When Can an LLC Expel a Member?

IE Test, LLC v. Carroll, 226 N.J. 166 (2016).  Until it was superseded by the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 to -94 (“RULLCA”), on March 18, 2013, relationships among members of a limited liability company were governed by the Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (“LLCA”).  Today’s decision, written by Justice Patterson for a unanimous Supreme Court, involved the question of when, under the LLCA, an LLC can expel one of its members.

After a dispute among defendant Carroll and the other LLC members, the LLC filed suit to expel Carroll.  The trial court, relying on N.J.S.A. 42:2B-24(b)(3)(c), which provides for expulsion of a member by “judicial determination” where a member has engaged in conduct related to the business of the LLC that “makes it not reasonably practicable to carry on the business” with that member still in his or her position, granted summary judgment for plaintiff.  The Appellate Division affirmed.  The Supreme Court, however, reversed and remanded the case for further proceedings.  The Court interpreted the statute and announced a multi-part test, adapted from a Colorado case, for applying the statute.  Under that test, summary judgment was improper.

The key words in the statute, Justice Patterson said, were “not reasonably practicable.”  Those words were not defined in the LLCA, so the Court employed general principles of statutory interpretation.  In particular, Justice Patterson looked to N.J.S.A. 42:2B-24(b)(3)(a), another sub-part of the same statutory provision.  That sub-part allowed expulsion by “judicial determination” where a member “engaged in wrongful conduct that adversely and materially affected the limited liability company’s business.”  The Court concluded that, unlike sub-part (a), which requires that a members’ wrongful conduct must have “damaged the LLC’s business in the past,”[u]nder subsection 3(c), the court prospectively analyzes the impact of that conduct on the LLC’s future.”

Giving the words “reasonable” and “practicable” their ordinary meanings, Justice Patterson ruled that the Legislature did not authorize expulsion whenever “it would be more challenging or complicated for other members to run the business with the LLC member than without him.”  Rather, it must be “unfeasible, despite reasonable efforts, to keep the LLC operating while the disputed member remains affiliated with it.”  Justice Patterson found additional support in other sections of the LLCA as well for the conclusion that “the mere existence of a conflict among LLC members” does not justify expulsion.

To implement that ruling, the Court announced a seven-part test, with no one factor being dispositive and no requirement that all the factors support expulsion.  “[T]he nature of the LLC member’s conduct relating to the LLC’s business; (2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals; (4) whether there is a deadlock among the members; (5) whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions; (6) whether, due to the LLC’s financial position, there is still a business to operate; and (7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible.”

This is a “high bar,” as Justice Patterson stated, and it applies to both the LLCA and the RULLCA’s counterpart provision, N.J.S.A. 42:2C-46(e)(3).  The Court applied the test to the facts of the case before it, applying the summary judgment standard of review that requires a view of the facts that is most favorable to the opponent of the motion, and found that summary judgment of expulsion was not justified.

Notably, as the Court state in a footnote, the statute is not the only way to terminate an LLC member.  If there is an operating agreement, that agreement can afford a mechanism for termination as well.