Direct-Causation Test for LLC Member Expulsion and a Strict, Less-Than-Impossible Standard for Judicial Dissolution in Virginia

Direct-Causation Test for LLC Member Expulsion and a Strict, Less-Than-Impossible Standard for Judicial Dissolution in Virginia

Introduction

In Ticonderoga Farms, LLC v. Knop, the Supreme Court of Virginia affirmed a Court of Appeals decision upholding two pivotal trial court rulings: (1) denial of an application to judicially expel minority members from a family-owned LLC under Code § 13.1-1040.1(5)(c); and (2) judicial dissolution of the LLC under Code § 13.1-1047 due to the company’s functional paralysis.

The dispute arose in a family-run agritourism and farming enterprise holding over 900 acres in Northern Virginia. Following years of intra-family strife, management actions by the majority member (Peter) precipitated litigation over capital calls and the right of minority members (Alexandra and William, individually and as Trustees of the Evergreen Trust) to inspect records. The circuit court found the operating agreement invalid, ruled the capital call unenforceable, enforced members’ statutory inspection rights, denied expulsion, and ordered dissolution. The Supreme Court’s opinion establishes important clarifications in Virginia LLC law on:

  • The causation showing necessary to expel an LLC member under § 13.1-1040.1(5)(c).
  • The meaning and application of “not reasonably practicable to carry on the business” in both expulsion (§ 1040.1(5)(c)) and dissolution (§ 1047).
  • The absence of any statutory preference for expulsion over dissolution, and the “present circumstances” lens required by Dunbar Group.
  • The independence and robustness of members’ inspection rights under § 13.1-1028 and the strict writing requirement for enforceable capital contributions under § 13.1-1027.

Summary of the Opinion

The Supreme Court affirmed across the board. It held that:

  • Expulsion under § 13.1-1040.1(5)(c) requires proof that a member’s conduct relating to the company directly made it “not reasonably practicable to carry on the business with the member.” The Court construed “makes” to denote a direct causal connection, not merely an indirect or innocent link in a chain of causation. Wrongfulness is not an element of subsection (5)(c), but whether conduct is wrongful may inform whether it directly caused impracticability.
  • Dissolution under § 13.1-1047 depends on whether, in the present circumstances, it is not reasonably practicable to carry on the business—an exacting standard that is less than impossibility but more than mere disagreement or routine litigation. The statute focuses on capability, not fault.
  • No remedial preference: The LLC Act does not command courts to try expulsion before dissolution or to favor one remedy over the other; the remedies are context-specific. Dunbar Group requires courts to assess “present circumstances,” including any changed circumstances resulting from an expulsion order; here, because expulsion was denied, the status quo persisted, and dissolution was appropriately evaluated on that basis.
  • Default statutory governance controls: With no valid operating agreement, default provisions of the Virginia Limited Liability Company Act govern. Thus, the capital call was unenforceable absent a written promise by members under § 13.1-1027(E), and members’ inspection rights under § 13.1-1028 were enforceable notwithstanding prior discovery in other litigation.

Applying deferential review to the bench-trial findings, the Court upheld the trial court’s determinations that (a) the minority members’ conduct—chiefly asserting statutory inspection rights and contesting an invalid capital call—did not directly cause the company’s dysfunction, and (b) the company’s paralysis and chronic governance failures made it not reasonably practicable to carry on the business, justifying dissolution with a court-appointed trustee to wind up affairs.

