ExpulsionThere are arguments pro and con when it comes to the power to expel a/k/a dissociate an LLC member. On the one hand, expulsion can be viewed as a necessary measure to preserve the LLC as a going concern when faced with persistent misconduct or failure to perform by one of its members. On the other hand, depending how broadly or narrowly the expulsion criteria are drawn, the power to expel can be a tool of oppression and abuse by those wielding it for their self-advantage.

Expulsion can occur in one of two ways. First, the operating agreement can authorize member expulsion under specified circumstances by self-executing action of the other members or managers. This is not a feature I regularly come across in operating agreements of LLCs, especially those whose membership consists of founding owners actively involved in the business.

Second, in states that have adopted the Revised Uniform LLC Act — to date numbering 16 plus the District of Columbia; New York is not one of them — courts are authorized to expel an LLC member on application by the company or a member on three specified grounds, two of which entail fault-based standards based on intentionally wrongful conduct or material breach, and the third of which dispenses with the notion of wrongful conduct by authorizing judicial expulsion of a member who

has engaged or is engaging in conduct relating to the company’s activities and affairs which makes it not reasonably practicable to carry on the activities and affairs with the person as a member.

Not surprisingly, the open-endedness of the above provision when utilized in LLC disputes has generated litigation, with New Jersey courts taking the lead. Last week, in IE Test, LLC v Carroll, 2016 WL 4086260 [NJ Sup Ct Aug. 2, 2016], that state’s Supreme Court handed down a major decision in which it reversed the lower courts’ summary judgment order expelling an LLC member and adopted a series of factors to assist trial courts in determining whether it is not reasonably practicable to operate an LLC in light of a subject member’s conduct. Continue Reading New Jersey Supreme Court Raises the Bar for Judicial Expulsion of LLC Members

Access1It’s been over 21 years since New York enacted its LLC Law, during which we’ve only seen a handful of court decisions concerning a member’s right to inspect company books and records under LLC Law § 1102. A first impression decision last month addressed not the scope of inspection, but whether inspection can be conditioned on an undertaking not to disseminate the information obtained or to contact other members whose identities are disclosed by the inspection.

Let’s begin with a few basics. Managing members of a limited liability company normally require unrestricted access to, and control over, company books and records, which is right and proper given their supervisory and fiduciary roles in regard to company operations and finances. Non-managing members generally have a narrower but nonetheless vital interest in gaining access to company books and records, centered on monitoring the activities of, and potential abuses by, the managers as agents of the LLC, and keeping themselves apprised of the company’s financial condition and the value of their investment.

Section 1102 of New York’s LLC Law, which in large part was patterned after Section 121-106 of the state’s Revised Limited Partnership Law, contains both mandatory and default rules governing the maintenance of, and member access to, books and records. Sections 1102 (a) and (b) mandate that “any member” has the right to inspect “for any purpose reasonably related to the member’s interest as a member” certain minimal records that must be maintained by the LLC including the names and addresses of all managers and members, the LLC’s articles of organization and operating agreement, and tax returns for the three most recent fiscal years, plus such “other information regarding the affairs of the [LLC] as is just and reasonable.”

At the same time the statute recognizes management’s competing interest to control and even limit both the logistics and scope of inspection. Under Section 1102 (b), the manner and circumstances of inspection are subject to “reasonable standards as may be set forth in, or pursuant to, the operating agreement.” For instance, it’s typical to find in operating agreements provisions requiring a written demand for inspection, regulating the time and place of inspection, and specifying the requesting member’s obligation to pay the costs of inspection. Continue Reading Conditional Inspection of LLC Books and Records: When Is It Permitted?

ChhoseThe Revised Uniform Limited Liability Company Act (2006) or “RULLCA” continues to gain momentum as it spreads across the United States. Currently, fourteen states plus the District of Columbia have adopted RULLCA including California, Florida, and two of New York’s neighbors — New Jersey and Vermont. If and when adopted by Pennsylvania and Connecticut, where RULLCA legislation already has been introduced, New York will be surrounded by RULLCA jurisdictions with the exception of Massachusetts. RULLCA legislation also is pending in Illinois and South Carolina.

Of greatest interest to business divorce lawyers are (1) RULLCA’s relatively expansive grounds for judicial (involuntary) dissolution of LLCs including oppressive conduct by managers and authorizing remedies other than dissolution, i.e, buy-out, and (2) RULLCA’s provision, completely foreign to LLC laws in New York and elsewhere, authorizing judicial dissociation (expulsion) of a member under certain circumstances.

