Expulsion for “Unlawful” Conduct

                                                        Expulsion For “Unlawful” Conduct

Many LLC Acts provide that a member may be expelled by the other members on either a majority or a unanimous vote, when it is “unlawful” to proceed with them as a member.  Those statutes are collected in Ribstein and Keatinge on Limited Liability Companies, appendix 14-3. A provision of this nature was recently considered in Montana, and in a manner I found curious.

Hebert v. Shield Arms, LLC, 2025 MT 199, 576 P.3d 327, 334, reh'g denied (Oct. 7, 2025) involved an LLC with a federal firearms license.  One of the members, Hebert, began exhibitinglets just say curious conduct that impacted upon both the internal operations of the LLC and its customer relationships.  On the basis of a statute that permitted the expulsion of a member by the unanimous vote of the other members when it is “unlawful” to continue with that person as a member, that vote was take and Hebert expelled.  He then objected that the predicate “unlawful” was in fact not present. 

The trial court and a majority of the appellate court found that Herbert’s erratic conduct, if not addressed by the other members, would implicate a failure to discharge their obligations of care and loyalty to the LLC.

Here, there are express provisions of law that would be violated if the other members were to carry on with Hebert as a member: they would violate their own fiduciary duties of care and loyalty required of them by § 35-8-310, MCA. Specifically, the duty of care requires a member “to refrain[ ] from engaging in grossly negligent or reckless conduct.” Section 35-8-310(3), MCA. Given Hebert’s actions, it would be at least reckless, if not grossly negligent, to allow him to continue as a member. To permit Hebert to continue governing the company would result in all of the other members expressly violating their fiduciary duties in contravention of express legal provisions.

In addition to finding a violation of general standards for a member’s conduct set forth in § 35-8-310, MCA, the District Court found that Hebert’s baseless claims against Brandly and interference with SA’s business relationships constituted slander and tortious interference, in violation of express provisions of the law. The court observed that Hebert’s actions could be imputed to SA pursuant to § 35-8-306, MCA (A company is “liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission or other actionable conduct of a member or manager acting in the ordinary course of business of the company or with the authority of the company.”). ¶¶ 23-24.

Further, not effecting his expulsion could have exposed the LLC to a suit from its employee, a target of his conduct. 

Finally, SA’s only employee, Hauss, observed Hebert taking company inventory from the facility without notice, verbally communicating ideas outside company protocol, and having strong emotional outbursts that vacillated from yelling to laughing to sadness within hours. Other members observed that Hebert’s behavior appeared detached from reality. Thus, the District Court concluded Hebert’s conduct not only interfered with SA’s business and was tortious, but the court also concluded Hebert created a hostile work environment for SA’s employee—exposing it to liability. ¶ 24.

A dissent by three justices took issue with that applicationof the statute and the melding of the terms for expulsion by the members versus in a judicial action, would have imposed a significantly narrower definition of “unlawful,” and would have set aside the expulsion at issue.

There was additional guidance in the decision as to enforcing a contractually agreed to valuation and the “going concern valuation” in a forced buy-out situation.

In the view of this commentator the dissent has the better reasoning, and the “unlawful” element relied upon by the company and both the trial court and the Montana Supreme Court was stretched beyond recognition.  I have always understood the “unlawful” prerequisite to involve express statutory law governing the organization.  Assume a bar/restaurant with a liquor license; under applicable state law an LLC with a liquor license may not have a person with a DUI conviction.  Upon member Tim’s conviction of DUI he needs to be expelled as the LLC cannot operate lawfully with a member who has a DUI on his/her record.  Now change the facts slightly and assume that state law provides that the LLC with a liquor license may not have as a member a person with two or more DUIs.  Tim’s first and only DUI conviction does not make it unlawful for the LLC to operate, and while the other members may be morally offended that Tim has a DUI and has put the company’s reputation on the line there is no predicate “unlawful” conduct justifying expulsion. Now the operating agreement could have said that although state law allows a DUI before the LLC’s liquor license is in peril, a single DUI is a legitimate basis for expulsion, but then Tim would be expelled for his single DUI under the terms of the operating agreement and not because his conduct was “unlawful.” 

