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Posted: September 23, 2018

Former LLC Manager’s Claims Regarding His Removal Must be Arbitrated

On September 17, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Milman v. Thrane, 2018 NY Slip Op. 32287(U), holding that the claims of the former manager of an LLC regarding his removal as manager must be arbitrated, explaining:

This case concerns the alleged wrongful removal of plaintiff as a manager and member of The Alldyn Group, LLC (the Company) and the events precipitating his removal. The Company is a New York LLC that is governed by an operating agreement dated October 10, 2017. Section 11.14 of the Operating Agreement provides that:

Any dispute between or among any of the Class A Members … relating to a Class A Member’s withdrawing from the Company or terminating his services for the Company for any reason, which cannot be resolved among the Class A Members (acting as the Executive Board of Managers or otherwise) after good-faith negotiation over a period of at least 15 business days, shall be referred to an independent legal expert selected and agreed upon by all parties, who shall act as sole arbiter to decide and settle the dispute, and whose determination shall be conclusive and binding upon the Class A Members and the Company.

While § l l.14 does not require the Company’s members to arbitrate any dispute arising under the Operating Agreement, it does require arbitration of all disputes relating to a member’s removal. Thus, the court held that the question of whether plaintiff was properly removed must be decided by an arbitrator. Section 11.14, however, does not -as it could have- merely limit arbitration to the sole question of whether removal was proper. Rather, it requires arbitration of all disputes relating to the removal. It is well settled that relating to signifies intent to be bound by a broad arbitration provision that covers all disputes that have any bearing on the subject matter.

All of plaintiffs causes of action contained in the complaint unmistakably relate to his withdrawal/removal. Plaintiff seeks recovery of his capital account and distribution of his share of a fee owed by one of the Company’s clients. Under § 6.9 of the Operating Agreement, upon removal for cause, plaintiff forfeits the right to his capital account and under § 4.1, only members are entitled to distributions. Thus is plaintiff was properly removed for cause, he has no claims. Even if he was not properly removed, because plaintiff himself alleges that his removal was motivated by a desire to wrongfully deprive him of his capital account and of his share of the subject client fee, his claim to such money is certainly related to his removal. Thus, all of plaintiff’s claims are subject to arbitration under § 11.14.

(Internal quotations and citations omitted).

This decision illustrates one the many rules for interpreting contracts: if a contract contains a pre-suit dispute resolution provision, the failure to comply with that provision likely will bar a claim for breach of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the interpretation of a contract.

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