks later the LLC files Chapter 11, and you are told most of your case now belongs to the bankruptcy estate.
The Second Circuit sorted a New York LLC member’s claims this way in Little Hearts Marks Family II L.P. v. Carter (In re 305 East 61st Street Group LLC), 130 F.4th 272 (2d Cir. 2025), borrowing Delaware’s test. California has its own test, and Ninth Circuit bankruptcy law decides what survives.
Which claims belong to me personally as a member of a California LLC?
Under Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93 (1969), a claim is derivative when its gravamen is injury to the company, or when it seeks to recover or protect company assets. You may sue individually when your injury is not incidental to an injury to the company.
Schuster v. Gardner, 127 Cal. App. 4th 305 (2005), lists suits to compel declared or mandatory payouts and to enforce voting rights as typical direct actions. Unless the operating agreement says otherwise, Cal. Corp. Code § 17704.07(c)(4) requires all members’ consent before a manager-managed LLC sells substantially all its property or acts outside the ordinary course. A refused records request under section 17704.10 is direct, as is fraud that induced your investment. Stopped distributions are harder: section 17704.04(b) creates no right to one unless the company decides to pay.
Why do most squeeze-out complaints belong to the LLC instead?
Because the money left the company’s account, not yours. In PacLink Communications International, Inc. v. Superior Court, 90 Cal. App. 4th 958 (2001), insiders allegedly moved an LLC’s assets into new entities. The members’ claims were derivative, since they owned no interest in specific LLC property and their loss was “essentially a diminution in the value of their membership interest.”
Schrage v. Schrage, 69 Cal. App. 5th 126 (2021), is the cautionary case. A one-third owner of a family business group that included several LLCs lost his fiduciary duty judgment against his brothers on appeal. The claim was derivative, and his damages (the group’s loss divided by three) proved it. The court refused to exempt closely held companies and doubted Jara v. Suprema Meats, Inc., 121 Cal. App. 4th 1238 (2004), which treated excessive pay used as a disguised distribution as a direct claim.
Derivative suits must follow Cal. Corp. Code § 17709.02: membership when the wrong occurred, a particularized demand on the managers (or the reasons you made none), and written notice to the company. Defendants may seek a bond of up to $50,000. Under Sirott v. Superior Court, No. A164037 (Cal. Ct. App. May 5, 2022), you must also stay a member until the case ends.
Did you sue your co-members over money that left the company? If those claims are derivative and the LLC files first, the estate takes them, so get the pleading right before a petition lands.
Can I force a buyout or dissolution of a California LLC?
Any member, regardless of percentage, may sue under Cal. Corp. Code § 17707.03 when, among other grounds, management is deadlocked or subject to internal dissension or those in control have engaged in “persistent and pervasive fraud, mismanagement, or abuse of authority.” Section 17701.10(c)(7) bars the operating agreement from removing that remedy.
The others can avoid dissolution by buying you out for cash at fair market value. A disputed price goes to three court-appointed appraisers, usually valued as of your filing date. I find a dissolution petition starts buyout talks faster than any damages count. Expulsion needs an agreement clause, narrow unanimous-vote grounds, or a court order under section 17706.02.
What happens to my lawsuit when the managers put the LLC into Chapter 11?
The LLC’s own claims become estate property under 11 U.S.C. § 541(a)(1). Estate of Spirtos v. One San Bernardino County Superior Court Case Numbered SPR 02211, 443 F.3d 1172 (9th Cir. 2006), gives the trustee the exclusive right to sue for the estate, and section 1107(a) hands that power to a debtor in possession. So the managers you sued now control your derivative claims. Ahcom, Ltd. v. Smeding, 623 F.3d 1248 (9th Cir. 2010), lets state law decide which claims are the estate’s. It found no general alter ego claim belonging to a California company and rejected CBS, Inc. v. Folks (In re Folks), 211 B.R. 378 (B.A.P. 9th Cir. 1997), so a member who is also an LLC creditor may keep alter ego theories for herself.
The automatic stay halts suits against the LLC, but In re Chugach Forest Products, Inc., 23 F.3d 241 (9th Cir. 1994), holds it generally does not protect non-debtors such as the managers personally. Claims against the LLC face section 510(b) subordination. In In re Tristar Esperanza Properties, LLC, 782 F.3d 492 (9th Cir. 2015), a California LLC member’s judgment for her buyout price was subordinated anyway.
What can a minority member still do inside the bankruptcy case?
As an equity security holder, you may be heard on any issue under 11 U.S.C. § 1109(b). Price v. Gurney, 324 U.S. 100 (1945), requires dismissal of a petition filed without authority under state law. If your operating agreement is silent, section 17704.07(c)(4)(B) arguably required your consent.
