VOLUME 91, NO. 1 JANUARY 2017
Involuntary Expulsion
of Troublesome Members Under
Florida’s Revised LLC Act
contents
651 EAST JEFFERSON STREET
TALLAHASSEE, FLORIDA 32399-2300
(850) 561-5600
FloridaBar.org
Features
8
Involuntary Expulsion of Troublesome Members
Under Florida’s Revised LLC Act
by Dennis A. Nowak and Caitlin M. Trowbridge
14
Booker: The First 10 Years in Florida
by Roger B. Handberg
Court-related information, flcourts.org
PUBLISHER
John F. Harkness, Jr.
EDITOR
Cheryle M. Dodd
ASSOCIATE EDITOR
Melinda Melendez
ASSOCIATE EDITOR
Rawan Bitar
ADVERTISING
Randy Traynor
CIRCULATION/ADMINISTRATION
Cheryl Morgan
Published monthly except July/August and
September/October, which are combined issues, by
The Florida Bar, 651 East Jefferson Street, Tallahassee
32399-2300, telephone (850) 561-5600. Periodicals
postage paid at the Post Office in Tallahassee, Florida
32399-2300 and at additional mailing offices. The
Florida Bar Journal, ISSN 0015-3915, Pub. No. 200-960.
Subscriptions: Florida Bar members receive
the Journal as part of their annual fee payment.
Nonmember subscriptions are $50 a year; single
magazine copies, $5. Single copy sales subject to
Florida sales tax.
The Journal will accept all advertising that otherwise is in keeping with the publication’s standards
of ethics, legality, and propriety, so long as such advertising is not derogatory or demeaning. Advertising
is not accepted by which the advertiser violates or
enables another to violate the Rules of Professional
Conduct or the Florida Code of Judicial Conduct.
The opinions and interpretations of staff counsel and
appropriate committees of The Florida Bar charged
with authority to interpret the codes will be controlling. Advertising copy is reviewed, but publication
herein does not imply endorsement of any product,
service or opinion advertised.
Views and conclusions expressed in articles
herein are those of the authors and not necessarily those of the editorial staff, officials, or Board of
Governors of The Florida Bar.
The Florida Bar Journal welcomes letters to
the editor. Letters should be no longer than 500
words. Letters should focus comments or criticism
on issues, rather than individuals acting in their individual capacities, and should not be defamatory.
Comments also may be clarified or edited by staff
as required based on space considerations and
the number and nature of comments received on
any single topic. Letters are considered property
of the Journal, and also may be displayed electronically on The Florida Bar’s website and made
available commercially through affinity partners
of the Bar. Letters should be directed to “Letters
to the Editor,” The Florida Bar Journal, 651 E. Jefferson St., Tallahassee, FL 32399-2300 or emailed
to cdodd@floridabar.org.
© 2017 The Florida Bar. Printed in U.S.A.
POSTMASTER: Send change of address to The
Florida Bar, Membership Records, 651 E. Jefferson
St., Tallahassee, FL 32399-2300.
Columns
4
PRESIDENT’S PAGE
Challenges and Opportunities
E\:LOOLDP-6FKL¿QR-U
28 REAL PROPERTY, PROBATE AND TRUST LAW
Have You Revised Your Health Care Surrogate Forms? A Look Back at the October 2015
Revisions to the Florida Health Care Surrogate Act
by Jeffrey A. Baskies
32 TAX LAW
Acquisition Planning for a Tax Basis Step-Up
by Steven D. Shapiro
36 ANIMAL LAW
Padi-Waggin: The Tail of One Dog’s Journey from Death Row to Legislative Inspiration for
Dog Bite Due Process
by Robert Eschenfelder
42 BUSINESS LAW
Commending Litigation Against a Defendant with International Ties? Not So Fast — An
Introduction to an International Approach to Domestic Litigation
by Grant Stanton Smith
46 ADMINISTRATIVE LAW
The Florida Homeowners Construction Recovery Fund: How to Collect from an Uncollectible
Contractor
by Diane S. Perera and Erik G. Ross
51 BOOKS
Cover by Barbara Kelley
2 THE FLORIDA BAR JOURNAL/JANUARY 2017
Involuntary Expulsion of
Troublesome Members Under
Florida’s Revised LLC Act
by Dennis A. Nowak and Caitlin M. Trowbridge
F
ar too often, limited liability company (LLC) members fail to consider the all-too-real risks of future
deadlock or dissension, and thus fail to craft an
operating agreement providing for a reasonable
and equitable mechanism for removing an unruly member.
