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Courts Order Divorces, What About Dissociations?

California's Revised Uniform Limited Liability Company Act provides that a limited liability company member may dissociate either "rightfully or wrongfully".  Cal. Corp. Code § 17706.01(a).  A dissociation is wrongful when, among other circumstances, a person is expelled as a member by judicial order before the termination of the LLC.  Cal. Corp. Code § 17706.01(b)(2)(B).  The LLC may apply to a court for an order of expulsion when a person has:

  • Engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the LLC’s activities.
  • Willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under Corporations Code Section 17704.09.
  • Engaged, or is engaging, in conduct relating to the LLC’s activities that makes it not reasonably practicable to carry on the activities with the person as a member.

Cal. Corp. Code § 17706.01(e). 

A recent example of the application of this statute can be found in Left Coast Wrestling, LLC v. Dearborn Int'l LLC, 2018 U.S. Dist. LEXIS 86808.  In that case, U.S. Magistrate Judge Nita L. Stormes recommended dissociation of a member that had set up a competing business by use of the marks, customers and contacts of the LLC.  Judge Stormes found that the defendant's conduct affected the LLC's activities and makes it not reasonably practicable for the LLC to carry out its activities with the defendant as a member.  This decision, however, must come with the caveat that it arose from a default judgment.  Therefore, Judge Stormes did not have to confront any countervailing arguments on the part of the defendant.

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