There is perhaps no provision in an LLC operating agreement more susceptible to abuse than one allowing those in control of the LLC to make mandatory capital calls. For one, that authority often comes with very few restrictions on the grounds for, frequency, and amount of capital calls. Moreover, the members with the power to make the mandatory capital calls often are better funded, have better access to information concerning the LLC, and—most importantly—have the ultimate authority to deploy the capital as they see fit. For minority members in an LLC subject to a mandatory capital call requirement, the risks of dilution and financial pressure can hardly be overstated.
Recognizing the potential for abuse in a mandatory capital call provision, courts sometimes contort themselves to avoid penalizing the non-contributing members. They either insist on strict compliance with technical requirements or otherwise equitably intervene. In one case, the Appellate Division, Fourth Department invalidated a capital call for failure to comply with the notice provision of the operating agreement. In another, the court enjoined the majority member from enforcing the capital call provision of an operating agreement until the minority member had a chance to petition for dissolution of the LLC.
New York LLC members defending against an abusive capital call should take note of a first-of-its-kind estoppel defense, courtesy of New York County Commercial Division Justice Borrok’s recent decision in Gurewitsch v Korff, No. 651080/2020 (New York County July 9, 2025).
The Riverside Development Project
Like many posts on this blog, Gurewitsch arises from a failed real estate development project.
In 2004, Plaintiffs and defendant Joseph Korff agreed to purchase and develop into condominiums a property in Riverdale, New York. They formed 3618 LLC, which acquired the property in 2005. Plaintiffs own a 49.5% interest in the Company, and entities under Korff’s control own the remaining 50.5%. Today, the Company is the beneficial owner of a 65-unit condominium building.
The parties executed an Amended and Restated Operating Agreement that designates Korff as the “Non-Member Manager,” and vests him with general authority to manage the affairs of the Company.
As soon as the Company acquired the property in 2005, Korff secured more than $44 million in financing and began development of the property.
According to Plaintiffs, however, the project since its inception has been a spectacular failure under Korff’s management. The Company sustained millions in losses, and it never paid any distributions to Plaintiffs. And more than 20 years later, Korff has still not caused the Company to sell at least two units.
Plaintiffs’ Claims Against Korff for Self-Dealing
Plaintiffs sued Korff in 2020 for various acts of self-dealing and misconduct in his role as the non-member manager. According to Plaintiffs, Korff misappropriated Plaintiffs’ share of Company profits and valuable tax losses. Plaintiffs further allege that Korff purported to grant his friends and family “senior equity” in the Company, wrongfully diluting and subordinating Plaintiffs’ ownership interest.
Korff’s Loans, Belated Capital Call
Korff told a dramatically different story. He explained that over the years, he repeatedly impressed upon Plaintiffs the Company’s dire need for additional funds. Plaintiffs responded that they had nothing further to contribute, but that they would contribute additional funds when they became available.
So based on those discussions, Korff or entities under his control loaned the Company more than $16 million over the years, which enabled the Company to meet its operating needs and keep the project afloat. By February 2024, the Company still owed more than $9 million to entities owned or controlled by Korff.
In February 2024—years after Plaintiffs commenced their lawsuit—Korff caused the Company to issue a mandatory capital call to the Company’s members for $8.8 million, Plaintiffs’ share of which was approximately $4.4 million. The stated purpose of the capital call was to sufficiently fund the Company to repay the insider loans to entities under Korff’s control.
The Mandatory Capital Call Provision
Korff found support for his capital call in the Company’s Operating Agreement, which permits the Non-Member Manager (Korff), to make capital calls “if the Company requires additional funds in connection with the business of the Company.” Section 2.1 of the Operating Agreement states:
The Members shall make such Capital Contributions . . . as the Non-Member Manager deems appropriate from time to time. If the Company requires additional funds in connection with the business of the Company, then the Members shall . . . make additional Capital Contributions in accordance with their Membership Interests.”
The Operating Agreement continues:
If any Member fails to advance its share of such Capital Contributions, one or more of the remaining Members may advance the sums needed, and such sums shall be considered a loan to the Company, on which such Member shall be paid interest . . .”
Notably absent from this provision is any self-effectuating penalty, such as equity dilution or forfeiture, for a member who fails to contribute his or her share of the capital call. In the event of a non-contribution, the remaining members can either loan funds to the Company or sue the non-contributing member for his or her share (drafters should see Peter Mahler’s post about the importance of carefully drafting a capital call provision).
Plaintiffs Refuse Korff’s Capital Call
The Plaintiffs refused to contribute any portion of their required capital. When Korff counterclaimed to enforce the mandatory capital call, Plaintiffs moved to dismiss Korff’s counterclaims.
Plaintiffs based their motion on Section 2.2 of the Operating Agreement, which provides that “Neither [of] the Members . . . shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member.” That limitation on personal liability, Plaintiffs argued, prevented Korff from making a capital call to satisfy the debts of the Company.
From my standpoint, Plaintiffs’ argument should fail. As I read the Operating Agreement, Section 2.2 simply recites the general liability shield of LLC Law 609; it doesn’t limit the manager’s ability to make capital calls to pay the Company’s debts. Add to that the likelihood that the Plaintiffs’ proposed reading of Section 2.2—that it prohibits capital calls to pay the debts of the Company—would eviscerate the capital call provision entirely; to what other use could the capital call funds be put?
Estoppel Carries the Day
By Decision and Order dated July 9, Justice Borrok granted Plaintiffs’ motion to dismiss Korff’s counterclaim, but on different grounds than those urged by Plaintiffs.
The Court started by observing that when the Company required financing throughout the development of the project, Korff chose not to make a capital call, but instead to finance the Company via loans from entities under his control. When he made that choice, he charted his path.
The Court continued:
Years later, he made a hindsight asymmetrical demand for reflective repayment. At this later date and for this purpose, this simply can no longer be said to be a legitimate capital call made pursuant to terms of the Operating Agreement. At this later date, the ‘capital call’ was to share the loss of his unilateral investment decision. As such, it is impermissible.”
Stated differently:
[H]aving made the unilateral decision to refrain from making a capital call where the Minority Members could have potentially exercised their rights (including by objecting to the capital call as not in the best interests of the business at that date, or otherwise bringing an application for injunctive relief, or seeking to put the Company in bankruptcy), the non-Member Manager cannot make a non-pro rata capital call to share in his reflective loss.”
Introducing an Estoppel Defense to Mandatory Capital Calls?
There’s an appealing fairness in the Court’s reasoning. When faced with the need for capital during the lifetime of the Company, Korff had the option to either make a capital call in accordance with the operating agreement, or loan funds to the Company in an amount and at a rate he chose. By choosing the latter, Korff chose—and benefitted from—all the traditional advantages that debt has over equity: guaranteed returns, priority in bankruptcy, etc. Now that the business does not have adequate capital to repay his loans, he cannot use his capital call rights to hoist 49.5% of that debt to Plaintiffs.
It also adds a new layer of defense for minority members seeking to oppose a mandatory capital call, and a new consideration for the majority considering how to raise funds: a capital call solely for the purpose of paying off insider debt might be a tough sell.
Perhaps the most powerful part of the Court’s decision is the procedural posture in which it arises. It’s extremely rare to see a fairness analysis like the Court’s at the motion to dismiss stage. As we began this post, courts appear willing to be far more critical of mandatory capital call provisions than others.
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