A recent unanimous ruling from the Appellate Division of the New York Supreme Court, First Department, reinforces a core benefit of the LLC structure: individual members and managers cannot be held personally liable for the company’s debts simply because of their role in the business. The decision in 27-21 27th St. Sponsors, LLC v. Kanta1 offers important guidance for business owners, investors, and lenders.
The case arose from a real estate investment gone sideways. The plaintiff invested $850,000 in the construction of a condominium through a convertible promissory note issued by KST2 Properties, LLC. The note was guaranteed by two individual defendants, including Kenneth Tolley, a minority member of KST2. When the deal soured, the plaintiff sued, seeking a recovery on the note and guaranty, a share of the building’s sale profits, and a declaration that it was a member of the LLC.
The trial court dismissed the claims against Tolley individually, and the First Department unanimously affirmed. The court’s reasoning rested on two independent grounds.
First, under New York Limited Liability Company Law § 609(a), an LLC member is not personally liable for the company’s debts or obligations solely because of that membership. The court found that nothing in KST2’s operating agreement changed this result. In fact, the agreement expressly disclaimed member liability for company debts except to the extent of each member’s capital contribution. Because there was no evidence that Tolley had separately and unmistakably agreed to take on personal liability, the claims against him had been properly dismissed.
Second, the note was void for usury. The note promised the plaintiff a maximum return of $306,000 on an $850,000 principal over one year—an effective interest rate of roughly 36%. New York caps civil interest at 16% and treats rates above 25% as criminally usurious. Because the note was criminally usurious on its face, it was void from the outset, and the guaranty fell with it. The court rejected the plaintiff’s attempts to recharacterize the payments as a return on a “preferred equity investment” and refused to give effect to boilerplate savings-clause language purporting to cap the rate at the legal maximum.
What’s the upshot?
For LLC members and managers, the LLC liability shield remains robust under New York law. To maximize its protection, ensure that the operating agreement expressly disclaims personal liability for company debts and obligations—mirroring the language of Section 609(a). Members should avoid signing instruments in their individual capacity in a way that could be read as a personal guarantee of company obligations.
For lenders and investors, this decision is a cautionary tale. Creative structuring, such as convertible features, preferred-equity labels, or savings-clause language, will not rescue a loan that, on its face, charges interest above New York’s statutory thresholds. Lenders should model the economics of every instrument against both the 16% civil and 25% criminal usury ceilings before closing. If the all-in return exceeds those limits, the entire instrument, and any related guaranty, may be void and unenforceable.
For all parties to LLC transactions, well-drafted operating agreements matter. The court in this case looked closely at the operating agreement’s language disclaiming member liability. Clear, precise drafting aligned with statutory protections can be a company’s first and strongest line of defense when disputes arise.
12026 N.Y. Slip Op. 01273 (1st Dept. Mar. 05, 2026).
