It is a common misconception that a member of a limited liability company (LLC) in New York can be expelled – non-judicially or judicially – by the other member(s) of the LLC for cause, for any reason, on any basis, at any time.
Eh, not so fast. Let’s visualize a flow chart here for a moment, where there is a single question at the top of the page with off-shoots in either direction to guide us on the next inquiry on this topic.
The first question that I ask clients to ask themselves when they bring this question to me is – what does the LLC’s operating agreement say about the expulsion of members?
If the LLC is silent on the expulsion of members, then you cannot expel them. Period. There is no judicial remedy available to expel members of an LLC in the absence of an express provision set forth in the operating agreement creating the mechanics for what that would look like.
Under New York Limited Liability Company Law, there is no statute providing for the expulsion of a member of the LLC. In fact, the only reference to “expulsion” is set forth in Section 701 (“unless otherwise provided in the operating agreement, the death retirement, resignation, expulsion, bankruptcy or dissolution of any member or the occurrence of any other event that terminates the continued membership of any member shall not cause the limited liability company to be dissolved or its affairs to be wound up. . .). Because of this very brief reference in Section 701, practitioners can often misconstrue that a judicial expulsion is an available remedy under LLC Law.
Rather, undisturbed case law on this topic advises that the expulsion of a member in the absence of an express provision in the LLC’s operating agreement is prohibited. Chiu v. Chiu, 71 A.D.3d 646 (2d Dept. 2010); Goyal v. Vintage India NYC, LLC, 2018 N.Y. Slip Op. 31926 (N.Y. Supr. Aug. 7, 2018); Weiss v. All Year Holdings Ltd., 648 B.R. 434, 453 (SDNY 2022).
Particularly concerning are the cases where a 50% member attempts to expel or remove the other 50% member as a manager of the LLC. Indeed, even the default provision set in Section 414 governing the removal or replacement of a manager of an LLC requires a majority vote, one that could not be captured by an equal 50/50 member.
All of the foregoing is to say – and stress – just how crucial it is to (i) first, have the proper governance documents drafted for your entity and (ii) second, fully understand those documents with the help of competent counsel. Otherwise, costly litigation over rights, interests, and conduct undertaken on behalf of and in the right of the LLC will undoubtedly unfold.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.