If you’re a managing member of an LLC, treating the company’s cash, computers, and customer lists as your own can do more than trigger dissolution and damages. In a recent Illinois appellate decision, Wolfson v. Dugout Northbrook, LLC, 2025 IL App (1st) 232257, the court upheld an award of the plaintiffs’ attorneys’ fees as punitive damages after a member diverted an LLC’s assets and business to a new, wholly controlled venture and used company property and data to do it. The message is simple: fiduciary breaches involving misappropriation and self-dealing can make you pay the other side’s legal bills on top of compensatory damages.
What happened
- After internal disputes, one member took sole control, transferred funds from the original LLC’s bank account to a new entity, and kept using the LLC’s computer and customer lists. The court found these facts undisputed at summary judgment and held this conduct constituted conversion of company assets and a breach of fiduciary duty. (¶ 11).
- The court also found that the member formed and ran a successor/competing entity, funneled benefits to an affiliated landlord through inflated rent and utilities, and refused to wind up and distribute assets despite demand—breaching duties of loyalty and fair dealing through wind up. (¶ 12).
Why attorneys’ fees were awarded as punitive damages
- The trial court awarded punitive damages by imposing the plaintiffs’ attorneys’ fees (reduced to 50%), expressly finding the breaches were willful, egregious, and calculated to harm—and that punitive damages are available for breaches of fiduciary duty and conversion. The appellate court affirmed. (¶¶ 49, 104).
Other financial exposure the member faced
- Disgorgement of benefits: 50% of the rent increase paid to the affiliated landlord, 50% of utilities paid for the landlord’s benefit, 50% of cash distributions taken by the member, and 50% of the successor entity’s fair market value, supported by unrebutted expert evidence—all affirmed on appeal. (¶¶ 44, 92, 97).
Practical cautions for LLC members and managers
- Do not repurpose company funds, equipment, or customer lists for a new or competing venture. That is classic conversion and a breach of fiduciary duty, especially pre-dissolution and during wind up. Courts may treat successor operations as holding diverted assets and opportunities in trust for the LLC.
- Related-party transactions demand rigor. Inflating rent or shifting utility burdens to benefit an affiliated landlord is likely to be viewed as self-dealing and lead to disgorgement.
- Expect fee shifting via punitive damages for willful breaches. Even without a fee-shifting clause, egregious misconduct can result in paying the other side’s attorneys’ fees as punishment and deterrence.
- Preserve your record—or risk waiver. Unsupported denials won’t defeat summary judgment; failure to submit counter-affidavits or to timely raise arguments can forfeit defenses on appeal.
Takeaway
LLC members owe duties of loyalty and fair dealing through wind up. Misusing company cash, devices, and customer data to prop up a new, personally controlled venture is a fast path to liability for conversion and fiduciary breach, hefty disgorgement, and, critically, the other side’s attorneys’ fees as punitive damages. The cost of “moving fast” with company assets can be far higher than walking the proper wind-up and distribution path.
The decision in Wolfson underscores the importance of the measures small company owners take in connection with the management or the dissolution of the company. If you are thinking of dissolving your company to take advantage of a better or different opportunity, or you suspect that the other members of your company might be planning such a move, you should reach and engage counsel before any such plans are executed.
By Peter M. Storm
Storm & Piscopo, P.C.