Alabama Court Addresses Venue for Actions Against LLC

Alabama Court Addresses Venue for Actions Against LLC

Alabama has three statutes addressing venue; one for individuals, one for unincorporated associations, and one for corporations.  In a recent decision from the Alabama Supreme Court it considered which of these statutes applies in a suit involving an LLC.  Ex parte Rivers, 2025 WL 2739216 (Ala. Sept. 26, 2025).

This decision required the Court to parse the various venue statutes to determine which of the three would apply to a suit against an LLC, the options being the venue statute for suits against individuals, suits against unincorporated associations, and suits against corporations.  After reviewing the history of the statutes, it was determined that the corporate venue statute would apply as to suits against LLCs.  The venue statute for unincorporated associations was held not applicable because at the time of its adoption that class was for partnerships and other organizations without a distinct legal personality, a taxonomy inapplicable to LLCs. On the other hand LLCs are legal entities legally distinct from their members, just as corporations are distinct from their shareholders, so the corporate venue statute is the better fit.

The Operating Agreement Is the Thing, Or "Except As Otherwise Provided"

                                                   The Operating Agreement Is the Thing,

                                                      or “Except as Otherwise Provided”

A decision from earlier this year applied the rule that the LLC act is largely a series of default rules that may as to any particular LLC be modified in the applicable operating agreement. In this case the sanction of certain conduct by a written operating agreement was held to have limited the possibility of a fiduciary breach for engaging in just that conduct. Svestka v. Oakes, 2025 WL 1415813 (Ky. App. May 16, 2025).

Sisters Ruth Svestka, Carolyn Steger, Marguarite Oakes and Mary Cherry were each 25% members in Vance Springs Farm, LLC, it organized in Kentucky. Vance Springs was manager-managed and governed by a written operating agreement. Pursuant to that agreement Marguerite was the LLC's manager. The agreement also (i) provided a right of first refusal in the case of a member wanted to sell her interest in the company and (ii) provided that the ROFR did not apply as to a purchase / sale among the four members.

In June, 2022, Margaurite purchased Mary Cherry’s 25% interest in Vance Spring,  Thereafter Ruth and Carolyn called a special meeting of the members to assess whether Margaurite should be removed as the LLC’s manager, removal requiring “cause.”  The operating agreement precluded the member-manager from participation on a vote as to her removal as manager, so Ruth and Carolyn held between themselves 100% of the voting rights as to whether or not Margaurite should be removed for cause.  And she was.

FYI, a point not addressed in the opinion was whether Margaurite believed that in buying Mary Cherry’s 25% interest she as well succeeded to that 25% voting interest. Ruth and Carolyn seem to have believed that to be the case, but the point was not pursued.

In response to her removal Margaurite and Mary filed an action for a declaration of rights including that the purchase / sale of Mary Cherry’s interest in Vance Farms was valid and that Marguarite’s alleged removal as manager was invalid.  In their answer Ruth and Carlyn asserted Margaurite, in purchasing Mary’s interest in the LLC, had violated her fiduciary obligations.  Marguarite and Mary sought and received from the circuit court a temporary injunction reinstating Margaurite to the position of manager.  While that matter was being appealed on an interlocutory basis Marguarite bought out the interests of Ruth and Carolyn pursuant to the ROFR when they sought to sell to a third party. There then followed additional motion practice and final judgments in favor of Marguarite.

On appeal, the first complaint was that the trial court should not have relied upon the terms of the LLC's operating agreement to determine the scope of Marguerite's fiduciary duties, it being asserted that doing so “improperly ignored KRS 275.170 and the common law.” As further characterized by the Court of Appeals:

appellants maintained that Marguerites June 4, 2022, ”purchase of Mary’s shares created a clear conflict of interest because it gave Marguerite a 50% ownership interest in the LLC. They argue this would effectively allow Marguerite to deadlock the LLC's strategic business operations, as well as some day-to-day operations. …. They argue that this imbalance of power would have been avoided if the Circuit Court had properly applied the statutory law and case law to determine the proper scope of Marguerite's fiduciary duties to Ruth and Carolyn. 2025 WL 1415813, *3.  

