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Oppression of LLC Member

What rights does a limited liability company member have if they are being treated unfairly by the other members of the company? The answer to this frequent problem is found in Michigan statute and case law. The statute MCL 450.4515 provides:

  1. A member of a limited liability company may bring an action in the circuit court of the county in which the limited liability company's principal place of business or registered office is located to establish that acts of the managers or members in control of the limited liability company are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member. If the member establishes grounds for relief, the circuit court may issue an order or grant relief as it considers appropriate, including, but not limited to, an order providing for any of the following:
    1. The dissolution and liquidation of the assets and business of the limited liability company.
    2. The cancellation or alteration of a provision in the articles of organization or in an operating agreement.
    3. The direction, alteration, or prohibition of an act of the limited liability company or its members or managers.
    4. The purchase at fair value of the member's interest in the limited liability company, either by the company or by any members responsible for the wrongful acts.
    5. An award of damages to the limited liability company or to the member. An action seeking an award of damages must be commenced within 3 years after the cause of action under this section has accrued or within 2 years after the member discovers or reasonably should have discovered the cause of action under this section, whichever occurs first.
  2. As used in this section, "willfully unfair and oppressive conduct" means a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member. Willfully unfair and oppressive conduct may include the termination of employment or limitations on employment benefits to the extent that the actions interfere with distributions or other member interests disproportionately as to the affected member. The term does not include conduct or actions that are permitted by the articles of organization, an operating agreement, another agreement to which the member is a party, or a consistently applied written company policy or procedure.

Various Michigan cases, including Castle v. Shoham, 2018 Mich. App. LEXIS 2975, *6-10, 2018 WL 3746550 quoted below provide additional details:

““The definition of "willfully unfair and oppressive conduct" as "a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member" in the LLCA mirrors the definition of the same phrase as set forth in the Michigan Business Corporation Act at MCL 450.1489(3) with the word "shareholder" taking the place of "member" in that statute. In Franchino v Franchino, 263 Mich App 172 189; 687 NW2d 620 (2004), the Court stated that "willfully unfair and oppressive conduct" refers to conduct that substantially interferes only with rights that automatically accrue to a shareholder by virtue of being a shareholder. Applying the same reasoning, only conduct that substantially interferes with rights that automatically accrue to a member by virtue of being a member will be considered for purposes of determining whether such conduct was willfully unfair and oppressive in a limited liability company. Shareholder interests typically include actions like "voting at shareholder's meetings, electing directors, adopting bylaws, amending charters, examining the corporate books, and receiving corporate dividends." Franchino, 263 Mich App at 184. These same interests could be deemed typical of a member in a limited liability company. While employment is not generally listed among rights that automatically accrue to a shareholder [*9] (or by extension, a member), (Id.), MCL 450.4515(2) specifically states that the termination of employment may constitute willfully unfair and oppressive conduct "to the extent that the actions interfere with distributions or other member interests disproportionately as to the affected member." As explained in Frank v Linkner, 500 Mich 133; 894 NW2d 574 (2017): In summary, MCL 450.4515(1) provides a cause of action for members of an LLC when the managers' actions are "illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member." "'[W]illfully unfair and oppressive conduct' means a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member." MCL 450.4515(2). Once a plaintiff has "establishe[d] grounds for relief" by proving that a defendant has engaged in one of these prohibited behaviors, "the circuit court may issue an order or grant relief as it considers appropriate, including, but not limited to," monetary damages. MCL 450.4515(1). Thus, the "harm" that is actionable under MCL 450.4515 is the "substantial [ ] interfer[ence] with the interests of the member as a member." The statute then enumerates a variety of remedies that a court might provide [*10] to a plaintiff once he or she has shown that the defendant substantially interfered with the plaintiff's interests as a member.””

While the statute and applicable case law governing these disputes are clear, these disputes typically involve complicated facts, accounting, tax and finance issues made more unpleasant by years of dislike, distrust and dishonesty and the huge financial risk at stake for the company and the parties.

Categories: Business Law

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