The answer to when an LLC member suffers oppression just came on September 29, 2020, in the Connecticut Appellate Court’s decision in Manere v. Collins et al. You can read the court’s opinion here. This precise question – what is member oppression under Connecticut’s limited liability company was never answered before. This is because Connecticut’s revised Limited Liability Company Act is only a little over three years old; it was effective July 1, 2017, and lists oppressive conduct as a basis for an LLC member to seek judicial dissolution of an LLC. The old LLC Act allowed a judge to dissolve an LLC only “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” The new Act adds member oppression by another member as a basis to seek dissolution.
What is Dissolution of an LLC?
Dissolution of an LLC is basically the same as dissolution of a corporation or a partnership. It’s the way a legal entity ends its existence. Dissolution is only the first step to ending an LLC’s existence, because the legal entity has to wind up its business affairs by paying creditors, distributing assets etc. An LLC can be dissolved in various ways. The LLC operating agreement (the governing document that sets forth the rights and obligations of the members of the LLC – like a shareholder agreement for a corporation) can identify events that, if they occur, dissolve the LLC. For example, the operating agreement may say that the LLC is dissolved upon death of any member. If the operating agreement doesn’t specify events of dissolution (which it really should), then the LLC statutes step in and define what constitutes dissolution.
The current Connecticut LLC Act’s grounds for judicial dissolution includes a provision that requires the managers or members controlling the company have acted or are acting in a manner that is: (A) illegal or fraudulent; or (B) oppressive and was, is, or will be directly harmful to the applicant. The Connecticut Appellate Court just addressed section (B) in this newly released opinion to guide Connecticut lawyers on LLC member oppression, which is very similar to shareholder or partner oppression.
What Was this New Case About?
The case was about what almost all small, closely held business disputes are about; different people, same type of dysfunction. The case involved the same basic facts that we’ve seen and litigated in the past because almost always the owners or members of a small, closely held business are related by blood or marriage, or were close friends. In this case they were long-time high school friends. They reconnected at their high school reunion, hit it off again and decided to purchase a bar in Fairfield, Connecticut called the “Seagrape Cafe,” a big Fairfield University hangout. They created an LLC, with a written operating agreement (good) and things were looking good. One owner, the plaintiff, lived in Connecticut and ran the business day to day. He owned 40%. The other owner, who owned 60%, lived in NYC and was less involved. Over time, the 40% owner started doing some bad things, but the same types of things we see over and over in shareholder, LLC or partnership disputes. He started using the business’s money to pay personal expenses like health insurance, car payments etc. He gave himself raises. Later, during a time when the business was recovering from a hurricane, the plaintiff started taking his salary in cash, after having increased it by $500 a week without the co-owners permission. (You may think hey, my partners and I do that also.) Problem here was the other owner didn’t know what the plaintiff was doing.
You get the picture.
The majority owner moved from NYC to CT and soon became very suspicious, and rightly so. Ultimately, after doing some investigating, he amended the operating agreement on his own (because he owned 60% of the LLC he didn’t need the other member’s permission) and terminated the plaintiff as a manager to take control away from him. He also removed the plaintiff as the liquor permittee (very valuable asset), fired his son whom the plaintiff had hired, and locked the plaintiff out of the building. Classic freezing out of one owner by the majority owner.
These are classic acts of LLC member oppression – the controlling owner squeezes the minority owner out of the business – which happens in shareholder oppression cases also.
Would you think the majority owner would be sued by the bad guy? Was the LLC member engaged in oppression of the other member, or partner?
Wasn’t the majority owner justified in doing what he did to the other member?
You would think the majority owner had very good reasons for taking the steps he did to protect his business. And he had the power as the 60% owner to do what he needed to do to protect the business and his investment. In fact his changes helped the business. He brought the business into compliance with federal and state wage and hour laws, because the plaintiff must have been paying servers and bartenders wrongly (wage and hour compliance with servers and bartender is challenging). The majority owner’s moves increased the cafe’s revenue by 25%.
So should the owner who was taking all the money be allowed to sue and shut the company down because he was being “oppressed” by the majority owner?
We will talk about that in the next blog on this important Connecticut case. If you have any questions about shareholder, partner or LLC member oppression or wrongful conduct, give Attorney Minchella a call. Your investment is worth some legal peace of mind to know your rights.