The Court of Appeals, adopting the reasoning of a prior motions panel and its reliance upon KRS 275.170 and its provision “unless otherwise provided in a written operating agreement,” wrote that:

Marguerite cannot breach fiduciary duties by completing a purchase that the parties specifically contemplated in their Operating Agreement. Common law fiduciary duties are intended to be imposed “in the absence of contrary provisions in the limited liability company operating agreement”, Patman v Hobbs, 280 S.W.3d 589, 594 (Ky. App. 2009 ). 2025 WL 1415813, *5.

I would note in passing that this author disagrees that there are “common law” fiduciary duties in LLCs, they being a statutory construct, but that is a discussion for another day. 

The opinion goes on to reject the notion that Marguarite’s purchase violated “her duties of loyalty, fair dealing, and good faith when she purchased Mary Cherry’s interest in the LLC without first notifying  the other members to give them the opportunity to purchase the shares.”   2025 WL 1415813, *6.  As to that argument I would note only that it is common to in ROFR agreements provide that the persons desiring to purchase may do so pari-passu; apparently this agreement did not, and that “good faith and fair dealing” (see KRS 275.003) will not create such a provision.

That said, I think there is a further step to consider as to these facts, namely whether in the absence of the ROFR here at issue Margaurite’s actions in acquiring for herself Mary’s 25% interest in Vance Springs would have been a legitimate.  Lets assume an operating agreement that is silent as to transfers of LLC interests, that LLC owned by four equal 25% members.  Those LLC interests are personal property, and there is nothing in the LLC Act that prohibits the unilateral transfer of those right whether to another member or to a third party.  Yes, the LLC Act affirmatively strips the conveyed interests of the right to participate in the LLC’s management (i.e., an assignee does not by reason of the assignment succeed to the management rights of a member), but that goes to the nature of the LLC interests in the hands of the assignee and not the propriety of the purchase / sale transaction.  

At that point, the question becomes whether a member has an obligation to share with the other members an opportunity to acquire outstanding LLC interest from a member who wants to sell. Another way to look at the question is to ask whether a member has a fiduciary obligation to at least afford the other members the opportunity to maintain a particular pari pasu interest in the company. For purposes of this thought experiment, let’s assume the LLC is member managed and that each of the members is bound by the default fiduciary obligations set forth in the LLC Act, specifically KRS 275.170, and that their conduct is as well informed by the obligation of good faith and fair dealing that exist in every contract and which is specifically adopted in Kentucky law at KRS 275.003.

On those assumptions, I don’t believe there is an obligation. While a member of an LLC subject to the default fiduciary obligations of the LLC Act is precluded, without disinterested prior approval, from using company assets for a personal profit or benefit, the LLC interests in the company are not company assets. Rather, they are the personal property of each individual member. I cannot see a basis on which an individual member, desiring to sell, has an obligation to offer that sale to all other, rather than a select group, of the incumbent members, and in parallel I cannot see a basis for holding that a member violates a fiduciary or other obligation when electing to purchase from another member LLC interests for their own account without offering an equal right to participate to the other members. Again, the LLC interests are not a company asset, and the company is not a party to the transaction.

Happy Birthday Erasmus

 Happy Birthday Erasmus

    Today we remember the birth of the man who came to be known as Erasmus of Rotterdam, sometimes Desiderius Erasmus Roterodamus, he entering the world on October 28 (that is pretty certain) likely in 1466 (the year of his birth is somewhat in dispute).  This is the 559th anniversary of that day

    I’ll be adding more later, but for now let me note that in the early 1500’s some ten to twenty percent of all books published and read were his works.  

(More to follow)

A Co-Tenancy Is Not a Partnership

                                                       A Co-Tenancy Is Not a Partnership

In a case from a few years ago, namely Jad Farhat Irrevocable Trust #1 v. TTM Group, LLC, 2018 WL 1980764 (Ky. App. April 17, 2018), the court considered and rejected the assertion that a co-tenancy was as well a partnership, a status crucial in determining whether some or all of the participants are bound by fiduciary obligations.  In this instance there was no partnership and for that reason no fiduciary obligations.

