Tuesday, August 27, 2019

Court Rejects “Untenable” Reading of Operating Agreement as To Removal of Manager


Court Rejects “Untenable” Reading of Operating Agreement as To Removal of Manager

      In his blog New York Business Divorce, Peter Mahler has reviewed a decision from California, Hillsboro Development Co., LLC v. Annen, Case D074818, 2019 WL 3758948 (Ca. Ct. App. 4th Dist. (August 9, 2019), wherein the court was called upon to interpret the applicable operating agreement and the controlling California LLC Act to determine whether or not a manager had been removed. That posting is titled Statute Trumps LLC Agreement’s Voting Rights Provision In Dispute Over Manager’s Removal; HERE IS A LINK to his posting.
      Essentially, the California LLC Act provides that a manager may be removed by a majority vote of the members. The Hillsboro operating agreement did not directly address the removal of a manager. The operating agreement did, however, contain a general voting rights section that provided, inter alia, that all decisions would require the consent of all members. Annen objected when a majority of the holders of the membership interests, by written consent, removed him as a manager of the LLC. He asserted that could take place only with a unanimous vote. The court rejected this suggestion, finding that the statutory rule requiring only majority consent had not been overridden and that it would not endorse the “untenable” notion that Annen could be removed as a manager only with his consent.
      At the end of the posting, which of course goes into far more detail than does this summary, Peter identified a number of other cases from New York that have addressed the removal of a manager. Simply seeking to add to that listing, another case of which you should be aware is Young v. Ellis, 172 Wash. App. 1014 (Wash. Ct. App. Div. 2, Dec. 4, 2012). Therein, the managing member of an LLC was named in the operating agreement, and the operating agreement required unanimity for its amendment. The court rejected as “absurd” the suggestion that the managing member could be removed only by unanimous consent of the members, in effect requiring the managing member’s consent to his own removal. Rather, the court found that the operating agreement’s general rule of the majority consent of the members would apply to the removal of a managing member.

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