You Can’t Sit With Us! Expulsion of an Unruly LLC Member

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Business divorces, like marital divorces, can be ugly, especially when one of the parties engages in misconduct or otherwise acts unruly. In Florida, limited liability company (“LLC”) members can remove other, unruly or rogue members by expulsion if the LLC’s Operating Agreement provides a method for expulsion, as well as under certain circumstances pursuant to Florida’s Revised Limited Liability Company Act (the “Revised Act”), which are addressed below.

 

Expulsion Provided by Operating Agreement

A member may be expelled if the LLC’s Operating Agreement includes a provision providing a mechanism for expelling a member as a remedy for specific instances of misconduct. Because courts typically enforce the terms of an Operating Agreement, having a well-crafted provision governing expulsion is typically the most preferable and potentially least complicated method of removal. This is also illustrative of why it is critical to have a comprehensive Operating Agreement.

 

Expulsion by Unanimous Consent of LLC Members

If no Operating Agreement exists, or the Operating Agreement does not address expulsion of a member, a member can be expelled under the Revised Act by the “unanimous consent of the other members” if certain circumstances occur, including:

  • It would be unlawful to carry on the LLC’s activities and affairs if this person were to remain a member;
  • The member transferred their entire transferable interest in the LLC (other than a transfer for security purposes or pursuant to a charging order that has not been foreclosed); or
  • The member is a dissolved corporation/entity.

 

Judicial Expulsion

The Revised Act also allows for judicial expulsion of a problematic member upon application to the court by another member(s) or the LLC. Upon such application, a court may enter an order expelling a member who:

  • Has engaged or is engaging in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the LLC’s activities and affairs;
  • Has willfully or persistently committed/is committing a material breach of the Operating Agreement or the member’s fiduciary duties of care or loyalty;
  • Has engaged or is engaging in conduct relating to the LLC’s activities and affairs which makes it not reasonably practicable to carry on the activities and affairs with the person remaining as a member of the LLC.

 

Effect of Member Disassociation by Expulsion

Whether a member’s dissociation is voluntarily or through involuntary expulsion, their right to participate in the management and conduct of the LLC’s activities and affairs is terminated, and, in a member-managed LLC, their fiduciary duties end. However, not all rights and interests of the expelled member are terminated, as the dissociated member may still retain their rights to economic benefits of receiving distributions. Dissociation of a member does not discharge any of their existing debts, obligations, or liabilities owed to the LLC or other members incurred while a member.

Because most unruly, rogue members will not often go silently into the night and voluntarily dissociate without a fight, and because of the complexity of expulsion claims and the statutory process, an LLC seeking to expel a member should consult with skilled, experienced business lawyers. The business litigation team at Haber Law routinely handles LLC member disputes as well as business transactional matters. Please contact me at lfallick@haber.law for more information or to schedule a consultation.

 

 

Lauren_Fallick-2017-197x300About the Author 

Lauren Fallick is a partner with Haber Law with over 10 years of practicing complex business and civil litigation. She also has extensive experience in construction defect litigation, insurance coverage litigation, business and partnership disputes, real estate disputes, and professional liability litigation.