In Domain Associates, L.L.C. v. Shah, C.A. No. 12921-VCL (Aug. 13, 2018), a member was expelled from a member-managed LLC and argued that the Delaware Limited Liability Company Act (the “LLC Act”) required the LLC to pay him the fair value of his member interest. The LLC and its members argued that, consistent with the right to modify the fair value requirement in the LLC Act, the LLC agreement specified the amount owed to a member upon a member’s retirement, resignation, death, incapacity or bankruptcy and should control the amount to be paid to the expelled member.
The Court found that neither the provision in the LLC agreement or the LLC Act fair value requirement applied to the expulsion. Given the LLC was member-managed, the Court looked to partnership law for guidance. The Court noted that each member benefited proportionately from the elimination of the expelled member’s interest. As a result, the LLC and its members were jointly and severally liable for the obligation to pay the value of the expelled member’s interest to the expelled member. The limitation of liability contained in the LLC Act did not change the analysis given it applies to obligations to third parties, not other members. The Court suggested that the members would have had a stronger argument against personal liability if the LLC Agreement had expressly provided that the LLC only was responsible to pay the value of the expelled member’s capital account.
BOTTOM LINE: Any checklist for drafting an llc agreement should include (1) the need to consider what to pay an expelled llc member and (2) whether llc member is personally responsible for obligations owed to other members.