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.”