Judicial Dissolution of LLC’s in Florida – What Does it Take to Kick Out Your Partner?

Statutory guidance for judicial dissolution under Florida’s Revised Limited Liability Company Act is found within Florida Statutes, § 605.0702.  Notably the section was revised in June of 2013 and became effective as of January 1, 2014.  The revised LLC act, commonly referred to as the “New LLC Act,” significantly modified the judicial dissolution procedure.  The New Act clarifies the grounds for judicial dissolution and the appointment of receivers and custodians in the dissolution process. The New LLC Act eliminated a creditor’s right to petition the court for dissolution, added three more bases for dissolution upon petition by a manager or member, and now permits a “deadlock sale provision.”  Fortunately, 2014 will be a “transition year” where existing LLC’s may elect to have the new rules apply to them, while all LLCs formed in 2014 will follow the provisions of the New LLC Act.  Existing LLC’s are not bound by the New Act until January 1, 2015.  Whether you are a member or manager of a newly formed LLC or an existing LLC, the New LLC Act will likely effect your dissolution process.  The following Blog post will explain what you will need to know about the judicial dissolution process under the New LLC Act as well as practicable issues in winding down a dissolved LLC.

There are three ways in which a court may dissolve a limited liability company (LLC). The first is in a proceeding by the Department of Legal Affairs, the second is in a proceeding by a manager or member of the LLC, and the third is in a proceeding by the actual LLC itself under a voluntary dissolution.[i]  In a proceeding by the Department of Legal Affairs the court may dissolve a LLC if it is established that the LLC obtained its articles of organization through fraud or the LLC has abused the authority conferred upon it by law.[ii]  In a proceeding by a manager or member, there are five ways in which the member or manager may establish grounds for judicial dissolution:

1.)    The conduct of all or substantially all of the company’s activities is unlawful;

2.)    It is not reasonably practicable to carry on in conformity with its articles or operating agreement;

3.)    The controlling managers or members have acted illegally or fraudulently;

4.)    The company’s assets are being misappropriated or wasted, causing injury to the company or to one or more members; or

5.)    The managers or members are deadlocked and irreparable injury to the company is being threatened or suffered.[iii]

Further, the New Act continues to allow judicial dissolution in the event of a deadlock between the managers or members where the managers or members cannot break the deadlock and the deadlock is causing or threatening to cause irreparable injury to the limited liability company. However, the New Act contains a “deadlock sale provision” to deal with situations where the operating agreement lays out what is to happen in the event of such a deadlock. If there is a deadlock in the management of the LLC’s activities and affairs, and there is a “deadlock sale provision” in the LLC’s operating agreement, then the deadlock sale provision will control and resolve the deadlock.[iv]   A “deadlock sale provision” is any provision in the operating agreement that may break the deadlock.  Examples include a buy-sell provision, a governance change, a “casting vote,” and a forced partition or sale of the company or its assets.  This deadlock breaking mechanism allows members to address the possibility of a future deadlock in their operating agreements so that they can avoid the costs and uncertainty of a potential judicial dissolution.

Lastly, the LLC itself may elect to have its voluntary dissolution continued under court supervision.[v]  If the court determines that one or more grounds for judicial dissolution exist then the court may enter a decree dissolving the limited liability company and specifying the effective date of dissolution. [vi]  From there, the court shall direct the winding up and liquidation of the LLC’s activities and affairs. [vii]

Once dissolution is triggered, a LLC transitions to the “wind up” phase.  Essentially, “winding up” is the period between dissolution and the filing of the statement of termination.  Winding up enables a dissolving LLC to discharge or provide for the discharge of liabilities, close the LLC’s activities, and distribute the LLC’s assets in as orderly a manner as possible.  During the wind-up process a LLC may preserve its activities for a reasonable time, prosecute and defend actions, sell property, and settle disputes by mediation or arbitration.[viii]   In the instance of a judicial dissolution the court will supervise the “wind-up” process in order to protect creditors.  Judicial supervision may include appointing an individual to wind up the LLC.  If the LLC is allowed to direct its wind up, the LLC should implement a wind up plan.  The plan should include a notice to known creditors, a method of disposing and conveying its property as well as collecting and dividing assets. A creditor, with good cause and under specified circumstances, may also initiate an action for judicial appointment of a trustee or receiver for winding up.

Finally, the New Act eliminates the Existing Act’s provision allowing a creditor to bring an action for judicial dissolution if the creditor had an unsatisfied judgment and the limited liability company was insolvent, or where the limited liability company admitted that the creditor’s claim was due and the company was insolvent.

Should you find yourself in a position where you are in operational or managerial gridlock, it is best to consult with competent counsel familiar with the laws governing non-judicial and judicial business breakups.