Risk Management Services, L.L.C. v. Moss, 40 So.3d 176 (La. App. 2010) provides an interesting lesson on the importance of covering all elements of an LLC’s existence within the operating agreement; including the expulsion or termination of a fellow member. If the operating agreement doesn’t spell it out-there’s no telling how a court will rule!
The April 2010 case was an appeal from an action for declaratory judgment and damages against Moss, a member who was expelled from the LLC. On November 23, 2004, a Petition for Declaratory Judgment and Damages for Breach was filed by Risk Management Services, L.L.C., (“RMS”), Jean L. Robert and Dominick A. Vaccaro, Jr. against Robert W. Moss, III, a former member and manager of RMS, alleging breach of an operating agreement signed by Moss. Specifically, plaintiffs alleged that Moss was acting outside his role and authority as manager of RMS by forming a competing corporation and soliciting RMS customers and staff, and that these acts amounted to a breach of fiduciary duty and duty of loyalty to RMS. Additionally, the members Robert and Vaccaro sought to have the court ratify Moss’ expulsion.
Moss argued that as the operating agreement failed to provide an affirmative right to expel a member; it would require either the amendment of the operating agreement or dissolution based on a strict reading of the operating agreement. Moss contended that as it took unanimous consent by the Members to amend or dissolve the operating agreement, as found under the provisions regarding voting rights, the 2/3 vote to expel him was invalid.
The sections of the operating agreement regarding dissolution were relied on, as the basis for Moss’ expulsion. These provisions in Section 6.1, set forth causes of dissolution, including consent of all members and a list of various events including expulsion.
Section 1.8 as per Section 6.1(2) discusses the voting rights of the member for dissolution and amending the operating agreement, stating that “Notwithstanding anything else in this Article I, the consent of one hundred percent (100%) of all the members eligible to vote will be required to approve the following matters. . .” The district court judge found, based on this provision, that unanimous consent was not required for expulsion, and that this provision only required notification of all members when there was going to be a vote on expulsion. As Moss was properly notified, the expulsion was proper.
Then, on Appeal the Appellate Court simply concluded that via the amended dissolution provision, the agreement actually did provide for the act of expulsion. Thus, Moss’ expulsion was valid, even though the operating agreement did not contain an explicit procedure for expulsion. The Court also added that equity consideration would require that a provision for expulsion be included in “this type of agreement”. Thus, the court found that the dissolution provision contemplated expulsion and that the same provision did not require unanimous consent of the members. The Court concluded that there was no error in the trial court’s determination that Moss’ expulsion was proper according to the operating agreement.
This is another example how boilerplate language can lead to unexpected consequences. It is always better to expressly provide for those important terms of operation, including the expulsion or termination of a member. As it is unlikely that the members of this LLC intended the operating agreement to be interpreted in such a manner when they entered into it; it is evident that you’re entering into a world of unknown when a clause is left up to the courts for interpretation.
-Allison M. Lindner