LLC Member Disputes in Michigan: Buyouts, Deadlock, and When to Sue

A Michigan LLC member can sue in circuit court under MCL 450.4515 when the people running the company act illegally, fraudulently, or with willfully unfair and oppressive conduct. A court may order a buyout at fair value, among other relief. The operating agreement decides much of the outcome, and damages claims carry a short deadline.

Start with the operating agreement

Most of what a member can do is set by the operating agreement. If it does not address voting, each member generally has one vote, and a majority in interest of the members entitled to vote decides. MCL 450.4502(1)(b), (8). A member may withdraw only as the operating agreement provides, and an operating agreement may provide for the expulsion of a member. MCL 450.4509. Unless your agreement gives you an exit, wanting out is not enough to force a buyout.

Read the dispute clauses too. In Altobelli v Hartmann, 499 Mich 284 (2016), a mandatory arbitration clause in a firm’s operating agreement covered a former principal’s claims against individual managers, because the managers acted as the firm’s agents. If your agreement has a clause like that, it needs attention before a circuit court complaint.

What the statute calls oppression

Section 515 lets a member sue to establish that the acts of the managers or members in control are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the company or the member. MCL 450.4515(1). The statute defines that last phrase as “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member.” MCL 450.4515(2). It can include ending a member’s employment or cutting benefits to the extent that doing so interferes with distributions or other member interests disproportionately. Id.

The definition does not cover conduct that the articles, an operating agreement, another agreement the member signed, or a consistently applied written company policy permits. Id. Conduct your agreement authorizes is outside the statute.

What a court can order

If the member establishes grounds, the circuit court may grant relief it considers appropriate, including any of the following. MCL 450.4515(1)(a) to (e).

• Dissolution and liquidation of the company’s assets and business.
• Cancellation or alteration of a provision in the articles of organization or the operating agreement.
• An order directing, altering or prohibiting an act of the company, its members or its managers.
• Purchase of the member’s interest at fair value by the company or by the members responsible for the wrongful acts.
• Damages to the company or to the member.

The action is filed in the circuit court of the county where the company’s principal place of business or registered office is located. MCL 450.4515(1).

I have not found a section of the Act that addresses deadlock by name. The closest is MCL 450.4802, which lets the circuit court for the county of the registered office decree dissolution on a member’s application when the company is unable to carry on business in conformity with the articles of organization or operating agreements. Whether a particular stalemate fits that language depends on the facts and the agreement.

The deadline for damages

An action seeking damages under section 515 must be commenced within 3 years after the cause of action accrued or within 2 years after the member discovered or reasonably should have discovered it, whichever occurs first. MCL 450.4515(1)(e). The Michigan Supreme Court held in Frank v Linkner, 500 Mich 133 (2017), that these are alternative limitation periods, and that a claim accrues when a manager has substantially interfered with the member’s interests as a member, even if no calculable financial injury has occurred yet. There the clock started when the operating agreement was amended to subordinate the plaintiffs’ common shares, not when the company was sold years later. The Court added that fraudulent concealment may toll the period under MCL 600.5855.

A claim against a manager for failing to perform the duties the Act imposes has the same structure. MCL 450.4404(6). Section 515 states a deadline for damages actions and none for the other remedies, which is one more reason not to wait.

Get the records first

A member may request the company’s most recent annual financial statement and tax returns, MCL 450.4503(1), and on reasonable written request may inspect and copy the records the company must maintain during business hours at the member’s expense. MCL 450.4503(3). Other books, records and information are available as is just and reasonable, and a member may seek a formal accounting as the operating agreement provides or whenever circumstances render it just and reasonable. MCL 450.4503(4), (5). I make those requests in writing and keep copies. They show whether a claim exists, and a refusal becomes part of the record.

Suing or negotiating

A possible court-ordered buyout at fair value frames settlement talks, but it comes only after the member establishes grounds. Disputes between a business and its members about their rights fall within the statutory definition of a business or commercial dispute, MCL 600.8031(1)(c)(ii), (2)(c), and an action that includes one must be assigned to a business court. MCL 600.8035(3). I describe how that works in my post on the Kent County Business Court.

I handle these disputes in my business litigation practice in Grand Rapids. Before recommending a lawsuit I want the operating agreement, its amendment history, the financial statements and a clear date for when the interference began, because that date drives the deadline.

If you are in a dispute with the other members or managers of a Michigan LLC, call my Grand Rapids office at (616) 213-3327 or use the contact page. This post is general information, not legal advice, and reading it does not make me your lawyer.