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  1. #1
    Join Date
    May 2013
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    Default How to Force a LLC Member to Give Up His Interest

    My question involves business law in the state of: NV or CA

    I've done a lot of research on this and cannot come to a conclusion....

    In this case there is no mention of removal, disassociation, expulsion in the Operating Agreement

    1) If a LLC member commits fraud, gets sued by the LLC, and loses based on acts of fraud.....does he retain his membership interest in the company?


    2) Can the operating agreement be amended(current OA says it can be amended anytime) to strip the membership interest away? If so, does the LLC have to buy the interest back, or can you just take it back?

    Thanks

  2. #2
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    Oct 2006
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    Default Re: Removing Membership Interest from Fraudulent Member

    Quote Quoting probateblog
    View Post
    My question involves business law in the state of: NV or CA

    I've done a lot of research on this and cannot come to a conclusion....

    In this case there is no mention of removal, disassociation, expulsion in the Operating Agreement

    1) If a LLC member commits fraud, gets sued by the LLC, and loses based on acts of fraud.....does he retain his membership interest in the company?


    2) Can the operating agreement be amended(current OA says it can be amended anytime) to strip the membership interest away? If so, does the LLC have to buy the interest back, or can you just take it back?

    Thanks
    I think that you would have to consult a local attorney. Membership in an LLC is an ownership interest. I don't think that you can simply take ownership of something away from someone without due process. Now, his membership/ownership interest might be something that could be seized as part of a judgment against him...particularly if it was not possible to collect the judgment in full, but I would definitely discuss the details with an attorney. I would not attempt any unilateral action.

  3. #3
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    Default Re: Removing Membership Interest from Fraudulent Member

    Quote Quoting llworking
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    I think that you would have to consult a local attorney.

    I have already...I get different answers from different attorneys.

  4. #4
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    Default Re: Removing Membership Interest from Fraudulent Member

    Quote Quoting probateblog
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    I have already...I get different answers from different attorneys.
    What kind of answers are the attorneys giving you, and are you fully disclosing the same information to every attorney you have consulted?

  5. #5
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    Default Re: Removing Membership Interest from Fraudulent Member

    Each attorney worked the lawsuit in some fashion. They know all the facts.

    One attorney feels they lose their interest base on fraud and unclean hands. Other feels you can't just take someone's property.

    I've read both NV and CA LLC code and it is tough to discern.

  6. #6
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    Default Re: Removing Membership Interest from Fraudulent Member

    so, since nobody else will ask:


    does the fraud even have anything to do with the business? If so, explain the situation.

    and you are going to have to pick a state. It can't be both.

  7. #7
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    Default Re: Removing Membership Interest from Fraudulent Member

    LLC is Nevada so I would argue NV LLC code trumps where the lawsuit is which is CA. So let's pick NV.

    LLC has 10 members. 5 members of LLC are very close friends. One of these friends manages the accounting and has authority to write checks. He sees some terrible sales data and emails his friends detailing how sales are terrible. He writes 5 checks to everyone for their contributed capital and brings the LLC to it's knees overnight. He claims they weren't members for more than 2 months so they deserved the money back. LLC sues and wins on fraud and conspiracy.

    When time comes and LLC actually collects, the question is do these people retain their membership interest. I can't believe their isn't explicit code for removing them without buying back their interest.

  8. #8
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    38,867

    Default Re: Removing Membership Interest from Fraudulent Member

    You cannot just write a check to the owners and buy them out unless there is something in the LLC articles of organization that allows such an action. Pretty dumb for anybody to become a member of an LLC that has such a rule in my opinion.


    You still haven't said what this fraud and now conspiracy issue is. Are you suggesting it has something to do with the guy writing checks to some members refunding their investments? Who was sued? Just the one guy writing checks or him and the 5 guys he wrote checks to?


    and what is the LLC collecting? The money paid to the members as you described? If so and the LLC is getting that money back, then the members still own whatever share they owned prior to the improper distribution. You don't get to boot the members and keep their money unless, again, there is something in the articles of organization that allows for that. Generally, when a member leaves, you buy him out; that is, whomever wishes to invest more (could be a current member, all current members, or an outsider), they buy his share of the LLC at whatever value they agree it is worth.

  9. #9
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    May 2013
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    Default Re: Removing Membership Interest from Fraudulent Member

    Quote Quoting jk
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    Pretty dumb for anybody to become a member of an LLC that has such a rule in my opinion.
    Actually, it is pretty dumb not to have this in an operating agreement. Why would you want your company to be silent on an issue that may occur? When a member commits fraud against the LLC, or breach of fiduciary duty, there should have a clause in the LLC to expel them and remedy their interest somehow.

    There are some cases where the judge can invoke equitable remedy for a member that breached fiduciary duty. I am trying to see if anyone knows anything helpful in any code that I am missing that speaks to this event.

    The 5 members were sued and all lost. The LLC is collecting money from them, mostly what they took, some damages on top of that.

  10. #10
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    Oct 2006
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    Default Re: Removing Membership Interest from Fraudulent Member

    Quote Quoting probateblog
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    Actually, it is pretty dumb not to have this in an operating agreement. Why would you want your company to be silent on an issue that may occur? When a member commits fraud against the LLC, or breach of fiduciary duty, there should have a clause in the LLC to expel them and remedy their interest somehow.

    There are some cases where the judge can invoke equitable remedy for a member that breached fiduciary duty. I am trying to see if anyone knows anything helpful in any code that I am missing that speaks to this event.

    The 5 members were sued and all lost. The LLC is collecting money from them, mostly what they took, some damages on top of that.
    While I see your point, it still doesn't fly under the law. Why? Because different assets have different values. You cannot take MORE from someone than what they have been awarded in a judgment. The LLC membership is an asset that is no different than any other asset they own. If someone gets hurt on your property and gets awarded a judgment, you cannot take the monetary value of the judgment PLUS their property. You can only take their property if they cannot or will not pay you the monetary judgment AND the courts give you permission to take their property instead. This is no different. You don't get the money back PLUS get to take their membership in the LLC.

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