On Feb. 12, 2022, the Ohio Revised Limited Liability Company Act (Revised Act), R.C. Chapter 1706, took effect. Importantly, the Revised Act expressly provides that R.C. Chapter 1706 applies to all Ohio limited liability companies (LLCs), even if the LLC was organized under the Revised Act's predecessor statute, the Ohio Limited Liability Company Act, R.C. Chapter 1705 (Prior Act).
While the Revised Act changed many things about the operation of Ohio LLCs, one change in particular that Ohio LLC members should be aware of is the circumstances under which a member may be involuntarily dissociated from the LLC. As discussed more thoroughly in this article, both Ohio LLC members owning a minority interest and those owning a controlling interest should be aware of the changes made to dissociation in the Revised Act, as their rights have been altered with the adoption of the Revised Act.
Importance of the Operating Agreement in Determining the Circumstances Under Which a Member may be Involuntarily Dissociated
As an initial matter, it is important to note that — unless expressly provided otherwise by the Revised Act — the LLC operating agreement will control and prevail in most factual scenarios involving both voluntary and involuntary dissociation. However, the Revised Act does prescribe certain baseline circumstances and requirements for voluntary and involuntary dissociation of LLC members. In situations where an Ohio LLC's operating agreement is silent on the ability of members to involuntarily dissociate another member, Ohio's General Assembly — by codification of R.C. 1706.411 — fills the gap and prescribes a process for involuntary dissociation in a number of circumstances. For that reason, members of an Ohio LLC should carefully consider under what circumstances a member of the LLC may be dissociated when preparing the operating agreement.
Involuntary Dissociation under the Prior Act, R.C. Chapter 1705
Under the Prior Act, other than provisions largely relating to the involuntary dissociation of an LLC member (i) that is an entity (e.g., dissolution or termination of the entity, R.C. 1705.15(F)–(J)), (ii) for reasons associated with bankruptcy relief (e.g., R.C. 1705.15(C)–(D)), or (iii) due to the death of an individual member (R.C. 1705.15(E)), the only provision relating to involuntary dissociation of a LLC member was as follows:
[A] person ceases to be a member of a limited liability company upon the occurrence of any of the following events of withdrawal: ... A member is removed or expelled as a member in accordance with the operating agreement.
R.C. 1705.15(B).
The issue, of course, is many operating agreements did not include mechanisms for expelling members, leaving members or LLCs without a process to dissociate a member. To address the deficiencies of the Prior Act and to modernize the provisions allowing for involuntary dissociation of a LLC member, the General Assembly enacted R.C. Chapter 1706.
Involuntary Dissociation Under the Revised Act, R.C. Chapter 1706
The involuntary dissociation procedures in the Revised Act are contained in R.C. 1706.411, which enumerates the circumstances under which a member of an Ohio LLC may be dissociated.
As an initial matter, similar to the Prior Act, the Revised Act allows for the provisions of the operating agreement of the LLC to control the involuntary dissociation of an LLC member. See R.C. 1706.411(A), (B). These provisions, again, underscore the importance of an expertly drafted operating agreement. Both controlling and minority members have a strong interest in ensuring that their respective interests are protected in the negotiation and preparation of the events causing automatic dissociation — or the ability to be dissociated — under the terms of the operating agreement.
Second, in relation to the present discussion, the General Assembly included a mechanism by which a member could be involuntarily dissociated via court order. The below provisions of R.C. 1706.411(D) may serve as a basis for LLCs — and their controlling members — to involuntarily expel a member of the LLC and will each be discussed in turn in Section D. below. Specifically, R.C. 1706.411(D) of the Revised Act provides:
On application by the LLC, the person is expelled as a member by tribunal order for any of the following reasons:
(1) The person has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the LLC's activities.
(2) The person has willfully or persistently committed, or is willfully or persistently committing, a material breach of the operating agreement or the person's duties or obligations under this chapter or other applicable law.
(3) The person has engaged, or is engaging, in conduct relating to the LLC's activities that makes it not reasonably practicable to carry on the activities with the person as a member.
Case Law Applying R.C. 1706.411(D)
Due to the relative newness of R.C. 1706.411(D), there is little case law interpreting and applying it. In fact, while multiple cases have been filed by Ohio LLCs requesting involuntary dissociation of a member, to date, only two such cases have been litigated to a judgment in a reported decision.
