Expulsion, Usurped Opportunity, and a Lawyer's Dual Role
Three members form Clearview LLC to develop a shopping center: Adele, Ben, and Carla. The operating agreement requires majority vote for ordinary matters and unanimous consent for 'admission of new members' and 'dissolution,' but says nothing about expulsion. While Clearview negotiates to buy an adjacent parcel, the seller rejects Clearview's $400,000 offer. Carla then learns the seller will accept $420,000 and buys the parcel in her own name. Adele and Ben vote to expel Carla, citing her 'wrongful conduct.' The jurisdiction has adopted the Uniform Limited Liability Company Act (2006), which permits expulsion by unanimous vote of the other members if the member engaged in wrongful conduct that adversely and materially affected the LLC's business. Lawyer Lane represented Clearview in the failed negotiation and also advised Carla personally that Clearview 'was not interested' in the parcel. Carla now moves to disqualify Lane from representing Clearview in the expulsion dispute.
1. Was Carla's expulsion valid under the operating agreement and the assumed statute?
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Expulsion
The operating agreement is silent on expulsion, so the ULLCA default applies. Under the assumed statute, expulsion requires the unanimous vote of the other members and wrongful conduct that adversely and materially affected the LLC's business. Adele and Ben are the only other members, so their two votes are unanimous. Carla's purchase of the adjacent parcel was likely wrongful: she used information from Clearview's negotiation, bought property the LLC was pursuing, and did so in her own name. It adversely affected Clearview by taking the parcel out of reach. The fact that the seller rejected Clearview's $400,000 offer does not necessarily excuse Carla; the LLC might have raised its offer to $420,000. Thus the expulsion is likely valid if the procedures in the operating agreement and statute were followed.
2. Did Carla breach a fiduciary duty by buying the adjacent parcel?
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Fiduciary duty
LLC members owe a duty of loyalty and care. A member may not usurp an LLC opportunity that is closely related to the LLC's business and in which the LLC has an interest or expectancy. Clearview was actively negotiating for the adjacent parcel; that is a classic business opportunity. Carla's personal purchase, using inside information, breaches the duty of loyalty. Her remedy may include disgorgement of profits or a constructive trust over the parcel for Clearview's benefit. The rejection of the $400,000 offer does not automatically defeat the claim because the seller's willingness to accept $420,000 shows the opportunity was available.
3. Must Lawyer Lane be disqualified from representing Clearview against Carla?
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Disqualification
Lane represented Clearview in the failed negotiation and also advised Carla personally. If Carla reasonably believed Lane was her lawyer for that advice, she is a former client. Rule 1.9 prohibits a lawyer from representing a new client in a substantially related matter adverse to a former client without informed consent. The expulsion dispute concerns the same parcel and the same negotiation, so the matters are substantially related. Lane likely obtained confidential information from Carla. Clearview's interests are adverse to Carla. Carla has not consented. Lane should be disqualified from representing Clearview against Carla, though the firm may be screened in some jurisdictions. The safer course is withdrawal.