TTM Group, LLC owned certain developed real property in Hardin County; the property was a fitness center that was leased to Energy Sports and Fitness of Elizabethtown, LLC (Energy Sports).  Both TTM and Energy group had the same cast of members.  Around the same time that Energy Sports entered into its $24,000 per month lease with TTM, it (TTM agreed to sell a one-fifth unaided interest in the property to the Jad Farhat Irrevocable Trust #1 for $180,000.  That sale was effected by a general warranty deed.   Under the related purchase agreement TTM agreed to pay to the trust “twenty (20%) percent of the [net] rental proceeds; on a monthly basis.”  That was all in 2009; in 2010 the members in TTM sold more than 70% of their ownership therein to a new LLC, DJD, LLC, and one of its members took over everyday management of TTM. 

In a prior decision it was held that the Purchase Agreement commitment to pay to the Trust 20% of net rental proceeds was unenforceable.  See Jad Farhat Irrevocable GSTT Tr. #1 v. T.T.M. Group, LLC, 2014 WL 5314701 (Ky. App. Oct. 17, 2012).  There was in that decision a remand to the trial court to address the question of the co-tenancy because “one co-tenant is liable to other co-tenants for any rents and profits collected from the joint property.”

The property was encumbered with two mortgages, and Farhat acknowledged he was aware of them at the time he made his investment. As described by the Court of Appeals:

At some point after DJD took control of TTM and began managing the property, TTM started having difficulty making regular payments on the mortgages. The parties dispute the underlying cause of TTM’s failure to make its mortgage payments. Farhat Trust asserted this was due to DJD paying themselves from the proceeds on the property instead of paying on the mortgages. However, even after discovery, Farhat Trust was unable to produce evidence supporting this contention, with the sole exception of Jad Farhat’s affidavit indicating his personal belief. For their part, the appellees asserted the failure to pay the mortgages was due to the following: (1) TTM had generally mismanaged the property prior to acquisition by DJD; (2) despite the best efforts of DJD and TTM, the athletic club regularly failed to pay rent and other required expenses under its lease; and (3) as a result of the athletic club’s failure to pay rent, TTM did not have the funds to pay the mortgages.

 

In August 2012, the second mortgage holder, First Federal Savings Bank, filed a petition to foreclose on the property in Hardin Circuit Court. Bank of the Bluegrass filed responsive pleadings asserting its position as the first mortgage holder. The property was foreclosed upon and sold through a master commissioner sale on December 19, 2013. Bank of the Bluegrass purchased the property for $1.4 million. All co-owners of the property—Farhat Trust, TTM, and DJD—lost their equity in the property due to the foreclosure. Approximately ten months after foreclosure, on October 17, 2014, EAC secured financing and bought the property from Bank of the Bluegrass for $1,461,344  2018 WL 1980764, *2.

The Farhat Trust filed suit in 2015 alleging a variety of claims including “it was in partnership with the appellees when they mismanaged the property and allowed the mortgages to go unpaid, resulting in the loss of Farhat Trust’s twenty percent ownership interest in the property.”  The trial court granted the defendants summary judgment as to the alleged partnership and this appeal followed.

As to the existence of a partnership, after a brief (but ultimately dicta) description of the requirements of those subject to fiduciary duties, and in reliance upon the prior decision, it was found that the co-tenancy was not a partnership.  First, they cited Kentucky Uniform Partnership Act (KRS 362.180) for the rules as to what is and is not a partnership; while the recitation of the law is accurate in and of itself it is curious as to why it was discussed at all -– the earliest that the partnership could have come into being was 2009, several years after KyUPA could have applied to the formation of a new partnership. It then cited that actually applicable provision of the Kentucky Revised Uniform Partnership Act (KRS 362.1-202) which provides that a joint tenancy in property is not a partnership.

