Monday, November 10, 2014

What Is “Misappropriation” for Purposes of Expulsion from LLC?

What Is “Misappropriation” for Purposes of Expulsion from LLC?

Peter Mahler, in his blog New York Business Divorce, has reviewed Harker v. Guyther, __ N.Y.S.2d __, 2014 NY Slip Op 07403, 2014 WL 5470807 (3rd Dept. October 30, 2014). In this case, there was a falling out between the two members of an LLC. The operating agreement in question allowed for the expulsion of a member upon the “substantial misappropriation” of company assets of more than $1000. The Court held that summary judgment was not appropriate in that “misappropriation” required an element of wrongful intent.  There was a colorable basis for the amounts taken as arguably they were appropriate in order to equalize distributions between the members.
Here is a link to Peter's blog posting.
In addition to Peter's commentary with respect to the merits (or not) of expulsion mechanisms in two member LLCs, it is also worth keeping in mind the rule that the mere fact that the words in an operating agreement are properly spelled does not resolve the question as to whether the operating agreement is clear. In that “misappropriation’ was not defined in the agreement, the generally accepted definition was determined by reference to various dictionaries.  This reference introduced an element of subjective intent that may not have been intended by the drafter.

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