In Missouri, the operating agreement of your LLC controls how to address misbehaving members and outlines the process of expelling a member. There are various reasons why a member can be involuntarily disassociated from an LLC, such as repeatedly breaching the operating agreement, engaging in actions that harm or could harm the company, or filing for bankruptcy. The operating agreement also specifies how to handle the expelled member’s interests. If your LLC’s operating agreement does not include specific provisions for these circumstances, the interests will be handled according to Missouri LLC laws. Specifically, Missouri Revised Statutes § 347.121 and § 347.123 govern the withdrawal of members and cessation of membership.
The Missouri case of Peter A. Nicolazzi v. Laura L. Bone, 589 S.W.3d 638 (Mo. App. E.D. 2019), is an example of how Missouri law determines whether a member is withdrawn when an LLC’s operating agreement does not contain specific provisions regarding withdrawal or expulsion. In this case, a member (the “good member”) of a Missouri LLC filed a lawsuit seeking a declaratory judgment to determine another member’s (the “misbehaving member”) status in the LLC. After the first appeal, the case was remanded to the trial court to determine whether the good member’s filing of the petition against the misbehaving member constituted an event of withdrawal under Missouri Revised Statutes § 347.123.
Understanding Missouri LLC Laws on Member Expulsion
The trial court surprisingly held that the good member had withdrawn from the LLC by filing the petition for declaratory judgment. The good member appealed again, and the appellate court ultimately ruled that filing a petition seeking a declaratory judgment on the misbehaving member’s status did not constitute an act of withdrawal under the Missouri Limited Liability Company Act. At the end of the case, even without a specific operating agreement, the good member had the power to ask the court to expel the misbehaving member. This case demonstrates how Missouri courts interpret § 347.123 in disputes regarding an LLC member’s status, including whether a member can be expelled or withdrawn from the business.
The Missouri case Urban Hotel Development Company, Inc. v. President Development Group, L.C., 535 F.3d 874, 879 (8th Cir. 2008), involved a developer suing a development group that included different LLCs and members. The developer claimed breach of fiduciary duty and breach of contract after the development group removed it as a member. The district court granted the development group summary judgment on the breach of fiduciary duty claim, ruling that the removal of the developer was valid under Missouri LLC laws. However, the court also granted the developer summary judgment on the breach of contract claim, as the group failed to pay a redemption price for the developer’s removal.
On appeal, the developer argued that its removal was invalid and that it was still a member of the development group, seeking over $167,000 in damages. Specifically, the developer claimed that the operating agreements did not authorize the removal of a member, only a redemption. The appellate court ruled that whether the mechanism for ending a member’s relationship with the group was called redemption or removal made no difference—the removal was valid. Furthermore, despite the group’s failure to pay the redemption price, the removal was still legally sound. The court affirmed that the fair value of the developer’s services was $10,000, not the $167,000 demanded. This case underscores the importance of having a detailed operating agreement that explicitly outlines the process for removing a member and the financial consequences of doing so.
In summary, an operating agreement should detail the exact process and actions required to remove a misbehaving member from a Missouri LLC. To ensure the agreement covers all necessary provisions, members should consult with an experienced attorney when drafting an operating agreement for their LLC. If you like our post on How to remove Misbehaving Member Out of a Missouri LLC.
