Friday, March 3, 2017

Expulsion of Member for Being a Jerk Upheld; Effort to Re-characterize Relationship as a Partnership Rejected

Expulsion of Member for Being a Jerk Upheld;
Effort to Re-characterize Relationship as a Partnership Rejected

      In a decision rendered last year in Illinois, there was affirmed the trial court's determination that a member was expelled for cause. In addition, that same opinion affirmed a summary judgment to the effect that there existed no partnership amongst the members of an LLC. Herrick v. Jumpforward LLC, No. 1-15-3261, 2016 Il. App (1st) 153261-U (Aug. 29, 2016).
      Herrick, the plaintiff in this action, joined Jumpforward LLC (the “Company”) as a nonvoting member and at-will employee. The purpose of the Company was to develop a software application by which college coaches and athletes could better negotiate the recruitment process. The founders of the Company, one of whom had been Herrick's college roommate, were former college athletes familiar with the process. In the course of joining the venture, he represented that he had several years of experience in the utilization of several software packages that would be used in developing the web application for which the Company was organized. His initial 20% interest in the Company was structure as 1/3 vesting immediately, 1/3 vesting on the one year employment anniversary and the last 1/3 vesting on the second employment anniversary.
      The relationship was not successful. It ultimately came to pass that the representations as to experience with the various software packages were not true. In addition, Herrick did much of the work for the website using software packages that were not effective in achieving the stated aim.
      In addition to these technical failures to deliver, the plaintiff became  exceptionally difficult to work with in the Company, not responding to internal inquiries and as well refusing to respond to certain important outside customers.  He as well engaged in abusive communications to other employees, even after being admonished by more senior officers in the Company. Eventually, Herrick's employment with Jumpforward was terminated. Thereupon, the unvested portion of his interest in the Company was forfeited, and the balance, in accordance with the operating agreement, was redeemed. Herrick challenged both the validity of his termination and the redemption of his interest in the venture. Certain of his claims were dismissed on summary judgment, the balance were all resolved against him at trial. This appeal followed.
      The trial court, on summary judgment had dismissed Herrick's assertion that there existed a partnership between him and the defendants such that partnership duties should govern the propriety of the termination of their relationship. After reciting the components of a partnership, the court noted as well that, under controlling Illinois law “[a] complete, valid, written, contract merges and supersedes all prior and contemporaneous negotiations and agreements dealing with the same subject matter.” (Citation omitted). Applying this principle, the court found that the employment and operating agreements to which Herrick had entered both controlled the relationship and did not reflect the formation of a partnership. Rather, “[W]hen they memorialized the relationship in writing, they formed a limited liability company, and not a partnership.” 2016 Il. App. (1st) 153261-U,*9, ¶46.
      In addition, the court granted credence to the fact that the operating agreement cited that the parties thereto “disclaimed ‘any intent to form a partnership under the laws of any jurisdiction.’” Id., *10, ¶50.
      The Court of Appeals likewise upheld the trial court’s grant of summary judgment with respect to the plaintiff's claims for breach of fiduciary duty. Based upon various case authorities, but curiously without referencing the text of the Illinois LLC Act or any contrary language in the operating agreement, it found that there did not exist a fiduciary relationship between the plaintiff and either Jumpforward LLC or McCombs, the founder.
       The Court of Appeals also affirmed the determination that his termination had been for “cause.”

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