LLC Member Dissociation – A Discussion
Posted Jul 15, 2020
By Washington State Business and Real Estate Lawyer David C. Tingstad
The Big Dipper is a club in Spokane known for its lively music and fantastic atmosphere. Unfortunately, it became the center of an ugly dispute between co-owners (and friends), which culminated in (almost certainly) the end of a friendship and the recent unpublished appellate decision, Brower v. Hoerner, No. 36442-9-III, 2020 WL 1282511 (Wn. App. Mar. 17, 2020). The decision raises interesting questions regarding LLC membership dissociation, a topic rarely discussed in Washington courts.
In Brower, plaintiff Brower and defendant Hoerner formed a partnership sometime before October 2013. As longtime friends, the two were certainly excited to begin a business venture wherein they would acquire and operate a club venue in Spokane, known as The Big Dipper. There was no written partnership agreement, but the two agreed to equally share expenses, profits, and losses. Shortly thereafter, the two formed a limited liability company together, the Big Dipper, LLC (the “LLC”) to begin operating the club. Once again, there was no written LLC agreement for the LLC. The two maintained the same understanding regarding expenses, profits, and losses.
As Brower and Hoerner operated the LLC, they quickly ran into problems that eventually spelled disaster. Brower began selling marijuana at the club’s location, which Hoerner believed may have jeopardized the club’s liquor license. Additionally, Hoerner harbored a distrust of Brower’s wife, who was responsible for serving alcoholic beverages at the club—Hoerner believed Brower’s wife was “misappropriating” the beverages from the club. Eventually, the parties reached their boiling point. One evening at the club, Brower and his wife confronted Hoerner in front of patrons and staff where various obscenities were exchanged between the parties.
After the ordeal, Brower went onto the club’s Facebook page where he posted he was “no longer the co-owner of The Big Dipper.” Hoerner apparently memorialized his acceptance of Brower’s “written dissociation” from the LLC by filing a “Change in Governing People, Percentage Owned, and/or Stock/Unit Ownership” with the Secretary of State.
The Court ultimately affirmed the trial court ruling that Brower effectuated his dissociation from the LLC. Brower’s posts on Facebook, in the eyes of the Court, clearly demonstrated Brower’s withdrawal from the LLC, thereby dissociating him as a member and terminating any rights Brower had as a full member.
RCW 25.15.131 provides a member the ability to dissociate from an LLC by withdrawing through a voluntary act, provided all of the members consent. Considering the youth of limited liability companies in a legal context, there is almost no case law discussing voluntary acts of withdrawal. Brower is significant as it provides perhaps this state’s first clear example of voluntary withdrawal effectuating a member’s dissociation.
Also significant is the Court’s analysis of dissociation in the Brower decision. “Dissociate” is not a defined term in Washington’s Limited Liability Company Act, RCW 25.15 (the “Act”). “Withdraw” is also an undefined term within the Act. However, the Act in RCW 25.15.131 specifies certain actions that effectuate a member’s dissociation. In Brower, the Court looked to the dictionary definition of “Dissociate” to see whether Brower’s actions aligned with the dictionary definition. The Court, however, ultimately determined that “Dissociate” has a “common, nonlegal meaning equivalent to taking voluntary action to withdraw.”
This determination is interesting as, under this analysis, it means one can essentially read RCW 25.15.131(1)(a) to say, “A person is dissociated once they dissociate.” I cannot help but wonder why the Court did not look to the definition of “Withdrawal” instead of “Dissociate,” because RCW 25.15.131(1)(a) states that a member is dissociated when they withdraw. What effects this has on the Act and its interpretation is yet to be seen but will nevertheless be interesting to follow.
In this case, it is pretty clear that Brower dissociated from the LLC. Stating you are no longer an owner on the LLC Facebook page is as straightforward as it gets. However, it would be interesting to see how the Court would rule if the facts were slightly altered. What if Brower verbally stated he was no longer an owner, as opposed to writing it on Facebook? Does that qualify as withdrawing by voluntary act? Alternatively, maybe Brower says and does nothing at all. Instead, Brower refuses to appear for work and moves to another state. Is that withdrawing by voluntary act?
My experience with these types of cases indicates that even if a member ceases to be involved in the business and moves to another state, they may have not “withdrawn” for purposes of membership. However, these are often very close calls that can be tried ten times and ruled ten different ways. These types of issues are important to keep in mind as membership and partnership disputes unfold. A well-drafted LLC agreement can go a long way in helping parse through, and ultimately avoid, these issues.
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