Judicial Expulsion of a Member-Manager Triggers Dissolution

Stock Photo - Manager OutAre you a member-manager of an LLC in Illinois? Your expulsion as a member of the LLC may result in your removal from “manager” status and may even bring about the dissolution of the LLC. The Illinois appellate court provided a cautionary example of such a situation in Tully v. McLean, 409 Ill. App. 3d 659 (2011). The court held that the judicial expulsion of a member from a LLC amounted to the “removal” of a manager of that LLC. That removal, the court held, triggered the dissolution provision in the LLC’s operating agreement.

Plaintiff Thomas M. Tully (“Plaintiff”), a member of the member-managed limited liability company, Old Town Development Associates (“OTD”), brought an action for breach of fiduciary duty and fraud arising from Defendants’ management of OTD. One defendant was OTD’s Managing Member (or the “Manager”).

According to its operating agreement, OTD’s business was to be conducted by a manager and that the manager also had to be a member. The operating agreement provided for the dissolution of OTD “only in the event … [o]f the death, removal, liquidation, dissolution, withdrawal or bankruptcy of a Manager.”

Plaintiff noticed transfers between OTD and unrelated entities affiliated with Defendants. Plaintiff confronted Defendants about the transfers, and Defendants admitted that it was their regular practice to move funds among the other business entities they managed, and that no interest was paid on the transfers. Defendants told Plaintiff that the transfers were recorded on the books and were periodically returned or paid back. Plaintiff requested that Defendants stop the practice. Defendants agreed.

However, a few years later, Plaintiff learned that the transfers were still occurring and, instead of noting the transfers on OTD’s books, Defendants had been hiding them. Plaintiff demanded that the Manager step down as manager of OTD and that all Defendants cease involvement with OTD. Defendants refused and Plaintiff filed his complaint.

In his complaint, Plaintiff sought the expulsion of the Manager as both a member and the LLC’s manager pursuant to section 35-45(6) of the Illinois Limited Liability Company Act (805 ILCS 180/1-1 et seq) (the “Act”). The trial court first ordered the Manager to give up its control of OTD and appointed Plaintiff as the sole manager for the duration of the litigation. In a counterclaim, Defendants sought the dissolution of OTD because, they argued, the termination of the Manager’s member status necessarily terminated its manager status, which, in turn, triggered the above-quoted dissolution provision in the operating agreement.

The trial court then held a hearing on Plaintiff’s request to expel the Manager and on Defendants’ counterclaim to dissolve OTD. The court resolved both issues in favor of Plaintiff. It ordered the Manager to be “judicially expelled and disassociated from OTD.” Notably, the court found that the dissolution of OTD was not warranted.

Defendants appealed the trial court’s denial of their request to dissolve OTD, arguing that the judicial expulsion of the Manager necessarily triggered the dissolution provision in the operating agreement.

To decide the dissolution question, the appellate court noted that the operating agreement provided that OTD would be dissolved “only in the event … [o]f the death, removal, liquidation, dissolution, withdrawal or bankruptcy of a Manager.” The operating agreement was silent on what constituted a “removal” of a manager. Turning to the Act, the court explained that a member is dissociated from a limited liability company upon a “member’s expulsion by judicial determination.” The court found that the judicial expulsion of the Manager as a member constituted its “removal” as manager under OTD’s operating agreement, which, in turn, triggered the dissolution provision in the operating agreement. Accordingly, the appellate court remanded the case for dissolution proceedings.

There are at least two lessons to be learned from Tully. First, as a member-manager, one should refrain from any conduct that jeopardizes your member status. Any wrongful conduct may end not only your member status, but your status as manager as well. Second, a court may strictly enforce the dissolution provisions of your operating agreement, even if the dissolution is sought by the wrongdoer, as was the case in Tully.

Eileen E. Boyle, Contributing Author

(This is for informational purposes and is not legal advice.)

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