First, in Kevin Kee and In A Flash Shipping & Delivery, LLC v. Michael Kee, Franklin Cty. C.P. Case No. 22-CV-1988, the Franklin County Court of Common Pleas involuntarily expelled a member of an Ohio LLC. In making its decision, the court relied on R.C. 1706.411(D), reasoning that the defendant had (i) breached the terms of the LLC operating agreement, (ii) breached the fiduciary duties defendant owed to the LLC, and (iii) wrongfully dissociated himself from the LLC. See Decision & Entry, 1–2 (July 11, 2023). Unfortunately for parties seeking additional interpretation of R.C. 1706.411(D), this decision was issued following a trial, wherein the defendant in the case — despite having appeared in the case previously — did not appear or defend himself. Second, in Bukovec v. Keger, 8th Dist. Cuyahoga No. 113024, 2024-Ohio-1162, the Eighth District considered an appeal of a Rule 60(B) motion to set aside a default judgment entry that expelled a member of an Ohio LLC. In that case, the expelled member had been alleged to have: (i) denied his former partner access to the business premises and the records of the company, (ii) diverted operating revenue, income, and cash receipts of the business to his personal bank account or to an account owned by another LLC, (iii) attempted to cancel the lease for the business premises in an attempt to have the landlord issue a new lease to another LLC, and (iv) attempted to dissolve the company with the Ohio Secretary of State. Id. at ¶¶ 4-5. Ultimately, in dismissing the appeal on jurisdictional grounds, the appellate court left undisturbed the default order expelling the member. Id. at ¶¶ 16-18.
Though no Ohio court has weighed in-depth on the provisions of R.C. 1706.411(D), case law of other jurisdictions that have similar statutory frameworks will be useful in future membership disputes and potential involuntary dissociation cases, as the Ohio General Assembly modeled the Revised Act on the American Bar Association's (ABA) Revised Prototype Limited Liability Company Act published by the ABA's Committee of LLCs, Partnerships and Unincorporated Entities. See here. The Uniform Law Commission's Revised Uniform Limited Liability Act has been adopted by about half of the states in the United States.
Because subpart (D)(2) of R.C. 1706.411 is rather straightforward (i.e., a member should not violate the operating agreement and must adhere to duties imposed by state law on members of an LLC), most courts analyzing similar statutory regimes have focused their analyses on subparts (D)(1) — wrongful conduct that has adversely and materially affected the operations of the LLC — and (D)(3) — conduct that makes it not reasonably practicable for a member to continue. In doing so, two key issues have been borne out in the case law that controlling and minority members should keep in mind when considering whether involuntary dissociation is a possible path to consider.
First, in relation to subpart (D)(1), courts have observed that statutory provisions like subpart (D)(1) require a greater degree of misbehavior to justify dissociation than do statutory provisions like subpart (D)(3). See e.g., All Saints Univ. of Medicine Aruba v. Chilana, Super.App.Div. No. A-2628-09T1, 2012 N.J. Super. Unpub. LEXIS 2797, *39, 2012 WL 6652510, *14 (Dec. 24, 2012). In Chilana, for example, the New Jersey appellate court recognized that the requirements of New Jersey's equivalent of subpart (D)(3) were "less stringent" because New Jersey's equivalent to subpart (D)(1) utilized the term "wrongful" as a normative component. Chilana, 2012 N.J. Super. Unpub. LEXIS 2797, at *39, 2012 WL 6652510, at *14. Ohio's statute includes the same distinction. Compare R.C. 1706.411(D)(1) with R.C. 1706.411(D)(3).
Second, in relation to subpart (D)(3), courts have routinely held that mere disagreements or distrust amongst the members is not a sufficient basis for the involuntary dissociation of a member. See e.g., Holloran v. G25 Holdings, LLC, 2018 WL 7019114, at *4 (Mont. Dist.). Instead, courts around the country have applied a multi-factor test to determine whether the conduct has risen to the level such that it is "not reasonably practicable to carry on the activities with the person as a member." Those factors include: (1) the nature of the member's conduct relating to the business of the LLC; (2) whether, with the member remaining, the LLC may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the members precludes them from working with one another to pursue the goals of the LLC; (4) whether there is a deadlock among the members; (5) whether, despite that deadlock, members can make decisions on the management of the LLC; (6) whether, due to the financial position of the LLC, there is still a business to operate; and (7) whether continuing the LLC, with the member remaining a member, is financially feasible. See e.g., I.E. Test, LLC v. Kenneth Carroll, 226 N.J. 166, 140 A.3d 1268 (2016); Holloran, 2018 WL 7019114.
Takeaways
As explained more thoroughly above, Ohio LLCs now have available to them the ability to petition an Ohio court to expel uncooperative members pursuant to R.C. 1706.411(D). LLCs, controlling members and minority members alike, should be aware of this new mechanism to involuntarily dissociate members, especially because R.C. 1706.412 describes that — once dissociated — the member has no right to participate in the management of the LLC, retaining only the right to receive distributions from the LLC. Moreover, once dissociated, R.C. 1706.412 provides that the expelled member continues to have a duty of loyalty and a duty of care with respect to matters arising and events occurring before the member's dissociation and that dissociation does not discharge the expelled member from any debt, obligation, or liability to the LLC or the other members that the former member incurred while still a member.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.