Member Who “Resigns” in Breach of Operating Agreement is Still a Member for Purposes of Diversity Jurisdiction

Member Who “Resigns” in Breach of Operating Agreement is

Still a Member for Purposes of Diversity Jurisdiction

      A recent decision from New York turned upon the question of whether a member who purported to resign in breach of the operating agreement of an LLC would continue to be treated as a member of the company for determining its citizenship for purposes of diversity jurisdiction.  In this case, the resignation having been in breach of the operating agreement, that member’s citizenship is attributed to the LLC, resulting in a lack of diversity.  Dumann Realty LLC v. Faust, No. 09-CIV-7651(JPO) (S.D. N.Y. Jan. 3, 2013). 

      Faust was a member of Dumann Realty, LLC.  Dumann, along with other plaintiffs, brought suit against Faust asserting various claims including breach of the operating agreement and breach of the common law duty of good faith and fair dealing.  Faust filed a series of counter-claims.  The Court, raising sua sponte the question of diversity jurisdiction, considered whether Faust’s citizenship would be attributed to the LLC.  Where that the case, diversity jurisdiction would be lacking.

      In this case, pursuant to Dumann’s operating agreement, a member was empowered to withdraw from the company upon either of the consent of two-thirds of the other members or on at least six months’ prior written notice.  No consent to the withdrawal was ever given, and Faust did not give six months’ notice of his withdrawal.  In fact, this improper withdrawal was the basis of the claim for breach of the operating agreement filed by Dumann.  In that Faust’s resignation was outside the terms of the operating agreement, it was deemed ineffective.  In consequence, at the time the suit was brought, the LLC was attributed with Faust’s citizenship, and for that reason diversity jurisdiction was lacking.  The suit was therefore dismissed.