LLC Member Disputes
LLCs are a relatively new form of business in New York. They are governed by the New York State Limited Liability Company Law (the “LLCL”) and by their operating agreements. The rights of members of LLCs are not identical to the rights of shareholders and partners, although they are similar. For example, a member and a shareholder may both have rights to inspect the company records and bring a derivative suit on behalf of the company against officers or directors who are harming the company. But the rights and rules that govern these derivative suits are different. If you are involved in litigation involving an LLC, you should consult the New York lawyers at Klapper & Fass.Disputes among LLC Members
Closely held businesses like LLCs are particularly prone to internal problems, and it is common for members to disagree at some point in the life of the entity. Disputes can be expensive and take valuable time away from running the company.
Member disputes in an LLC may arise over a number of different problems, including a member's poor work effort, a member's use of company funds for personal expenses, a member acting outside his or her scope of authority, self-dealing, oppressive acts, or a refusal to participate in a capital call. An LLC structure tends to offer less statutory protection for mistreated members than what a corporation offers for shareholders.
In the context of an LLC member dispute, the first place to look for guidance is the LLC operating agreement. Members of New York limited liability companies have broad freedom to decide ahead of time what their rights and obligations are, and how disputes are to be resolved. In some circumstances, such as when the parties are all represented by counsel and are sophisticated businesspeople, LLC members may even agree in the operating agreement that they do not owe fiduciary duties to one another, and that they can engage in other business ventures and compete with the LLC. However, members of an LLC that have a less comprehensive operating agreement may not have a statutory remedy if they are faced with oppressive acts by fellow members.
Although there is a lack of statutory authority, New York's highest court has extended minority shareholder protection concepts to members of LLCs in certain cases. In one case, the Court ruled that an LLC member could bring a derivative action on the LLC's behalf even though the statute did not provide for this option. In another appellate case, a court held that an LLC member could seek an equitable accounting, even though the statute did not expressly provide such a remedy.
One way for LLC members to protect themselves is to include provisions in the operating agreement that provide for alternative dispute resolution in case of member conflicts. It may also be necessary to include a provision that allows a member to liquidate membership interests and specify whether it is for cause or for good cause. If no such provision is included in an operating agreement, a member may need to litigate the issue, which can prove expensive. In some cases, a member will need to convince the court that dissolution is appropriate.Enlist a New York Lawyer to Handle a Business Dispute
If you operate an LLC in New York or elsewhere, you should consult an attorney for any business dispute that may arise. The experienced litigators at Klapper & Fass can help you protect your interests from our offices in White Plains and Manhattan. We also represent clients across the five boroughs in New York City, as well as Rockland, Suffolk, Westchester, Dutchess, Nassau, and Orange Counties. Klapper & Fass can provide services in other states, such as Illinois and California. Contact our office at 914.287.6466 or via our online form to set up an appointment.