Expulsion, Apparent Authority, and Declared Distributions in a Member-Managed LLC
Northline Precision, LLC has three members: Alvarez, Boone, and Chen. Its operating agreement provides that 'no member may be expelled except by the unanimous vote of all members.' Boone serves as manager and handles procurement. Alvarez discovered that Boone routed a $300,000 supply contract to a company Boone owns, without telling the other members. Alvarez and Chen vote to expel Boone; Boone votes no and refuses to leave. The LLC also declines to pay Boone a $40,000 quarterly distribution that the members had voted to declare last month. Separately, Boone signed a $75,000 contract with Vantage Supply on Northline's behalf. The operating agreement requires member approval for contracts over $50,000, but Vantage had dealt with Boone for three years, always through Boone, and never saw the operating agreement. Boone sues for his distribution and challenges his expulsion; Vantage demands payment.
1. Was Boone validly expelled, and what consequence follows from the operating agreement's unanimity clause?
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No. The operating agreement is the LLC's constitutive contract and governs expulsion. Because it requires unanimity, Alvarez and Chen cannot expel Boone over his no vote. Boone's self-dealing is a breach of the duty of loyalty and may support a derivative action, an accounting, damages, or a judicial remedy such as dissolution or buyout in egregious cases. But fiduciary breach does not amend the agreement or create a self-help expulsion right. The LLC could seek judicial expulsion if the statute authorizes it for wrongful conduct, but that requires court action, not a member vote. Until then, Boone remains a member with the rights the agreement gives him, subject to equitable remedies for his misconduct.
2. Is Northline bound by the Vantage Supply contract under agency principles?
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Likely yes. Actual authority may be lacking because the operating agreement conditions contracts over $50,000 on member approval. Apparent authority, however, rests on manifestations by the principal to the third party. Northline placed Boone in the manager and procurement role, let him deal with Vantage for three years, and never disclosed the internal cap. Vantage reasonably relied on the ordinary authority of a procurement manager to bind the LLC. An undisclosed internal limitation does not defeat apparent authority unless the third party knew or had reason to know of it. Vantage had no duty to demand the operating agreement absent red flags. Northline is therefore bound. If Boone exceeded actual authority, Northline may have an indemnity claim against him for the unauthorized amount and for breach of fiduciary duty, but that claim does not defeat Vantage's contract.
3. May Northline withhold the declared $40,000 distribution as leverage or setoff?
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A declared distribution is generally a debt owed to the member, not a discretionary fund. Because the members voted to declare the $40,000, Boone has a contractual right to it. Northline may assert a setoff for liquidated damages caused by Boone's disloyalty, but it cannot withhold the entire distribution as punishment or leverage, especially after an invalid expulsion. If the fiduciary claim is unliquidated and disputed, the safer course is to pay the distribution and pursue damages, or seek a court order permitting a setoff. Withholding without a legal basis may itself breach the operating agreement and the duty of good faith, exposing the LLC to interest and fees.