Fortunately, Florida’s Revised Limited Liability Company
Act (revised act)1 contains several new provisions to facilitate the involuntary dissociation of a troublesome member.
First, judicial dissociation, or rather, what the revised act
refers to as judicial “expulsion,” provides for the involuntary
dissociation of a troublesome member upon application
by another member or the company to the court.2 While
judicial expulsion is one of the more noteworthy changes
to the revised act, a member can also be involuntarily
“expelled” by the unanimous consent of the other LLC
members (although expulsion by consent does not focus
solely on troublesome members).3
Thus, whether by judicial fiat or unanimous consent of
the other members, Florida LLCs’ newly found ability to
dissociate an unruly member makes it more attractive for
companies to do business in Florida, particularly when
an operating agreement fails to address the involuntary
dissociation of a member.
Background and Effective Dates
The revised act was enacted in 2013 and took effect January 1, 2014, for new Florida LLCs and January 1, 2015, for
all Florida LLCs. The revised act is a thorough overhaul
of Florida’s Limited Liability Company Act (old act) and is
based on the Revised Uniform Limited Liability Company
Act of 2006, as amended in 2011 (RULLCA).4
Like the old act, the revised act is a “default statute” in
that it provides default rules that must be followed when
there is no operating agreement; the operating agreement
does not address a particular issue; or the operating agreement purports to modify or waive certain statutory rights
and provisions that cannot be modified or waived under
the revised act.5 LLC members attuned to the statutory requirements will have comprehensive operating agreements
intended to address significant default rules that may be
altered and the most common issues that arise among the
members, managers, and company. Nevertheless, an LLC’s
operating agreement may not address every default rule
or issue that arises, such as the necessity of dissociating
an unruly member and the mechanisms by which to do so.
Involuntary Dissociation Under the Revised Act6
Involuntary dissociation, or dissociation by expulsion,
can occur under one of two circumstances. First, the operating agreement can prescribe a method by which a member
may be involuntarily expelled.7 However, absent a method
for expulsion in the operating agreement, the members
may unanimously vote to expel a member.8 Expulsion by
unanimous consent is only available if the LLC cannot
lawfully carry on its activities with the expelled member;
the expelled member has transferred his or her entire
transferrable interest in the LLC; or the expelled member
is a corporation or other entity that is dissolved.9 Thus,
expulsion by unanimous consent under the revised act
arguably only applies to unruly members to the extent the
lawful activities of the LLC can no longer be carried on.
Judicial expulsion, on the other hand, permits members of an LLC, with no contractual means of extricating
themselves from a deadlock or other impasse, to apply
THE FLORIDA BAR JOURNAL/JANUARY 2017
9
to the court to dissociate a member
who engages in “wrongful conduct”
that “adversely and materially” affects the LLC’s business or “willfully
or persistently” commits a “material
breach of the operating agreement”
or for material violations of the
member’s duties under the revised
act.10 The revised act also authorizes
dissociation by the court when a
member engages in conduct “which
makes it not reasonably practicable
to carry on the activities and affairs
with the person as a member.” 11
Judicial expulsion, therefore, is particularly helpful when unforeseen
conflicts arise after an LLC is formed
and the operating agreement fails to
include a method by which to resolve
those conflicts.
Rights, Obligations, and Legal
Status of a Dissociated Member
The revised act’s use of the word
“expulsion” in connection with the
involuntary dissociation of a member
connotes the complete and full termination of that member’s rights and
interests in the LLC. Indeed, the word
“dissociation” ordinarily is defined as
the “disconnection or separation of
something from something else.”12
However, per the terms of the revised
act, the involuntary expulsion of a
member does not actually “oust” or
“banish” that member from the LLC,
thus, terminating any and all of the
member’s rights or interests.13 Rather,
judicial dissociation simply serves to
limit a member’s rights by precluding
them from participating in the management of the LLC’s affairs.14 This
is appropriate because the member’s
participation is what is giving rise to
the troublesome conduct. Such limitations include terminating their future
fiduciary duties,15 which, by their
troublesome conduct, the dissociated
member is presumably violating. Dissociation also restricts the dissociated
member’s interest to include only the
member’s economic rights.16
Regardless of whether a member
becomes dissociated by judicial decree,
unanimous consent, or even voluntarily
by express will, the member’s right to
participate in the management and
conduct of the LLC’s activities and
affairs ends. So too do their fiduciary
obligations to the LLC. Further, the
member is limited to receiving distributions from the LLC only at the
time he or she would otherwise have
received them.17 Dissociation also does
not relieve a member of any existing
liabilities, debts, or obligations he or she
owes to the LLC or other members. 18
The Interpretation and
Application of the Revised Act’s
Judicial Dissociation Language
Florida appellate courts, to date,
have not had occasion to interpret or
apply the revised act’s judicial expulsion or unanimous consent language
since the act’s enactment in 2013.
