The Ultimate Combatant Case: A Member Dispute Involving an LLC Without an Operating Agreement
Part of the appeal of the LLC business structure is that the members of an LLC are free to choose a unique set of rules for operating the LLC, called an operating agreement. There is a lot of flexibility in what you can include in the operating agreement; only provisions that enable or encourage members to break the law are invalid. See Fla. Stat. § 605.0105. The LLC operating agreement will be an important document in any legal dispute that may arise among members of an LLC. Thus, it follows that, if the LLC does not have an operating agreement, both parties will have an uphill battle in proving their cases to the court.
Details of the Ultimate Combatant Case
In Froonjian v. Ultimate Combatant, LLC, 169 So. 3d 151 (Fla. 4th DCA 2015), the parties, Ronald Polomny and Natsuko Nakahara, had created Ultimate Combatant, LLC, pursuant to Florida law, by filing the company’s articles of organization with the state. The articles of organization identified Polomny and Nakahara as members of the LLC. They did not, however, adopt an operating agreement, which is an oral or written explanation of the relationship among the members of an LLC.
Sometime later, Polomny invited Gary Froonjian to join the LLC as a member, which he accepted. Froonjian’s title would be “managing member,”` and his membership interest would entitle him to one third of the company’s profits and losses, as well as give him voting rights. Nakahara formally amended the LLC’s articles of organization, adding Froonjian as a “managing member” in the new version of the articles. Polomny notified Froonjian by email that he was now a member according to the company’s new articles of organization and would have equal ownership but that a formal contract was still pending and that there were still many details to discuss before one could be signed.
A week later, however, Polomny sent Froonjian another email, this time saying that Froonjian was no longer a member of the LLC and that he had never had a one-third membership interest. Instead, Polomny offered Froonjian the opportunity to buy a five percent interest in the company for $20,000. Nakahara then filed a second amendment to the LLC’s articles of organization with the State and removed Froonjian’s membership interest and status as a member of the LLC.
Froonjian threatened to file a lawsuit, challenging the deprivation of his one-third membership interest, but Polomny and Nakahara filed a lawsuit preemptively. At the trial level, the issues were (1) whether Froonjian had a valid claim as a member of the LLC without a signed agreement stating he was a member; and (2) whether Polomny and Nakahara could refuse to recognize Froonjian’s membership interest. Froonjian filed a counterclaim and third-party complaint, requesting a mandatory injunction that required the LLC to reinstate him as a member and one-third owner. The trial court dismissed the counterclaim and third-party complaint and ruled that Polomny and Nakahara had the absolute right to remove Froonjian from the company.
Froonjian appealed the decision, but the court again sided with Polomny and Nakahara. First, the appellate court held that, because the company did not have an operating agreement, there was no way to stop Polomny and Nakahara from removing Froonjian as a member. Under Florida law, when an LLC does not have an operating agreement, a majority-in-interest decision of the members is controlling. See § 608.422(2)(a)-(b), Fla. Stat. As to Froonjian’s membership interest, however, the appellate court held that the majority members could not just redistribute his membership interest in the LLC to themselves. Therefore, the court found that Froonjian could state a cause of action for an injunction to prevent the redistribution of his membership interest without going through the proper procedures under Florida law. See §§ 608.427, 608.441-446, Fla. Stat.
Changes to Florida’s LLC Act
Since the events in Froonjian, the Florida legislature amended Florida’s LLC Act, which is now chapter 605, instead of chapter 608. Under chapter 605, absent an operating agreement, the members can only remove another member by unanimous consent in certain specific situations. See § 605.0602, Fla. Stat. Thus, in the situation in Froonjian, Polomny and Nakahara would not have been able to remove Froonjian as a member unless it was provided for in an operating agreement.
Furthermore, under section 605.0603 of the new Act, if a member is removed from the LLC, the member will retain their interest as a transferee.
Therefore, if the events in Froonjian occurred after the legislature adopted the new LLC Act, the case would have come out differently. Regardless of the result, the lesson is that it is important for an LLC to maintain an operating agreement and consider all scenarios.
Reach Out to Us Today for Help
If you are involved in a legal dispute with the other members of your LLC, whether or not it has a written operating agreement, or if your business partners have unjustly removed you from an LLC of which you were a member, an LLC litigation lawyer can help you. The West Palm Beach complex litigation lawyers at McCabe Rabin have experience dealing with LLC member disputes. Contact us for a free initial consultation.