In re Marsch, 36 F.3d 825 (9th Cir. 1994), upheld dismissal under section 1112(b) of a petition filed to head off a state court judgment. Otherwise, section 1104(a)(1) requires a trustee for fraud, dishonesty or gross mismanagement, before or after filing. A trustee can sue the managers or sell the claims under section 363(b), and you can bid. Bankruptcy Rule 2004 examinations can stand in for the stayed records suit.
How would this sort out for a three-member logistics LLC in Ontario?
In this illustrative case, Maya paid $250,000 in 2021 for 25 percent of a manager-managed trucking and warehousing LLC in Ontario; Ray and Tom manage it and split the rest. In 2025 they raised their fees from $150,000 to $420,000 apiece and stopped distributions. The LLC still reported $640,000 of taxable income, so Maya’s K-1 shows $160,000 with no cash. Her February 2026 records request goes unanswered. She sues in San Bernardino County Superior Court in April; the LLC files Chapter 11 in June.
The $540,000 of added fees is a derivative claim held by an estate Ray and Tom run; measuring her harm as 25 percent of it ($135,000) is exactly what sank the plaintiff in Schrage. Her records claim is direct but stayed as to the LLC. A fraud claim about her 2021 investment, aimed at Ray and Tom personally, keeps going. Her leverage is a dismissal or trustee motion, plus an offer to buy the fee claims.
As a CPA, I see the tax side hurt most. A multi-member LLC is a partnership by default, so 26 U.S.C. § 702(a) taxes Maya’s share whether or not cash arrives (the S corporation version is similar). Section 705(a) adds the $160,000 to her basis, so a later buyout is not taxed twice. Section 17704.10 entitles her to the returns, with tax information due within 90 days after year-end. If Ray and Tom buy her out, a section 754 election can give them an inside basis step-up worth pricing in. And if the plan cancels LLC debt, section 108(d)(6) tests the bankruptcy exclusion at the member level, so Maya may report cancellation income she cannot exclude that way.
What should a minority member negotiate into a California operating agreement?
Mandatory tax distributions first, subject to the solvency limits in section 17704.05. Then a cap on manager pay, or approval of related-party payments by the members not receiving them. Section 17701.10 lets the agreement define what is not disloyal but not eliminate the duty of loyalty in section 17704.09. Monthly financials should supplement the unwaivable statutory inspection right, usually my first pressure point. Add tag-along and put rights and a deadlock procedure. The clause I most often find missing is one requiring your consent to any bankruptcy filing.
| Typical complaint | Direct or derivative in California | If the LLC files bankruptcy |
|---|---|---|
| Assets diverted to managers’ new company | Derivative (PacLink) | Estate controls the claim |
| Excessive manager pay | Usually derivative; Jara exception questioned | Estate claim; supports a trustee motion |
| Denied records or tax returns | Direct (§ 17704.10) | Stayed against the LLC; use Rule 2004 |
| Withheld distributions | Direct only if mandatory or declared | Likely subordinated (§ 510(b)) |
| Fraud inducing your investment | Direct | Against managers, not stayed; against the LLC, subordinated |
| Freeze-out sale | Asset loss derivative; skipped member vote direct | Needs court approval; object as equity holder |
Frequently Asked Questions
Can I sue the managers of my California LLC in my own name?
Only for an injury that is not incidental to the company’s injury, such as breach of your own rights under the operating agreement. Claims that company money was wasted or diverted are usually derivative, with their own procedure.
Does the LLC’s bankruptcy stop my lawsuit?
It stops claims against the LLC, and derivative claims pass to the estate. Direct claims against the managers personally generally continue, though the debtor may ask the court to extend protection.
Can I still get a buyout if the LLC is in Chapter 11?
Not through the state dissolution case while the stay lasts. If the bankruptcy is dismissed, your dissolution claim and the buyout election under section 17707.03 return. Inside the case, a claim for your interest’s value is likely subordinated.
Why do I owe tax on LLC income I never received?
A multi-member LLC is usually taxed as a partnership, so members report their share of income even without cash. That income raises your basis, so it is not taxed twice. A mandatory tax distribution clause is the usual fix.
How do I get my LLC’s tax returns and books?
Make a written request under Corporations Code section 17704.10. The operating agreement cannot waive those rights, and a court may award attorney’s fees when a refusal was unjustified.
How North Star Law Firm Can Help
North Star Law Firm advises California LLC members on operating and shareholder agreements, from entity formation through disputes, and handles the bankruptcy side when the company files. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.
If you are being squeezed out of a California LLC, contact North Star Law Firm or schedule a consultation.