The two provisions have a lot in common. Indeed, there’s substantial overlap between the statutory grounds for dissolution and dissociation under RULLCA. A recent appellate ruling out of the District of Columbia provokes examination of the strategic choice to be made when initiating a business divorce litigation whether to pursue dissolution, dissociation, or both. Continue Reading Choose Carefully: Dissolution vs. Dissociation Under RULLCA

ExpulsionPresently fourteen states and the District of Columbia have enacted the Revised Uniform Limited Liability Company Act (2006). RULLCA legislation is pending in three other states. Regrettably, New York is not one of them.

One of RULLCA’s innovative features, carried over from the original Uniform LLC Act (1996), is its provision in Section 602(6) authorizing judicial expulsion (“dissociation”) of a member who:

(A) has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under Section 409; or

(C) has engaged in, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

New Jersey adopted RULLCA effective March 2013 for all new LLCs and made applicable to all existing New Jersey LLCs as of March 2014. However, even before adopting RULLCA, New Jersey’s previous LLC Act included a provision substantially mirroring RULLCA’s Section 602(6). Continue Reading Involuntary Member Dissociation Under RULLCA

In Laurel Hill Advisory Group, LLC v American Stock Transfer & Trust Co., 2013 NY Slip Op 08351 [1st Dept Dec. 12, 2013], a Manhattan appellate panel recently reinstated a claim to enforce an alleged oral LLC agreement, among other provisions, granting the appellant a 10% membership interest. The decision turned on the lower court’s conclusion, with which the appellate panel disagreed, that the appellant had conceded the existence of a written operating agreement both that pre-dated the alleged oral LLC agreement and excluded him as a member.

The court’s brief decision aroused my curiosity, mostly because it didn’t mention the LLC’s state of formation which matters greatly because in some states, including New York, the LLC statutes mandate a written operating agreement. Nor did the opinion cite any case law on the point, from New York or elsewhere, that might have given it away.

Sure enough, when I checked the lower court’s decision (read here), I saw that the LLC in question, a New York based corporate governance/proxy solicitation firm known as Laurel Hill Advisory Group, is a Delaware LLC. Section 18-101(7) of the Delaware LLC Act defines an LLC agreement as “any agreement . . . written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” Indeed, Delaware recently strengthened its policy protective of oral LLC agreements by amending § 18-101(7) to specify that such agreements are not subject to any statute of frauds, thereby legislatively overruling the Delaware Supreme Court’s 2009 ruling in Olson v Halvorsen. Continue Reading The Oral LLC Agreement: Boon or Bane?

My recent post about New Jersey’s adoption of the Revised Uniform Limited Liability Company Act (RULLCA) highlighted the statute’s new provisions for judicial dissolution of LLCs under which the controlling members’ oppressive conduct is grounds for relief, and authorizing the court to order a buy-out in lieu of dissolution.

One aspect of the new law that remains substantially unchanged, and which also can become a weapon when LLC members have a falling out, is its provision for judicial “dissociation” of a member, i.e., the involuntary expulsion of one member of an LLC upon application to the court by another or by the company. The LLC statutes in New York, Delaware and (I suspect) most other states have no similar provision which was also included in the original Uniform LLC Act promulgated in 1996.

Under the old and new New Jersey LLC Act, a court may dissociate a member who engages in “wrongful conduct” that “adversely and materially” affects the LLC’s business or “willfully or persistently committed a material breach of the operating agreement.” Both versions also authorize dissociation by a court when the member engages in conduct “which makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company.” Continue Reading “But I Did Nothing Wrong!” No Defense to Involuntary Dissociation of LLC Member

I want to write about neighboring New Jersey’s recent adoption of the Revised Uniform Limited Liability Company Act and, in particular, the changes to its LLC dissolution provisions, but first some background:

Between 1988, when the IRS recognized partnership tax classification for limited liability companies formed under Wyoming’s pioneering LLC statute, and the mid-1990s, all 50 states adopted enabling statutes for LLCs. (Read here my 2002 article published in the NY State Bar Journal recounting the tax-driven history of the LLC movement.)

Many states, including New York, adopted LLC statutes brewed from a melange of ingredients found in the limited partnership and business corporation laws, with a dash of the 1992 ABA Prototype LLC Act thrown in. When it came to the subject of involuntary, judicial dissolution, most if not all of those statutes, including those of New York (LLC Law §702) and New Jersey (NJSA §42:2B-49) borrowed almost verbatim from the language of the uniform limited partnership laws, authorizing dissolution when it is “not reasonably practicable to carry on the business” in conformity with the organizational articles or the operating agreement. Relatively few LLC dissolution statutes utilized the more expansive standard found in most state laws governing judicial dissolution of close corporations based on the controlling shareholders’ fraudulent or “oppressive” acts against the minority shareholders. Likewise, the LLC statutes in states like New York and New Jersey included no analog to the statutory buy-out remedies provided for in the business corporation laws.

Continue Reading New Jersey Adopts Revised LLC Act Authorizing Dissolution for Minority Oppression