A Member Can Be Judicially Expelled From A Limited Liability Company (LLC)

• Tuesday, April 21, 2015
• Category: Business & Corporate Law, Business Litigation

The business litigation case of IE Test, LLC v. Carroll, 12-2-6140, App. Div. is an appeal relating to a provision of the Limited Liability Company Act (“LLCA”), in particular, N.J.S.A. 42:2B-24(b)(3), which permits under certain circumstances the expulsion of a member of a limited liability company “by judicial determination.” Specifically at issue here, the LLCA permits expulsion of a member “by judicial determination” if “the member engaged in conduct… which makes it not reasonably practicable to carry on the business with the member as a member of the (LLC).”

Defendant Kenneth Carroll appealed from the Chancery Division’s interlocutory order that granted partial summary judgment to plaintiff IE Test LLC and expelled Carroll from membership in the LLC pursuant to subsection 3(c) of the LLCA, and from the final judgment that awarded Carroll thirty-three percent of the value of plaintiff, $227,497, plus interest. The appellate panel concluded that Judge Klein correctly granted plaintiff partial summary judgment.

The facts demonstrated that discord among the parties arose immediately after the LLC’s formation. The parties’ relationship never recovered from the initial exchange. Prior to the filing of plaintiff’s summary judgment motion, no proposed operating agreement was ever circulated and there is no indication in the record that Carroll ever altered his position that he was due compensation for IE’s debt, whether in the form of a salary draw or in some “premium” payment from the LLC’s distributions. Under these circumstances, the motion record supported Judge Klein’s decision that the continued operation of plaintiff with Carroll as a member was “not reasonably practicable” under N.J.S.A. 42:2B-24(b)(3)(c).

Reference: Case & Analysis, New Jersey Law Journal, 219 N.J.L.J. 975 (March 23, 2015)

Filed Under: Business Entities; Limited Liability Company, Expulsion as Member

Please visit our Business Law & Business Litigation websites for more information on this topic.