Even though judicial expulsion provisions now appear in numerous states’
LLC acts, the caselaw addressing
judicial expulsion is sparse. Given
this lack of caselaw, as discussed
below, courts in other jurisdictions
have turned to LLC and partnership
dissolution cases in order to interpret
and apply their act’s judicial expulsion
standards.
For example, in IE Test, LLC v. Carroll, 2014 WL 8132907 (Super. Ct. N.J.
March 17, 2015), the Superior Court
of New Jersey affirmed on appeal the
trial court’s determination that the
continued operation of an LLC with
a member who demanded repayment of the LLC’s debt to him was
not “reasonably practicable” within
the meaning of New Jersey’s LLC
act governing judicial dissociation.19
Because the superior court was not
able to locate a reported decision
interpreting subsection (b)(3)(c) of
New Jersey’s LLC act, which provides
for judicial expulsion if “the member
engaged in conduct which makes it
not reasonably practicable to carry
on the business with the member as
a member of the LLC,” or a decision
interpreting verbatim language from
the Revised Uniform Limited Liability Company Act (RULLCA), 20 the
court looked to LLC dissolution law
to analyze the situation.21 The court
noted that both New Jersey’s LLC
act and the RULLCA permits judicial
dissolution of an LLC “whenever it is
not reasonably practicable to carry on
the business in conformity with the
operating agreement.”22
The court discussed and applied the
10 THE FLORIDA BAR JOURNAL/JANUARY 2017
Colorado Court of Appeal’s decision
in Gagne v. Gagne, 338 P.3d 1152,
1159 (Colo. Ct. App. 2014), in which
the Colorado court construed for the
first time Colorado’s LLC act, which
permitted judicial dissolution “if it is
established that it is not reasonably
practicable to carry on the business
of the limited liability company in
conformity with the operating agreement of said company.”23 The Colorado
court set forth a number of factors to
be considered in making the “not reasonably practicable” determination.
These factors included:
(1) whether the management of the entity is unable or unwilling reasonably to
permit or promote the purposes for which
the company was formed; (2) whether a
member or manager has engaged in misconduct; (3) whether the members have
clearly reached an inability to work with
one another to pursue the company’s goals;
(4) whether there is a deadlock between
the members; (5) whether the operating
agreement provides a means of navigating
around any such deadlock; (6) whether,
due to the company’s financial position,
there is still a business to operate; and
(7) whether continuing the company is
financially feasible.24
Finding Gagne persuasive, the
Superior Court of New Jersey applied the Colorado court’s factors to
Carroll, holding that dissociation was
warranted due to the irreparable deterioration of the members’ relationship
following the one member’s insistence
on repayment of the debt.25
On August 2, 2016, the Supreme
Court of New Jersey reversed and
remanded the superior court’s decision in Carroll, holding that expulsion
under the LLC act’s “not reasonably
practicable” standard was not necessarily satisfied by the mere existence
of a conflict among members.26 In interpreting the statutory language, the
Supreme Court found that subsection
(b)(3)(c) requires a court to evaluate
the LLC member’s conduct relating to
the LLC, and assess whether the LLC
can be managed notwithstanding that
conduct, prior to expelling a member
pursuant to the not reasonably practicable standard.27 According to the
Supreme Court, this inquiry involved
the consideration of a modified version
of the factors set forth in Gagne:
(1) the nature of the LLC member’s conduct relating to the LLC’s business; (2)
whether, with the LLC member remaining
The revised act’s introduction of
involuntary expulsion highlights the
importance of including a forced buyout
provision in an LLC operating agreement,
especially since a dissociated member
retains his or her rights to the economic
EHQHÀWVRI KLVRUKHUPHPEHUVKLSHYHQ
WKRXJKWKDWPHPEHU·VÀGXFLDU\GXWLHV
terminate upon dissociation.
