But Did They Really Withdraw?: Donnelly v. McNelis

But Did They Really Withdraw?:  Donnelly v. McNelis

In a recent decision from Maryland, the Court of Special Appeals reviewed the effect of an involuntary withdrawal from an LLC, holding that where the LLC did not exercise a call right to redeem the interests of the involuntarily withdrawn member that they were mere assignees with no voting or other rights to participate in the LLC’s management.  Which is all well and good.  It is not clear, however, that the members actually effected an involuntary withdrawal. Donnelly v. McNelis, No. 2347, Sept. Term, 2018, 2020 WL 1814777 (Md. Ct. Spec. App. Apr. 9, 2020).

Solomons II, LLC was owned by V. Charles Donnelly (“Donnelly”), and Deborah Steffen (“Steffen”), Christine McNelis (“McNelis”) and Catherine Erickson-File (“Erickson-File”).  The LLC’s “Amended Operating Agreement, which was drafted by Donnelly, listed the membership interests as follows: Donnelly (1%); Steffen (49%); McNelis and Erickson-File jointly (50%).”  Slip op at 2. Donnelly and Steffen formed on 50% faction in the LLC while McNelis and Erickson-File formed the other 50% block. Donnelly and Stefen purported to assign to Donnelly certain commercial pier rights related to the LLC’s property.  That property has been purchased pursuant to a note on which McNelis and Erickson-File were making payments even as Donnelly and Steffen had failed to do so – the opinion is silent as to member obligations to contribute to meet LLC obligations.  Donnelly and Stefen did not disclose to McNelis and Erickson-File that the assignment had been given or that it had been recorded.  Regardless, when the assignment of the pier rights was discovered, litigation ensued.  An aspect of that litigation was that Donnelly and Steffen filed a “Petition for Dissolution, Accounting, and Appointment of Receiver against Solomons II.” Slip op. at 5.  McNelis and Erickson-File brought a declaratory rights action seeking relief including a declaration that the assignment was invalid.  Further, “McNelis and Erickson-File additionally requested that the court declare that Donnelly and Steffen had involuntarily withdrawn from Solomons II and lost their voting rights.”  Slip op. at 6.  The trial court held that Donnelly and Stefen had involuntarily withdrawn from the LLC, but that they had not lost their voting rights therein.  Slip op. at 18. The determination that they had not lost their voting rights was reversed on appeal.

The decision of the Court of Special Appeals recites that:

Section 1 of the Operating Agreement defines “Involuntary Withdrawal” to include the occurrence of the filing of a petition seeking dissolution or seeking the appointment of a receiver.  Donnelly and Steffen filed for both, and therefore, had clearly involuntarily withdrawn from Solomons II.  Slip op. at 18.

***

The remaining question is the status of Donnelly and Steffen’s rights in Solomons II.  The Operating Agreement is silent regarding this issue, and therefore, we look to CA §§ 4A-606-606.1 for guidance on this issue.  Pursuant to CA § 4A-606, a person ceases to be a member of a limited liability company if removed as a member in accordance with the operating agreement, “[f]iles a petition or answer seeking for that person any reorganization, arrangement, composition, readjustment, liquidation, dissolution,” or “[s]eeks, consents to, or acquiesces in the appointment of a trustee for, receiver for, or liquidation of the member or of all or any substantial part of the person's properties.”  Donnelly and Steffen ceased to be members when they involuntarily withdrew from Solomons II. Slip op. at 19.

What is important about the first of these sentences is that it does not address whose dissolution, that of the LLC or that of the member.  The third sentence of the second paragraph does answer that question, restricting its application to dissolution “for that person.”   Except here the court said “if a member seeks the LLC’s dissolution, the member in so doing is treated as having moved for the member’s dissolution and in consequence ceases to be a member.

And that is inconsistent with any number of decisions on similar statutes. There have been a series of cases in which it was asserted that the action of seeking the LLC’s dissolution has the effect of depriving the moving member of the status to do so because that action effects the moving member’s dissociation.  A long series of decisions make it clear that this is an incorrect reading of the statute, its focus being upon the moving member and not the subject LLC. See, e.g., Darwin Limes, LLC v. Limes, No. WD-06-049, 2007-Ohio-2261, 2007 WL 1378357, * 5-6 (Ohio Ct. App. 6th Dist May 11, 2007) (applying an Ohio statute providing for withdrawal when a member “files a petition or answer in any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief proceeding under any law or rule that seeks for himself any of those types of relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC); Sayers v. Artistic Kitchen Design, 633 S.E. 2d 619 (Ga. App. 2006); Nicolazzi v. Bone, ___ S.W.3d ___, 2019 WL 5700365, *4 (Mo. Ct. App. Eastern Dist. November 5, 2019) (holding that the provision addresses the member, and not the LLC, a determination that is consistent with the decisions of a number of other jurisdictions; “Our exhaustive multi-jurisdictional review demonstrates that courts interpreting statutes with nearly identical language have rejected the argument that a person’s membership automatically is relinquished when the individual member seeks reorganization or dissolution of the LLC rather than for itself.”); Oliver v. Johanson, 329 F.Supp.3d 684, 689-91 (W.D. Ark. 2018) (applying an Arkansas statute providing for withdrawal when a member “files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC); Crumpton v. Vick’s Mobile Homes, LLC, 779 S.E.2d 136, 137-39 (Ga. Ct. App. 2015) (applying a Georgia statute providing for withdrawal when a person “files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC or otherwise pursue equitable relief or an accounting); Crouse v. Mineo, 658 S.E.2d 33, 38-39 (N.C. Ct. App. 2008) (applying a North Carolina statute providing for withdrawal when a person “[f]il[es] a petition or answer seeking for him any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief” and finding withdrawal did not occur when an LLC member petitioned to dissolve the LLC.).

            It is not clear that either Donnelly or Steffen ever did anything that of itself constitutes an involuntary withdrawal from the LLC.