Legal Question in Business Law in California

Re: LLC buyout

Legally binding upon WHOM is probably the real issue here. If properly executed by the two of you in your individual capacities and also on behalf of the LLC, and assuming you are all the managers, the agreement will probably be binding on the LLC and the two of you.

The problem is, you lack the power to bind third parties.

Look at it this way. X and Y, individuals, form X&Y, LLC. Then, to get it up and running, X&Y, LLC borrows $1,000 from ABC Bank. There is a debtor-creditor relationship between X&Y LLC and ABC Bank. Neither X nor Y has any legal relationship with ABC Bank.

Now, suppose X&Y, LLC needs an additional $2,000. ABC Bank agrees to make the loan, but due to credit concerns, it requires X to co-sign.

Later, X gets tired of the business and Y agrees to buy him out by assuming "the debt" (meaning, in their thinking, all $3,000). They write up the deal and X withdraws by causing the proper form to be filed with the Secretary of State (an LLC-2, I think, if memory serves).

Later, the business fails. Who is liable to ABC Bank, and for how much?

As I see it, ABC Bank has a claim against X&Y, LLC for $3,000, and if only $1,500 is collectible from X&Y, LLC, then ABC Bank can pursue X for the $1,500 balance, because ABC Bank is not bound by the agreement between X and Y. If X has to pay the $1,500, he can then go after Y personally - but the bank can't - UNLESS there has been some fraud, breach of duty, alter ego, etc. misdeed in connection with the operation or liquidation of X&Y, LLC, in which case there could be individual liability to ABC Bank by X and/or Y, but it wouldn't (most likely) be based on the buy-out agreement.