As of January 1, 2015 all Florida limited liability companies will be subject to the provisions of the new Florida Limited Liability Company Act. As demonstrated by a lively discussion at the recent Business Law Section meeting of the Florida Bar Association in Naples, Florida, one of the most controversial changes made by the New Act are provisions giving any member of a Florida LLC the right to “dissociate.” As used in the New Act “dissociate” means the right to voluntarily terminate your status as a member of a Florida LLC. Unlike the Old LLC Act, which provided that a member could not withdraw from the LLC unless the organizational documents allowed withdrawal (or upon dissolution), the New Act gives a member the absolute right to withdraw. It applies retroactively and the right cannot be waived in any of the LLC’s organizational documents. One of the issues up for debate is what happens to a member’s obligations to the LLC after disassociation when the LLC was formed prior to the New Act and disassociation is either not addressed in the organizational documents of the LLC or is prohibited by them.
Let’s take some examples.
Assume that three individuals are equal members in a Florida LLC formed prior to January 1, 2014. The LLC was formed to develop a multi-phase real estate project. Under the LLC’s operating agreement, if a capital call is made by the Manager of the LLC, each of members must make a pro-rata contribution to satisfy the call. The operating agreement is either silent or specifically prohibits dissociation. Sometime after January 1, 2015 the project gets into trouble. In anticipation of a capital call from the Manager, and to avoid what she believes would be throwing good money after bad, one of the members gives notice to the LLC of “dissociation.” After the dissociation notice is received, the Manager makes a capital call for $1,000,000. Under the New Act the dissociation notice is effective no matter what the operating agreement says. Is the dissociated member still liable for the capital call made after dissociation?
Next, assume that two software developers teamed up some time before January 1, 2014 and formed a Florida LLC to create some new computer games with amazing 3-D graphics and spectacular sound. They included a provision in their LLC’s organizational documents prohibiting dissociation, or the documents were silent on the issue – with the same result. They also included work-for-hire, non-competition and non-disclosure provisions relating to their gaming development. It would seem that as long as each of them are members of the LLC, all of the gaming technology either of them develops belongs to the LLC. After January 1, 2015 one of the members disassociates under the New Act – even though disassociation would have been prohibited under the operating agreement or the OLD LLC Act – and goes to work for Monster Gaming Corp. where she develops a spectacularly successful new game. What happens to her obligations to the LLC since she is no longer a member?
Section 601 of the New Act tries to deal with the problems presented by the examples I’ve given, as well as other issues I and my partners will discuss in later blogs. It provides that if a person “wrongfully” dissociates from a Florida LLC, they are liable to the LLC and the other members for “damages” (my emphasis) caused by the dissociation. It goes on to say that the liability for damages is in addition to each debt, obligation, or other liability of the member to the LLC or the other members “which the person incurred while a member.”
At least two issues arise.
The first is whether there even is a “debt, obligation or liability” on the part of the dissociated member if it relates to events taking place after dissociation. In the capital call example, the person dissociating is not, by statute, a member of the LLC when the capital call is made. The question comes to mind, was the obligation “incurred” while she was a member or was the obligation and liability for the capital call incurred when she was no longer a member? In the second, the talented developer is not a member once she withdraws from the LLC and goes to work for Monster Gaming Corp. where she uses her creative skills to produce the spectacularly successful new game. In either case does the former member still have a debt, obligation or liability to the LLC for obligations like capital calls or the invention of a new game if they occur after withdrawal? Unfortunately, the phrase “incurred while a member” is open to different interpretations. It does not explicitly indicate a continuing liability with respect to obligations that would clearly apply to the dissociating member if they were still a member of the LLC. The policy reasons for changing the statute and giving members the absolute right to withdraw at least suggest not. If, in the examples given, there is no debt, obligation or liability, then how can there be any damages? Lawyers at the Naples conference took both sides of this issue. There is no reason that the issue should be in doubt. I suggest that a partial solution would be to amend the statute to provide that for purposes of determining whether a “debt, obligation, or other liability” is incurred by the withdrawing member, that member’s dissociation should be ignored. The amendment could be part of the “Glitch” amendments the Florida Bar Association is currently preparing for submission to the legislature.
The second issue relates to the damage remedy itself. Even if there is a debt, obligation or liability on the part of the dissociating member, there is no indication in the statute that the LLC or the remaining members have any other remedy, such as specific performance in the case of a non-competition provision, at hand. As with the first issue, the absences of a reference to remedies other than damages could be easily addressed as part of the “Glitch” amendment being submitted by the Bar Association to the legislature.
It was clear from our discussion in Naples that the committee drafting the New Act carefully considered the policy decision privileging a member’s right to withdraw from an enterprise against the Old Act’s which privileged the prohibition of withdrawal. They judged that since most of the LLCs organized in Florida involve small businesses and ventures, people joining them should be free to leave if the LLC no longer served their purpose or continued membership in it violated their morals or ethics. It is also clear that careful draftsmanship in crafting new operating agreements, or amendments to operating agreements predating the New Act which assumed a prohibition on dissociation, can solve most, if not all, of the problems discussed here – but at a cost. What is not clear is the impact of the New Act on LLC’s created under the Old Act where the members, for one reason or another, don’t go back and revise their operating agreements to take into account the consequences of the New Act’s absolute right to dissociate.