a member, the entity may be managed so
as to promote the purposes for which it
was formed; (3) whether the dispute among
the LLC members precludes them from
working with one another to pursue the
LLC’s goals; (4) whether there is a deadlock
among the members; (5) whether, despite
that deadlock, members can make decisions on the management of the company,
pursuant to the operating agreement or
in accordance with applicable statutory
provisions; (6) whether, due to the LLC’s
financial position, there is still a business
to operate; and (7) whether continuing the
LLC, with the LLC member remaining as
a member, is financially feasible.28
The Supreme Court found that
because the appellate court in Gagne
construed a Colorado statute that
addressed dissolution of an LLC and
not the expulsion of an LLC member,
it was necessary to amend the Gagne
factors to better conform to the judicial dissociation language found in the
New Jersey statute.29
As Florida caselaw in this area
develops, select cases in both Florida
and other jurisdictions interpreting
and applying the “not reasonably
practicable” language in both the LLC
and partnership dissolution contexts
may be instructive. In Horizon/CMS
Healthcare Corp. v. Southern Oaks
Health Care, 732 So. 2d 1156 (Fla. 5th
DCA 1999), the Fifth District Court of
Appeal affirmed the trial court’s order
of dissolution noting that dissolution
fell within the scope of §620.8801(5)
(c), permitting judicial dissolution of a
partnership when “[i]t is not otherwise
reasonably practicable to carry on the
partnership business in conformity
with the partnership agreement.”30
In Horizon/CMS, Horizon and
Southern Oaks entered into several
partnership and management contracts for the ownership of a new
120-bed nursing home facility and a
preexisting facility formerly owned
by Southern Oaks.31 Three years into
the 20-year partnership, Southern
Oaks sued alleging numerous defaults
and breaches by Horizon.32 Horizon
claimed irreconcilable differences
between the two entities and sought
dissolution of the partnership under
both an express provision of the
partnership agreement and Florida’s
version of the Revised Uniform Partnership Act (RUPA).33 After finding
largely in favor of Southern Oaks, the
trial court ordered dissolution of the
partnership “finding that the parties
to the various agreements which are
the subject of this lawsuit are now
incapable of continuing to operate in
business together.”34 Although the issue on appeal centered around Southern Oaks’ entitlement to damages
for lost future profits, the Fifth DCA
noted that “[w]hile ‘reasonably practicable’ is not defined in RUPA, the
term is broad enough to encompass
the inability of partners to continue
working together, which is what the
[trial court] found.”35
Interestingly, the few cases that
12 THE FLORIDA BAR JOURNAL/JANUARY 2017
do discuss judicial dissociation fail
to interpret the “material breach”
or “wrongful conduct” bases for dissociation found in the various states’
(and in Florida’s) LLC acts. The New
Jersey Superior Court, in All Saints
University of Medicine Aruba v. Chilana, 2012 WL 6652510 (Super. Ct.
N.J. Dec. 24, 2012), even sidestepped
a “wrongful conduct” analysis despite
the fact that appellants’ alleged
wrongful conduct was the most contentious issue raised in the appeal.36
The court found it easier to justify
dissociation under the “less stringent”
not reasonably practicable standard:
“Given these significant differences
in the applicable statutory tests, we
elect to confine our analysis to the
trial court’s determination under
subsection 3(c) — the less stringent
provision — rather than subsection
(a).” 37 Nevertheless, the “material
breach” and “wrongful conduct” bases
for involuntary dissociation are less
likely to be problematic or in need of
judicial interpretation simply because
the “material breach” of an operating
agreement is a familiar concept and
well-developed in contract law. The
same is true regarding the concept
of “wrongful conduct” that is equally
well-developed in tort jurisprudence.
Conclusion
The revised act’s introduction of
involuntary expulsion highlights
the importance of including a forced
buyout provision in an LLC operating agreement, especially since a
dissociated member retains his or
her rights to the economic benefits of
their membership even though that
member’s fiduciary duties terminate
upon dissociation. A buyout provision triggered by dissociation could
prevent the dissociated member from
competing with the LLC while preserving the member’s right to receive
distributions and other economic
benefits from the LLC.38
Involuntary dissociation is an
important tool for LLCs as it limits
the risks associated with alternative, more intrusive mechanisms for
dealing with troublesome members,
such as judicial dissolution, wherein
the fate of the company usually lies
in the hands of a judge. Accordingly,
LLCs should consult with their legal
advisors during and after formation
to ensure that their operating agreements not only address the revised
act’s new involuntary dissociation
provisions, but also the consequences
of any such dissociation for its members and company.‰
1
The revised act is codified at FLA. STAT.
