expulsion

October 4, 2022

When Can a LLC Member Be Expelled?

How to Expel a Member from a Limited Liability Company

The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.
Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.
Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

October 1, 2022

Anatomy of a Business Divorce Lawsuit

by Jay R. McDaniel, Esq.

- A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.
- These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.
- Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

February 2, 2020

How to Expel an LLC Member

by Jay R. McDaniel, Esq.

There are circumstances in which a member of a limited liability company in most states may be expelled as a member from the company. This is known as involuntary dissociation.
An action may be brought by the LLC seeking a court order of involuntary dissociation on the basis that the member has engaged in wrongful conduct that has or will harm the company, has repeatedly breached the operating agreement, or because it is not ‘reasonably practicable’ for the company to continue with him or her as a member.
Dissociated members lose their rights to participate in management, but retain their financial interest and a right to receive distributions.
In litigation over an involuntary dissociation, a court may order a sale of the interests of a member to the LLC or to any other party to the litigation.

The expulsion of a member is likely the most litigated issue in disputes involving members of a member of a limited liability company. The expulsion, or involuntary dissociation, is a remedy for wrongful conduct or breach of the operating agreement. We represent majority owners when they are trying to remove a member and we represent the minority member who is fighting removal. Not all states permit removal or expulsion for misconduct and some recent decisions indicate that in the states that do, it will likely be harder than once thought.

Involuntary Dissocation of a Limited Liability Company Member

There was a belief, perhaps unreasonably so, that Courts were unwilling to keep people in business together when plainly the owners were no longer capable of maintaining a working relationship. The New Jersey Supreme Court, in the first decision by any state supreme court on the topic, held that the concept of “not reasonably practicable” to stay in business together means more than a personality conflict. It requires a structural inability to act, such as ongoing deadlock or significant wrongful conduct. Continue reading

October 4, 2016

Business Divorce New York Style

by Jay R. McDaniel, Esq.

Reading through a recent court opinion out of the New York Supreme Court, I am struck by the way the law has diverged in corporate governance litigation. There are two distinctly different approaches to the business divorce. Crossing the Hudson can make a world of difference in operating a closely held business.

Business Divorce State by State

Understanding the different approaches taken by the courts of different states is something that should be considered by business owners not just when they form the business, but as they work through the inevitable conflicts that are part of running a business.

September 13, 2016

Supreme Court Sets Standard to Expel Member from Limited Liability Company

by Jay R. McDaniel, Esq.

The Revised Uniform Limited Liability Company Act adopted in New Jersey permits a court to expel a member of a limited liability company when it is not reasonably practicable for the company to continue with that individual as a member.
Expulsion, known as involuntary dissociation, based on the not reasonably practicable standard requires a showing that there is a structural impediment to the members continuing in business together, such as deadlock.
When the company is able to make decisions and pursue its business purpose, the not reasonably practicable standard does not exist, whatever the level of animosity among the members.

May 26, 2015

Limited Liability Company Breakup: Crossing the Hudson Makes a Difference

by Jay R. McDaniel, Esq.

LLC Divorce: Till Death Do Us Part, or Just Irreconcilable Differences

Should a business divorce be hard or easy? In the world of human divorces, it’s the difference between no-fault divorce and divorce only after a showing of cause. In the world of businesses, it turns on the
concept of court-ordered purchases and sales of minority interests. And in the area of law governing limited liability companies, it is the concept of “involuntary dissociation” – expulsion, if you will, of one of the members.

Involuntary Dissolution of LLC

Two recent cases in the past month demonstrate this concept. East of the Hudson River, we have the First Department of the Appellate Division in New York opinion in Barone v. Sowers, , 2015 NY slip OP 04195 (1st Dept May 14, 2015), in which the court held that allegations of oppressive conduct simply don’t make out a claim for relief under New York’s limited liability statute.

Compare this Empire State decision with one from the Garden State captioned IE Test, LLC v. Carroll, docket No. A-6159 (N.J. Super. App. Div., March 17, 2015)(Opinion Below). Here, the appellate court affirmed the expulsion of a member because it was clear that the parties personal animus prevented them from maintaining a working relationship.

September 7, 2012

Expelled LLC Member Not ‘Employee’ In Age Discrimination Claims

by Jay R. McDaniel, Esq.

LLC Member Who Refused to Retire Was Expelled by Managers

The challenges in making the transition from the the founding members of a successful enterprise to the second generation of managers are often difficult, as this litigation involving that has endured for nearly a decade demonstrates. It may be that the business has moved in a new direction, or perhaps it is simply that the founding member no longer inspires the same type of confidence as when he or she was younger. The second generation of owners often has its own ideas about the way the business should run, but the founders are loathe to cede control.

And of course there are those cases in which the founding member simply refuses to retire long after they have ceased to be a productive contributor to their business. It is not particularly unusual that the more active members of a business, whether it is a partnership, limited liability company, or a close-corporation, will ultimately seek to expel the founder from the business.

May 26, 2010

Expelling a Member of a NJ Limited Liability Company

by Jay R. McDaniel, Esq.

Time was that the expulsion of a troublesome individual from a limited liability company or partnership generally meant that the business entity would have to be dissolved and either start over or be sold off. Changes to partnership laws — and the adoption of similar provisions in New Jersey’s limited liability company — make it possible to remove an LLC member without dissolution of the entity.

Unlike Delaware law — on which New Jersey’s LLC Act was modeled — or New York law, New Jersey law includes a provision borrowed from partnership statutes that permits the involuntary dissociation of a member for wrongful conduct or when it is simply no longer reasonably practicable to stay in business together. The statutory provision comes from uniform limited liability company and partnership laws. This departure from Delaware law is a substantial consideration when organizing an LLC or when a dispute arises between the owners.

What that means in practical terms is that for LLCs organized under New York or Delaware Law, the aggrieved parties must often establish that the business cannot go on in pursuit of its original purpose if they are to immediately recoup their investment or, in similar fashion, that the behavior of the offending party is so egregious that the business cannot continue.

The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.

These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

There are circumstances in which a member of a limited liability company in most states may be expelled as a member from the company. This is known as involuntary dissociation.

Dissociated members lose their rights to participate in management, but retain their financial interest and a right to receive distributions.

In litigation over an involuntary dissociation, a court may order a sale of the interests of a member to the LLC or to any other party to the litigation.

Involuntary Dissocation of a Limited Liability Company Member

Business Divorce State by State

The Revised Uniform Limited Liability Company Act adopted in New Jersey permits a court to expel a member of a limited liability company when it is not reasonably practicable for the company to continue with that individual as a member.

Expulsion, known as involuntary dissociation, based on the not reasonably practicable standard requires a showing that there is a structural impediment to the members continuing in business together, such as deadlock.

When the company is able to make decisions and pursue its business purpose, the not reasonably practicable standard does not exist, whatever the level of animosity among the members.

LLC Divorce: Till Death Do Us Part, or Just Irreconcilable Differences

Involuntary Dissolution of LLC

LLC Member Who Refused to Retire Was Expelled by Managers