United States: Judicial Expulsion Of A Member: What We Have Learned From All Saints University Of Medicine Aruba, IE Test And Kenny v. Fulton Associates

A previous column, after mentioning the provisions of partnership and LLC law which at times enable the expulsion of a partner/member, discussed a number of the issues incident to contractual provisions in an operating agreement for the expulsion of a member.¹ This column focuses upon judicial expulsion, reviewing the rather limited available case law. Still, that case law is illuminating. In one of the leading cases, I.E. Test,² the court held that the standards for judicial expulsion had not been satisfied. Conversely, in All Saints University of Medicine Aruba,³ the court authorized judicial expulsion of members who had engaged in egregious conduct. In the last decision herein reviewed, Kenny v. Fulton Associates, LLC,⁴ judicial expulsion was effected against a member who had acted unreasonably and in opposition to the operating agreement with respect to the admission as members of certain assignees.

The Various Statutes

As previously noted, certain LLC Acts provide a mechanism for judicial expulsion of a member.⁵ In the absence of either a contractual or statutory mechanism for expulsion, there is no right to do so.⁶ A pair of recent cases, coincidentally both from New Jersey, identified perhaps the two bookends to the application of the statutory provisions. A third decision, it from Illinois, explores a mid-point fact pattern and what some may think a questionable application of the judicial expulsion tool.

I.E. Test LLC v. Carroll

In August 2016, the New Jersey Supreme Court held, on the facts of this particular case, that the standard for judicial expulsion of a member from an LLC had not been satisfied.⁷ This decision has ramifications in all states that have adopted either the Uniform Limited Liability Company Act, Revised Uniform Limited Liability Company Act or the Revised Prototype Limited Liability Company Act, all containing these same standards for judicial expulsion.

Footnotes

1 See Rutledge, It's Not Me, It's You—Planning for Expulsion of Members from LLCs, J. Passthrough Entities, July/aug. 2016, at 43.

2 I.E. Test, 140 a3d 1268 (n.J. 2016).

3 All Saints University of Medicine Aruba v. Chilana, 2012 wL 6652510 (n.J. app. Div. Dec. 24, 2010) ("Aruba I").

4 Kenny v. Fulton Associates, LLC, 2016 iL app (1st) 152536, 2016 wL 7470006 (Dec. 27, 2016).

5 See, e.g., Rev. Prototype LLC act §602(e), 67 Bus. Law. 117 at 169 (nov. 2011); Rev. Unif. Ltd. Liab. Co. act (2006) §602(5), 6B U.L.a. 502 (2008); Ky. Rev. Stat. ann. §275.172. Accord Unif. Ltd. Part. act §603(5), 6a U.L.a. 453 (2008). with respect to this topic generally, see also 2 Robert R. Keatinge, Larry E. Ribstein, and Thomas E. Rutledge, Ribstein and Keatinge on Limited Liability Companies §14.2, at 235–239 (2nd ed. June 2019); id., appendix 14-3.

6 See, e.g., Page v. ADS Investments, LLC, C.a. no. nM-2006-0334 (R.i. Super. Ct. aug. 5, 2014) ("absent a provision in an operating agreement allowing for the involuntary removal of members, the parties seeking removal are left to the default rules [of the LLC act]."); Man Choi Chiu v. Chiu, 896 nYS2d 131, 132 (Sup. Ct. app. Div. 2 2010) (provision of LLC act addressing expulsion of a member only indicated that operating agreement could provide for expulsion; absent having done so there is no right to expel a member); Brazil v. Rickerson, DC-MO, 268 FSupp2d 1091, 1099 (2003); David Mortuary, LLC v. David, 194 So2d 826 (La. Ct. app. 3rd Cir. 2016) (in the absence of a statute or a provision of the operating agreement authorizing expulsion of a member, no right to effect expulsion existed); Walker v. Resource Development Group Co., L.L.C., (DE), 791 a2d 799 (Del. Ch. 2000) (Delaware LLC act does not provide for expulsion of LLC member even in response to allegations of breach of fiduciary duty). See also Ky. Rev. Stat. ann. §275.003(2) ("a written operating agreement may provide ....").

7 IE Test, LLC v. Carroll, 140 a3d 1268 (n.J. 2016). This decision reversed both the trial court and the appellate Division (2014 wL 8132907).

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