Disassociation of LLC Member

By David White, Esq.
dwhite@pashmanstein.com

The Appellate Division recently construed the disassociation provisions of the LLC Act in a way that ostensibly eliminates the need for fault to expel a member.  In All Saints University of Medicine Aruba v. Chilana, 2012 N.J. Super. Unpub. LEXIS 2797  (2012), the Court held that judicial disassociation under N.J.S.A. 42:2B-24 b (3) may be granted, without more, where the member ‘s business conduct makes the prospect of continuing the LLC’s activities reasonably impractical.

In All Saints, plaintiffs and defendants formed a New Jersey LLC in connection with their operation of a medical school in Aruba.  Disputes arose among the members over financial issues and management of the company, including signing authority for checking accounts.  Plaintiffs’ complaints about the signatories resulted in the company’s  banks freezing its accounts.  Inability to access the accounts aggravated the already dire financial status of the medical school and threatened its operation.  The answering Defendant elicited capital contributions from the other members to continue the operation.  Plaintiffs declined to contribute and brought an order to show cause seeking relief for breaches of the Operating Agreement.  Defendant counterclaimed seeking authorization to operate the LLC unilaterally.  While the matter proceeded, defendant funded the company and sought to judicially disassociate plaintiffs from the LLC.

N.J.S.A. 42:2B-24(b) controls judicial disassociation of LLC members.  Sub section (3) (a) provides for expulsion where the member “engaged in wrongful conduct that adversely and materially affected the limited liability company’s business.”   Sub section (3)(c) permits expulsion where the member’s business related conduct “makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company.”

The trial court determined that plaintiffs’ conduct met both tests, finding that it was wrongful under sub section (3)(a) and, under sub section (3)(c ), that it made impractical carrying on the business together.

On appeal, the Appellate Division observed that the statutory grounds were expressed disjunctively.  It further noted that N.J.S.A. 42:2B-24 uses the generally mandatory verb, “shall,” in providing for disassociation on the occurrence of one of the specified bases.  Accordingly, it found that either basis would suffice, calling them “equally dispositive.”

While the decision sidesteps whether the fault alleged against plaintiffs was “wrongful,” it carefully notes “the reality” of the adverse consequences.  The court limited its holding “to the facts of this rather unusual case.”  Notwithstanding the apparent equation of the wrongfulness and impracticality grounds for disassociation here, the sub-text of the Appellate decision suggests that in general, fault remains at least a background factor.

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