Navigating a Business Divorce

Expelling an LLC member under RULLCA.

By Jordan Kaplan On Aug 30, 2017

For most, the last thing that comes to mind when forming a new business is how to expel a partner from participating in the venture once working together is no longer feasible. Operating agreements often lack provisions directing the procedures for ousting a co-member from participation in the LLC. Fortunately, where the operating agreement is silent or an operating agreement does not exist, New Jersey’s Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 et seq. (RULLCA) fills in the gaps. But what happens in areas where the RULLCA is vague or fails to provide sufficient guidance? The New Jersey Supreme Court provides clarification.

In August 2016, the New Jersey Supreme Court evaluated two LLC members’ attempt to obtain an order expelling a third member from participating in the LLC because the third member’s conduct caused conflict, controversy and even litigation among the LLC’s members. The plaintiffs sought to expel the third LLC member under a specific section of the RULLCA that allows expulsion by judicial order where the offending member’s continued participation “makes it not reasonably practicable” to continue the business. However, the Court held that infighting and controversy alone does not meet the “not reasonably practicable” standard required to judicially expel a member from an LLC. Instead, a higher burden is required so that no member is denied the opportunity to continue participating in the LLC solely because he or she does not get along with their co-members. For applications to expel a member under the RULLCA, trial courts should examine the following factors:

• The nature of the LLC member’s conduct relating to the business;
• Whether the entity may be managed to promote its intended purposes with that member remaining;
• Whether the dispute among members precludes them from working to pursue the LLC’s goals;
• Whether there is a deadlock among members;
• Whether, despite the deadlock, the members can make decisions on the management of the company;
• Whether there is still a business to operate; and
• Whether continuing the LLC is financially feasible with the LLC member remaining.

The New Jersey Supreme Court’s ruling shows that, in the absence of a well-written operating agreement, an attempted expulsion under the RULLCA must be carefully thought out and documented. A proper legal strategy to judicially expel co-members from an LLC must include documentary evidence showing that the co-member’s conduct has made it difficult or impossible to achieve the intended purposes of the business, and, notably, an application to expel must present more than mere disputes among co-members. An application to expel lacking the proper proofs will be denied by the Court.

About the Author: Jordan Kaplan is an associate in the litigation department of Fox Rothschild LLP. His practice focuses on complex commercial litigation matters.

 

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