Will an arbitrator in CA force a buyout of a member’s 50% LLC interest based on a fiduciary breach?
I am a 50% member of a California LLC. My business partner (the other 50% member) purchased a separate business in the same industry last year without informing me. He did not disclose the purchase, did not seek unanimous consent, and did not mention it at any time until I independently discovered the entity through Secretary of State filings. He later transferred that business to his family members as officers.
Our operating agreement states that all members owe fiduciary duties to each other and that no self-dealing or conflicted transactions may be done without unanimous approval. He has since acknowledged in writing that the purchase was not disclosed.
Since the discovery, the working relationship has completely broken down. We are at a standstill in running the business, and I no longer trust him as a partner.
Would an arbitrator compel a buyout of his membership interest even if the company he bought made no income and he did not operate it after purchasing what he says was a "lemon"?
Hi there, I'm sorry to hear that you have been through a rough patch regarding the business and the loss of trust in the business partner. These are valid and legitimate business concerns you have. There are too many follow-up questions that attorneys need to do that are best done in a private confidential consultation with an attorney. Examples are 1) is Arbitration the stated form of dispute resolution in your agreement with the partner? 2) if so, is it binding or non-binding? 3) Arbitrators function as "private judges" in "private court" and would evaluate all the evidence and will have to give their analysis in an "award" which generally will have their opinion of how they came to a particular decision(s). Etc etc. We as attorneys have to evaluate as much as possible before we can answer any questions such as the one you asked. Can an Arbitrator compel this or that? Answer is: it depends.
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It is unclear why you think arbitration is the way to go instead of litigation. Perhaps your Operating Agreement compels it. An arbitrator cannot compel a buyout (unless your Operating Agreement provides for it.) Normally one would file for the involuntary dissolution of the LLC in a court and it appears your 50% ownership would qualify or on the grounds that those in control of the LLC are guilty of fraud or abuse of authority. (Corp. Code § 17707.03 (b). This might trigger mandatory buyout provisions. What an arbitrator (or judge) can order is money damages. In my view this is never a do it yourself project and requires the intervention of an experienced lawyer to assist you.
The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts...