The court as well rejected claims that a fiduciary relationship arose out of agency:

The evidence before the trial court was that Farhat Trust was simply willing to act as a passive co-owner and collect its portion of the monthly rent. This is not sufficient to support a finding of agency. Farhat Trust cannot claim fiduciary duties through an agency relationship. 2018 WL 1980764, *5

or out of special confidence:

Finally, we examine Farhat Trust’s claim to fiduciary duties through a special confidence placed in the appellees to act in its best interests. In order to find a fiduciary relationship, one requirement is that the party claiming the relationship “must show [the] reliance was not merely subjective.” Ballard, 430 S.W.3d at 242 (quoting In re Sallee, 286 F.3d at 892). Inexplicably, Farhat Trust asserts its “reliance on Appellees was not subjective since the Trust completely entrusted Appellees with managing the Property on its behalf and looking out for its interests.” This statement fails to show anything but a subjective reliance. Farhat Trust cannot demonstrate it was entitled to fiduciary duties through a special confidence. Id.

No Partnership — Cross-Posting from New York Business Divorce

                     No Partnership — Cross-Posting from New York Business Divorce

Peter Mahler and his team at Farrell Fritz in New York publish New York Business Divorce, a blog I have followed for many years.  Whether written by Peter or one of his partners, the case descriptions are always clear and the decisions placed into the broader body of New York law.

Recently a post authored by Becky (Hyun Jeong) Baek addressed a dispute spanning eleven years that came down to the question “Was there a partnership?”  After 11 years the New York intermediate appellate court found that there was no partnership, and there necessarily flowed there was no breach of the partnership agreement. HERE IS A LINK to that posting.

Eleven years.  I have no idea how much has been expended by either side in this litigation, but even from the position of the prevailing party there has been proven the adage “the second worst thing that can happen to you is that you win a lawsuit.”  Be careful when negotiating agreements to be clear there is no agreement until there is a final agreement, make it clear that all parties reject the possibility of forming an inadvertent (unintentional and often oral) partnership, and make it clear that any final agreement will be a written instrument signed by each party.  Then, in actual agreements provide that irrespective of the terms to the relationship it is not a “partnership” (well, unless it is a partnership).  

Saint Crispin’s Day and the Battle of Agincourt

                         Saint Crispin’s Day and the Battle of Agincourt

       Today is the anniversary of the Battle of Agincourt, taking place in 1415 (605 years ago) between the forces of France and her various allies and the invading English forces under the command of King Henry V. Shakespeare, by having his character Henry V repeatedly refer to the day of the battle as St. Crispin’s Day, otherwise saved this obscure saint from being lost, save for experts in hagiography, to the mist of history.

            Agincourt was the third of a trio of famous battles in the course of the 100 Years War; the other two were Crecy (1346) (I reviewed the Battle of Crecy in an earlier post) and Poitiers (1356).  The English won all three of these battles.  In the end they lost the war.  If you should want a comprehensive review of the 100 Years War, the four volume treatment by Jonathan Sumption (The Hundred Years War I – Trial by Battle; The Hundred YearsWar II – Trial by Fire; The Hundred Years War III – Divided Houses; and The Hundred Years War IV – Cursed Kings) is authoritative.

      The English forces, likely numbering in the range of 7,000, were compelled to do battle with a numerically superior French force likely numbering in excess of 20,000. All else being equal, the English force should have expected to be annihilated. As is typical in the case of significant historical events, however, all things were not equal. The French and their allies were disorganized, and overall command of the battlefield was never achieved.  Rather, individual nobles led their own contingents forward in a disorganized and sometimes conflicting manner.  The terrain favored the English in several ways.  The French “artillery,” crossbowmen (largely Pisan mercenaries) were not effectively deployed, and they had the unenviable task of shooting uphill.  That same terrain required the French forces, both mounted and on foot, to attack uphill over a recently plowed field that, consequent to the recent rain, was more mud than dirt. The French knights and men at arms, slogging their way uphill, were a “target rich environment” for the rain of arrows let loose by the English longbows; assuming Henry’s forces numbered 7,000, likely 5,800 were longbowmen, each releasing four to six arrows a minute.

      Another factor was that the very size of the French force worked to its disadvantage in that those behind continued pressing forward, hoping for their moment of glory, even while those at the front were being slaughtered. It was not quite the situation suffered by the Romans at the hands of Hannibal at Cannae, but then likely it was not hugely better.

