“Being from New York, everybody’s a point guard. Even when you play in the park, you’ve got to know how to handle the ball. If you can’t handle the ball, you can’t really play.” – Joakim Noah, Two-Time NBA All-Star
The article is a great primer for the issues in New Jersey and published in the Association for Corporate Counsel – Focus on the New Jersey Chapter.
It poses the important questions:
- What options do members of a Limited Liability Company (LLC) have if they cannot get along with a fellow member?
- What if the LLC’s operating agreement provides little or no guidance for resolution?
- Is judicial expulsion a viable option and, if so, must the complaining members show that the member sought to be expelled acted wrongfully and materially harmed the LLC, or will some lesser standard be sufficient to expel?
The article answers those questions and relates the answers from a recent case, In IE Test, LLC v. Kenneth Carroll, (N.J. Appellate Division, Docket No. A-6159-12T4, decided March 17, 2015). I recommend a read.
However, in New York, we do things a little different. Rougher. Tougher.
Let’s tackle the questions in reverse order:
Is judicial expulsion a viable option and, if so, must the complaining members show that the member sought to be expelled acted wrongfully and materially harmed the LLC, or will some lesser standard be sufficient to expel?
Unless the Operating Agreement provides for expulsion, New York Limited Liability Company Law does not so provide in the statute.
What if the LLC’s operating agreement provides little or no guidance for resolution?
Judicial intervention is your only option.
What options do members of a Limited Liability Company have if they cannot get along with a fellow member?
In New York, the options for a dysfunctional Limited Liability Company are limited if such provisions are not covered in the Operating Agreement. If the Operating Agreement is silent, the courts have no authority to order an expulsion, as indicated in Man Choi Chiu v. Chiu, 71 AD3d 646 (2d Dept Mar. 2, 2010). While the litigation in that matter rolled on for many more years, and there is a confused subsequent appellate history, the Second Department declined to find a common law right of expulsion as a remedy under the reasoning of the Court of Appeals’ 2008 decision in Tzolis v. Wolff, 10 NY3d 100 (2008). In Tzolis, the Court of Appeals divined a common law basis for derivative actions in a partnership, a limited partnership, and Limited Liability Company even where the statutes do not expressly provide. The Second Department declined to advance the common law right of expulsion in Tzolis, and in Garcia v. Garcia, 33 Misc. 3d 1237A, (N.Y. Sup. Ct. 2011), the New York State Supreme Court cited Chiu in its decision: “There is no Limited Liability Company Law provision addressing the expulsion of a member. As such, in the absence of a provision in the operating agreement providing for expulsion, a limited liability company cannot expel a member.” (see, Man Choi Chiu v. Winston Chiu, 71 AD3d 646, 647, 896 N.Y.S.2d 131 ).
So – what to do? New York Limited Liability Company Law offers little solace. New York Limited Liability Company Law §702 allows for judicial dissolution. Sort of.
The NY LLCL § 702 reads:
“§ 702. Judicial dissolution. On application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. A certified copy of the order of dissolution shall be filed by the applicant with the department of state within thirty days of its issuance.”
One key element should be noted, and noted how it differs from the corresponding Business Corporation Law §§1104, 1104-a, which addresses judicial dissolution for corporations, that a Limited Liability Company will be dissolved under New York law “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”
New York law puts the caveat: whenever it is not reasonably practicable to carry on the business.
So, you can’t expel a bad member, and you can’t dissolve the Limited Liability Company. What can you do?
You can buy out the Limited Liability Company Member.
New York Limited Liability Company Law does not permit the expulsion of the member. The court dismissed the applicability of the Business Corporation Law principles, and then applied those same principles to show that dissolution appeared to not be warranted. Schindler v. Niche Media Holdings, LLC, 1 Misc. 3d 713, 772 N.Y.S.2d 781 (Sup. Ct. New York County 2003). So we are left with the notion that though the Business Corporation Law does not apply, its principles do. One of those key principles is that if a shareholder elects to proceed under BCL § 1104-a, the corporation has an absolute right of buy-out under BCL § 1118. (see, In re Dissolution of Cristo Bros., Inc., 97 A.D.2d 274, 470 N.Y.S.2d 781 [3d Dep’t 1983], aff’d, 64 N.Y.2d 975, 489 N.Y.S.2d 35 ).
The answer is planning. Plan for this eventuality in your Operating Agreement and avoid court. If you have questions, or need some help, please feel free to give us a call or send us an email.