When a minority member of a Connecticut LLC is oppressed, the legal standard Connecticut applies is called the “reasonable expectations” standard. This looks at the reasonable expectations of the minority member who claims he/she is being oppressed by the majority member.
I first wrote about the new Connecticut case that adopts that standard, here. There you can find out what “oppression” means generally when it comes to owners of a corporation or limited liability company. Let’s take another look at that case which decided whether minority member oppression by a majority member can support dissolution of an LLC.
An Oppressed Minority Member Can Be Doing Bad Things and Still Seek Dissolution of the LLC
That case represents the first appellate court interpretation of a section of our revised LLC Act that allows an oppressed LLC member to seek judicial dissolution of the LLC. What I find so interesting about the case is that the member that claimed he was being oppressed by the majority member was stealing from the business. Yes, stealing. It goes like this: First, I will start stealing from our business. Then I will hire my son to work for us and pay him too much money. And then I will steal some more. Then, wait, when you catch me, and limit my members rights and fire me, I am going to try to dissolve the business. Talk about turning the tables!
The Bad Things the Minority Member Was Doing
Some history. Two men had an LLC that ran a college bar in Fairfield, Connecticut called the Sea Grape. The minority member was running the day-to-day business for an agreed-upon salary of $1,000 a week. The majority owner lived in NYC where he had another business. After Hurricane Sandy shut the bar down, the two agreed that neither would take any money out of the business for a year. But the plaintiff instead kept on taking his salary, only now in cash rather than checks (gee I wonder why). He even upped it to $1500 a week. All along he was also paying a ton of his personal expenses out of the business.
The Majority Member’s Actions That Led to Oppression
The majority member figured out something was going on and asked his partner to let him see the books and records (all members have this right). When his partner provided only partial business records, he got them on his own. Remember, this is the defendant in this case! the guy who was SUED! After he discovers that his partner had taken about $190,000 from the business, he fires him and his son who was also working there, amended the LLC operating agreement (he could because he was the majority member) and locked the plaintiff out of the building. And he did a whole bunch of other things that ended up strengthening the business.
And then the bad guy sued the good guy for squeezing him out of the LLC. Yup, the guy who was taking money whenever he wanted, paying his personal expenses from the business without his partner knowing, turned around and sued the good guy that came in and rescued the business.
Why? Well, the bad guy was still a member, and had rights. And because he was a minority member at the mercy of the majority member, was fired from his job, locked out of the building, and getting no money from the LLC, he was permitted to go to court and claim that he was being oppressed and wanted to dissolve the LLC. That’s one of the issues the court decided.
What the Connecticut Appellate Court Decided
Under Connecticut’s new LLC Act, an oppressed minority member, even one who has been stealing from the business, can sue to dissolve the LLC. This new case decided for the first time what legal standard trial courts should apply when deciding whether to permit a minority member to dissolve an LLC. The appellate court held that whether a member is being oppressed depends on the “reasonable expectations” of that member. What did that member reasonably expect to get from his investment in the LLC? Income alone? A job? Health insurance? Steady distributions? A legacy to bequeath to his/her children?
The court didn’t decide whether the bad guy in this case should be able to dissolve the LLC. Rather, it court decided what legal standard the lower court should apply. The appellate court ruled that Connecticut’s trial courts must apply the reasonable expectations standard to the new LLC Act, and in doing so and rejected the “fair dealings” standard that other states have used, to determine whether a majority owner is oppressing the minority owner.
As of now (neither party appealed, which I don’t understand) Connecticut courts will look at what the minority member’s “reasonable expectations” are, compare them with what the operating agreement says, and determine whether they are reasonable and have been violated to decide whether the LLC should be dissolved.
In determining whether the oppressed owner had reasonable expectations in anything, the Court provided some guidance and seemed to forecast to the trial court that has to apply this new standard that, maybe just maybe, this bad guy’s reasonable expectations were not violated.
Next time we will go through a list of factors that court should look at in deciding the reasonableness of the members expectations.
Betcha can’t wait huh?