Operating Agreement Cannot Waive Member Right to Seek Judicial Dissolution of LLC
Among the important rights held by members of California LLCs is the right to file a lawsuit requesting a decree of judicial dissolution of the LLC. Under the current judicial dissolution statutes (Corporations Code section 17707.01(d) and section 17707.03), the grounds for judicial dissolution include where:
- it is “not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement”
- “dissolution is reasonably necessary for the protection of the rights or interests of the complaining members”
- “the business of the limited liability company has been abandoned”
- “the management of the limited liability company is deadlocked or subject to internal dissension”
- “those in control of the limited liability company have been guilty of, or have knowingly countenanced, persistent and pervasive fraud, mismanagement, or abuse of authority.”
The prior statute (the Beverly Killea Act) contained essentially the same language in former Corporations Code section 17351.
In a case recently published by California’s Third Appellate District — Meads v. Driggers — the Court of Appeal confirmed that the right of judicial dissolution cannot be waived in the LLC’s operating agreement.
Facts: LLC operating agreement waives right to seek judicial dissolution
Steven Meads and Penny Lipking-Meads (referred to in the opinion as “the Meadses”) owned and operated a business for many years together. The business included liquor sales, a service station, and a convenience store. They lived off the income generated by the business.
In 2010, the Meadses met Jed Driggers and ultimately agreed to partner with him to expand the business. The Meadses agreed to contribute their liquor license, the goodwill of the business, certain personal property, the real property on which the business was run, and cash. Driggers agreed to contribute his “know-how” and “initial operating capital.”
They formed Afterburner, LLC in 2011. At that time, California’s operative LLC statute was the Beverly-Killea Act, which has since been replaced by the Revised Uniform Limited Liability Act (RULLCA). Driggers hired an attorney to prepare the operating agreement. Driggers was named the LLC’s manager. Profits would go 51% to Driggers and 49% to the Meadses.
The operating agreement provided that the LLC could be dissolved only by the vote of the members or the bankruptcy or insolvency of the company. The agreement also stated: “Notwithstanding anything in Cal. Corp. Code §§17350 and 17351 to the contrary” the two grounds stated above “are the exclusive events which may cause the LLC to dissolve. Each of the Members herby agrees not to take any other voluntary action that would cause the LLC to dissolve, notwithstanding any provision of the [Beverly Killea Act] to the contrary.”
A decade after partnering, the Meadses sued Driggers, claiming Driggers had improperly diverted monies from the business. The complaint included a cause of action for judicial dissolution.
Driggers filed a cross-complaint against the Meadses, alleging they breached the operating agreement by suing for judicial dissolution despite the waiver provision.
The Meadses filed a special motion to strike Driggers’ cross-complaint under the anti-SLAPP statute, arguing that the cross-complaint arose out of their protected petitioning activity and did not have a reasonable probability of success because the operating agreement’s provisions waiving the right to judicial dissolution were invalid and unenforceable.
Trial court: Driggers’ cross-complaint stricken
The trial court granted the Meadses motion to strike and ordered Driggers’ cross-complaint stricken. The court ruled that the cross-complaint was plainly based on the Meadses protected petitioning activity (i.e., the filing of their complaint), and that Driggers’ cross-claims did not have a probability of success.
Driggers appealed.
Court of Appeal: affirmed; judicial dissolution cannot be waived in operating agreement
The Court of Appeal affirmed the trial court’s ruling. The court agreed with the Meadses that the judicial dissolution waiver provision was unenforceable.
The court noted several statutory provisions from the Beverly-Killea Act that applied:
- section 17005(a), which states that “except as provided in subdivisions (b) and (c)” of section 17005, the relations among members and between members and the LLC are governed by the articles of organization and the operating agreement
- section 17005(c), which states that the rights to judicial dissolution under the chapter of the Corporations Code containing section 17351 “may be varied by the articles of organization or by a written operating agreement only to the extent expressly provided” in that chapter
- section 17350, which allows dissolution of an LLC by various means, including by “entry of a decree of judicial dissolution pursuant to section 17351”
- section 17351, which states the grounds for judicial dissolution, without any express limitations
Putting the statutory language together, the court held that
Nothing in [the statutes] expressly provides that an operating agreement may vary the circumstances in which a court may enter a decree of judicial dissolution. We thus hold that an operating agreement may not vary — or waive — a member’s right to seek judicial dissolution in the circumstances identified in former section 17351.
The court concluded that the waiver provision in the operating agreement was “contrary to an express provision of law” and therefore “void and unenforceable.”
Lesson
Under the holding of the Meads opinion, and under the language of the former Beverly-Killea Act, the right to petition the court for judicial dissolution is a key LLC member right and cannot be waived in the LLC’s operating agreement.
Note that the outcome should be the same under RULLCA. Under Corporations Code section 17701.10, an operating agreement “shall not … vary the power of a court to decree dissolution in the circumstances specified” in section 17707.03.