Business Associations

Fact pattern

Ms. A, Mr. B, and Mr. C form ABC, LLC as a limited liability company (LLC), of which they are the members, in a state that has adopted the Revised Uniform Limited Liability Company Act (RULLCA). Ms. A contributes 60 percent of the start-up capital, Mr. B contributes 30 percent, and Mr. C contributes the remaining 10 percent. No member enjoys any preferential rights.

The three members draft an operating agreement that contains a host of inspirational platitudes, but little substance. For instance, the agreement provides that “ABC, LLC will be run by management leaders and visionaries.” After the company is formed, it hires J to help run the business. However, J is not a member. 

Shortly after joining the company, J wishes to hire an employee, a matter the operating agreement does not address. The company regularly hires and fires employees.  Nevertheless, Mr. B and Mr. C do not approve J’s decision here. J hires the new employee anyway. Meanwhile, the company is experiencing financial distress, so Mr. B suggests making J a member in exchange for a significant cash contribution.

Despite the company’s current financial turmoil, J is initially willing to purchase a membership interest; the operating agreement does not address the addition of new members. Ms. A and Mr. B vote in favor of making J a member, but Mr. C votes against it. After learning of the discord among the members, J withdraws his offer to purchase a membership interest, though he continues to help run the business.

The following year is much better for ABC, LLC. The company is still approximately 60 days behind on its monthly debt payments, but revenue has increased significantly. Consequently, the members vote to issue themselves a sizable dividend. J is unhappy with the decision, citing the company’s still-precarious financial position. But the members insist on the dividend, so J distributes the funds the following week. 

Unpaid creditors hear about the dividend payment and become furious. Several angry suppliers contact J directly, asking why he issued the dividend. J responds that he did not want to issue the dividend, but the members forced him. Upon hearing this, Mr. B and Mr. C want J fired. Ms. A refuses to fire J. Once again, the operating agreement is silent on the issue. 

Before the members can vote on the matter, J sends an email stating that he is resigning from the company. Unfortunately, J’s resignation causes the company’s creditors to threaten direct legal action against the members. Ms. A is unconcerned. She tells the other members, “We didn’t authorize the distribution. J did. We don’t have any liability. They can sue J if they like.”

Questions

1. Under RULLCA, is ABC, LLC a member-managed or manager-managed company? Explain.
2. Under RULLCA, was J authorized to unilaterally hire an employee? Explain.
3. Under RULLCA, was the dividend payment to the members improper, and if so, could the members face liability for J’s distributing the dividend? Explain.
4. Would the votes of only two members have been enough to remove J from his position, had he not resigned, or to make him a member, had he not withdrawn his offer to purchase a membership interest? Explain.