From time to time a member of an Arizona LLC calls and tells me that another member of the LLC filed an amendment to the Articles of Organization with the Arizona Corporation Commission that removed the caller as a member of the LLC without the caller’s knowledge or consent. There was no legal basis to file the amendment.
The caller always asks “what can I do?” The simple answer is the caller should prepare and file another amendment to the Articles of Organization to correct the removal of the caller as a member. This solution, however, is only a temporary band aid. It does not solve the fundamental problem which is the members cannot get along.
Unfortunately this scenario is an all too common problem. The Arizona Corporation Commission is, in actuality, a mere filing service. If a person submits a document for filing and it satisfies the ACC’s filing requirements, the ACC will file the document. The ACC does not confirm or verify that the information set forth in a document is correct. Many times when members of an Arizona LLC can not agree on the management of the LLC one of the members will file an amendment to the Articles of Organization that removes another member without any legal basis for the removal.
People who file false documents with the ACC are usually unaware that they could be committing a felony. Arizona Revised Statutes Section 29-613.A states:
“A person who . . . signs any articles, statement, report, application or other document filed with the [Arizona Corporation] commission that is known to the person as false in any material respect is guilty of a class 4 felony.”
The bottom line is that when this happens the members need to consummate a “company divorce,” i.e., a legal termination of their relationship as members of the same LLC. The best solution occurs if the members agree on the terms and conditions of their company divorce and they sign documents that evidence their agreement. If the members cannot agree, they have two options:
- Continue their relationship as members of the LLC, which means ongoing disputes, problems and stress.
- File a lawsuit in an Arizona Superior Court and ask the court to dissolve the LLC. This option takes time and causes both members to pay large amounts of money to their lawyers.
As a result of this latest call, I revised my multi-member Operating Agreement (yes I have a single member and husband and wife owned Operating Agreement that is about 20 pages shorter) to include a section that obligates a member who causes a fraudulent amendment to the Articles of Organization to be filed with the ACC to pay each other member liquidated damages in the amount of $10,000. If the liquidated damages are not paid within 30 days of the filing date the unpaid amount accrues interest at the rate of 10% per annum. If the entire amount is not paid within one year of the filing date, the offending member’s membership interest in the LLC will be forfeited on the first anniversary of the date the false amendment to the Articles of Organization was filed with the ACC and the unpaid portion of the liquidated damages will be forgiven.
For more on this topic read my blog post called “Can One Member of an Arizona LLC Expel Another Member?“