Ch. 605.
2
FLA. STAT. §605.0602(6).
3
FLA. STAT. §605.0602(5).
4
Louis T.M. Conti & Gregory M. Marks,
Florida’s New Revised LLC Act, Part I, 87
FLA. BAR J. 8 (Sept/Oct 2013).
5
FLA. STAT. §605.0105.
6
Under the revised act, a member of a
Florida LLC can also dissociate voluntarily
at any time, rightfully or wrongfully, by
withdrawing as a member by express will.
FLA. STAT. §605.0601(1) and §605.0602(1).
7
FLA. STAT. §605.0602(2), (4).
8
FLA. STAT. §605.0602(5).
9
Id.
10
FLA. STAT. §605.0602(6).
11
Id.
12
Dissociation, MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2016); Black’s
Law Dictionary does not define “dissociation” but does define “dissociate”: “To
regard (two things or people) as separate
and not connected to each other.” Dissociate, BLACK’S LAW DICTIONARY (10th ed. 2014).
13
FLA. STAT. §605.0603(1).
14
FLA. STAT. §605.0603(1)(a).
15
FLA. STAT. §605.0603(1)(b). This would
not necessarily be the case in a managermanaged LLC.
16
FLA. STAT. §605.0603(1)(c); §605.0710(1)(2)(b); §605.1006.
17
FLA. STAT. §605.0404(2).
18
FLA. STAT. §605.0603(2).
19
IE Test, LLC, 2014 WL 8132907, reversed and remanded, 226 N.J. 166, 140
Dennis A. Nowak is a partner in
the Miami office of Rumberger, Kirk &
Caldwell, P.A. An experienced trial lawyer
for over 30 years, he represents clients
in securities class actions, shareholder
derivative lawsuits, securities litigation,
including corporate governance litigation,
business torts, internal investigations, financial institution litigation, mergers and
acquisitions, and real estate litigation. He
also represents clients in investigations
and enforcement actions by the Securities
Exchange Commission, the Federal Deposit
Insurance Corporation, and other regulatory agencies.
Caitlin M. Trowbridge is an associate in the Miami office of Rumberger,
Kirk & Caldwell, P.A. She handles cases
for individuals and corporate entities in a
variety of state and federal litigation matters, including complex corporate disputes,
securities law violations, breach of contract
and warranty claims, officer and director
liability, commercial landlord/tenant matters, foreclosures, and insurance coverage
disputes.
A.3d 1268 (Sup. Ct. N.J. Aug. 2, 2016).
20
New Jersey’s LLC act was repealed effective March 18, 2013, and replaced with
the RULLCA. The superior court notes
that the provision of the LLC act at issue in
Carroll remained “essentially unchanged
in the RULLCA.” Id. at *1, fn.1.
21
Id. at *5-6.
22
Id. at *6.
23
Id. (citing Gagne v. Gagne, 338 P.3d
1152, 1159 (Colo. Ct. App. 2014)).
24
Id.
25
Id. at *7.
26
IE Test, LLC v. Carroll, 226 N.J. 166,
140 A. 3d 1268, 1275-79 (Sup. Ct. N.J. Aug.
2, 2016).
27
Id. at 1275-79.
Id. at 1279.
Id. at 1279, fn.7.
30
Horizon/CMS, 732 So. 2d at 1160-61.
31
Id. at 1157.
32
Id.
33
Id. at 1157-58.
34
Id. at 1157.
35
Id. at 1160.
36
Chilana, 2012 WL 6652510 at *14-18.
37
Id.
38
Consideration should also be given
to whether in a manager managed LLC
dissociation as a member would also disqualify a manager from participating in
the management of the LLC.
28
29
om
eb.c
rsw 31
e
t
n
3
-5
.ce
www 7) 766
(87
The Centers provides a full range of services specifically
designed to meet the needs of law firms and the clients they
serve. From our dedicated case management center to our
accounting department, our organization offers a full spectrum
of tools to optimize your client’s settlement, minimize your risk
and increase your bottom line.
4912 Creekside Drive | Clearwater, FL 33760
www.centersweb.com | (877) 766-5331
THE FLORIDA BAR JOURNAL/JANUARY 2017
13
Illustration by Barbara Kelley
14 THE FLORIDA BAR JOURNAL/JANUARY 2017