      While comparative casualty figures are effectively impossible to ascertain, it is clear that the French were badly mauled with significantly more casualties than the English. Further, a significant number of French nobles fell in contrast to only two English nobles. Also, a significant number of French knights who had been captured in anticipation of being ransomed were executed.  The validity of the execution order, given by Henry V, is to this day debated.

      For an excellent review of the battle, see Juliet Barker's Agincourt: Henry V and the Battle That Made England. It is also covered in volume four of Sumption’s treatise.

      As invented by Shakespeare in Henry V, Scene iii, the St. Crispin’s Day speech would immortalize Henry V:

WESTMORELAND. O that we now had here

But one ten thousand of those men in England

 That do no work to-day!

 KING. What’s he that wishes so?

 My cousin, Westmoreland? No, my fair cousin;

 If we are mark’d to die, we are enow

 To do our country loss; and if to live,

 The fewer men, the greater share of honour.

 God’s will! I pray thee, wish not one man more.

 By Jove, I am not covetous for gold,

 Nor care I who doth feed upon my cost;

 It yearns me not if men my garments wear;

 Such outward things dwell not in my desires.

 But if it be a sin to covet honour,

 I am the most offending soul alive.

 No, faith, my coz, wish not a man from England.

 God’s peace! I would not lose so great an honour

 As one man more methinks would share from me

 For the best hope I have. O, do not wish one more!

 Rather proclaim it, Westmoreland, through my host,

 That he which hath no stomach to this fight,

 Let him depart; his passport shall be made,

 And crowns for convoy put into his purse;

 We would not die in that man’s company

 That fears his fellowship to die with us.

 This day is call’d the feast of Crispian.

 He that outlives this day, and comes safe home,

 Will stand a tip-toe when this day is nam’d,

 And rouse him at the name of Crispian.

 He that shall live this day, and see old age,

 Will yearly on the vigil feast his neighbours,

 And say “To-morrow is Saint Crispian.”

 Then will he strip his sleeve and show his scars,

 And say “These wounds I had on Crispin's day.”

 Old men forget; yet all shall be forgot,

 But he’ll remember, with advantages,

 What feats he did that day. Then shall our names,

 Familiar in his mouth as household words-

 Harry the King, Bedford and Exeter,

 Warwick and Talbot, Salisbury and Gloucester-

 Be in their flowing cups freshly rememb’red.

 This story shall the good man teach his son;

 And Crispin Crispian shall ne’er go by,

 From this day to the ending of the world,

 But we in it shall be remembered-

We few, we happy few, we band of brothers;

 For he to-day that sheds his blood with me

 Shall be my brother; be he ne’er so vile,

 This day shall gentle his condition;

 And gentlemen in England now-a-bed

 Shall think themselves accurs’d they were not here,

 And hold their manhoods cheap whiles any speaks

 That fought with us upon Saint Crispin’s day.

 

           HERE IS A LINK to Kenneth Branagh’s masterful rendition.

          Not recited in the list of nobles who were part of the battle was Edward of Norwich, the Duke of York (a grandson of Edward III)   He was killed while defending the king.

            In 1420 Isabeau of Bavaria, queen to the incapacitated Charles VI, signed the Treaty of Troyes, granting the French Crown to Henry V and his heirs in place of her son. Further to that treaty, Henry V married Catherine of Valois; she would be the mother of Henry VI with the Valois inherited mental instability that would contribute to the Cousins War (a/k/a the War of the Roses); HERE IS A LINK to a discussion of that situation. Henry V died in 1422. Joan of Arc would join the fray in 1429; while she would be in the field just a year and a half she helped turn the tide, and the 100 Years War would end with England holding only the region of Calais.  It would be lost in the reign of Mary (a/k/a Bloody Mary).

     October 25 is as well the anniversary of the elevation of Henry II to the throne upon the death of Steven of Blios, thereby bringing to an end "The Anarchy,' and the 1854 Battle of Balaclava and the better known "Charge of the Light Brigade" during the Crimean War.