Illinois Third District Appellate Court Holds that Disassociation of Member of Limited Liability Company Requires Substantial Shortcoming, or Facts Showing that Continued Association was Unreasonable.
(McManus v. Richards, 2018 IL App (3d) 170055)
The Third District Appellate Court issued an opinion March 2, 2018 regarding “cause” for the expulsion of a member of an Illinois limited liability company (LLC).
Two orthodontists signed an operating agreement in 2012. The agreement provided that buyer would purchase half of the practice from seller over a five-year term. In 2016 the buyer (now a 45% owner) was given notice by the seller (now a 55% owner) that he was terminating the agreement. The relevant provision of the operating agreement read as follows:
“In the event that (Seller) finds cause to involuntarily disassociate (Buyer) from the Company’s dental practice, (Buyer) shall give written notice…(and) shall repurchase all of (Buyer’s) membership interest at one hundred percent of the purchase price...either as a single payment, or quarterly over a period of three years.”
The Court strongly implicated that Seller was trying to recapture the business because of growth over the four-year term. Without question, the seller in 2012 felt that buying back the business in 2016 for the 2012 price was a bargain.
The seller argued that he could find “cause” for disassociation without restriction, given the authority granted him by the language above. The buyer argued that “cause” is a term of legal significance in the context of a business transaction, which required proof of malfeasance or at least more than a subjective reason for termination. Buyer prevailed, though only defeating summary judgment on appeal (remanded).
The Court held that allowing the Seller to repay Buyer over three years without objective cause was not only inequitable but “absurd.” The court relied upon two arguments in reaching the conclusion that “cause” as set forth in the LLC agreement required more than a subjective decision.
First, the Court held that an employer-employee relationship is analogous to that of two members of a limited liability company. Because “cause” in the context of terminating an employee requires a substantial shortcoming or reasonable reason for termination, the same should be expected of LLC member.
Secondly, the Court relied upon a section in the Limited Liability Company Act, which provides for Judicial Expulsion only upon a showing of wrongful conduct. The Court made no reference to a section in that statute which provides for dissociation pursuant to the terms of the written agreement.
Relying on these two sources of authority, the Court concluded that Seller must show that Buyer’s conduct made it unreasonable for the two to work together before disassociation could occur.
Bottom line: If an operating agreement is to allow for termination without a showing of unreasonable conduct, the language should clearly state that termination is permitted at will, with or without cause. Otherwise, equity and evidence will loom large over any decision to disassociate.
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