Analysis

Precedents Cited and Their Influence

  • Dunbar Group, LLC v. Tignor, 267 Va. 361 (2004):
    • Establishes deference to a trial court’s factual findings after a bench trial (“same weight as a jury verdict”).
    • Requires dissolution decisions to be based on the present circumstances at the time of decision. In Dunbar, expulsion altered the status quo, eliminating the asserted cause of impracticability (deadlock), so dissolution was improper.
    • Influence here: The Supreme Court emphasized that because expulsion was denied in Ticonderoga, no new circumstances arose to change operational impracticability; therefore, dissolution was assessed on the existing, dysfunction-ridden status quo.
  • Geico Advantage Ins. Co. v. Miles, 301 Va. 448 (2022):
    • Plain-meaning approach to statutory terms. Influenced the Court’s dictionary-driven analysis of “makes” in § 1040.1(5)(c) to require a direct causal link.
  • Stoots v. Marion Life Saving Crew, Inc., 300 Va. 354 (2021):
    • Expressio unius canon: When the General Assembly includes a term in one provision and omits it in another, courts presume the difference is intentional. Here, “wrongful” appears in § 1040.1(5)(a) but is omitted from § 1040.1(5)(c), confirming that wrongfulness is not an element of (5)(c).
  • Commonwealth v. Jackson, 276 Va. 184 (2008):
    • Same-term, same-meaning canon: A phrase used in related statutes carries the same meaning absent contrary indication. The Court applied this to interpret “not reasonably practicable to carry on the business” identically in § 1040.1(5)(c) and § 1047.
  • Geouge v. Traylor, 68 Va. App. 343 (2017) and Garst v. Obenchain, 196 Va. 664 (1955):
    • Appellate posture: Evidence is viewed in the light most favorable to the prevailing party; conflicting evidence is disregarded. This framed the Court’s deference to the trial court’s factfinding supporting denial of expulsion and granting of dissolution.
  • Massey v. Commonwealth, 67 Va. App. 108 (2016) and Vasquez v. Commonwealth, 291 Va. 232 (2016):
    • Credibility determinations are for the factfinder; it may believe or disbelieve any testimony, in whole or part. The trial court credited the CPA’s testimony about “red flags” and management failures and credited Peter’s portrayal of dysfunction without crediting his blame-shifting.
  • Minh Duy Du v. Commonwealth, 292 Va. 555 (2016):
    • Limited unsealing principle: Only those facts from a sealed record necessary to decide the case are unsealed. The Court applied this to describe only essential sealed facts.

Legal Reasoning

1) Statutory Framework and Default Governance

With the operating agreement found invalid, the LLC was governed by the default rules of the Virginia Limited Liability Company Act:

  • Capital contributions (Code § 13.1-1027): A member’s obligation is enforceable only if contained in a writing signed by the member. Because the minority members had not signed any such promise, the majority member’s $5.5 million capital call was unenforceable against them.
  • Inspection rights (Code § 13.1-1028): Members are entitled, upon reasonable request, to access key company records (membership list, governing documents, tax returns, financial statements, and other “true and full information”). Prior production in litigation does not displace or satisfy this statutory entitlement. The court found the minority’s requests reasonable, especially in light of “red flags” in the books.
  • Expulsion (Code § 13.1-1040.1(5)): A court may expel a member if subsection (a), (b), or (c) is met. Only (c) was at issue on appeal.
  • Dissolution (Code § 13.1-1047, § 13.1-1048): Courts may decree dissolution if it is not reasonably practicable to carry on the business and may appoint a liquidating trustee to wind up.
  • Effect of expulsion (Code § 13.1-1040.2 and § 13.1-1039): An expelled member retains the economic interest as an assignee (profits, losses, distributions) but loses management rights. The Court noted this to underscore that expulsion is a surgical remedy directed at governance capability.

2) Expulsion Under § 13.1-1040.1(5)(c): “Makes it not reasonably practicable” Imposes a Direct-Causation Requirement

The Court gave “makes” its ordinary meaning—“to cause to happen; bring to pass”—and held that subsection (5)(c) requires the moving party to prove the challenged member’s conduct was a direct cause of the company’s inability to carry on its business with the member. The Court deliberately distinguished this from familiar tort formulations like “proximate cause” and cautioned against treating innocuous or legitimate conduct as an expulsion trigger merely because it appears somewhere in the causal sequence.

Key applications and limits:

  • Wrongfulness not required: Unlike subsection (5)(a), (5)(c) contains no wrongfulness element. That said, wrongfulness (or its absence) may be probative in assessing whether the conduct, rather than the company’s reaction to it, directly caused impracticability.
  • Records demands rarely justify expulsion: Asserting § 13.1-1028 inspection rights will “rarely, if ever” be sufficient, standing alone, to constitute direct causation of impracticability—even if the company’s reaction is hostile or disruptive. Here, the minority’s insistence on records was found legitimate and justified by credible forensic “red flags.”
  • Cumulative conduct: A “series of behaviors,” each insufficient in isolation, may cumulatively satisfy (5)(c) if the totality directly produces operational impracticability. The Court left this door open while finding it unmet on the record.
  • Deference to factfinding: The trial court found the minority’s conduct aimed at legitimate objectives and was not the cause of the paralysis. On deferential review, those findings stood.

3) Dissolution Under § 13.1-1047: A Strict, Less-Than-Impossible Standard Focused on Present Capability

The phrase “not reasonably practicable to carry on the business” sets an exacting standard. It does not require literal impossibility; the modifier “reasonably” distinguishes it from an absolute bar. Yet it demands more than mere friction:

  • Insufficient triggers: Routine disagreements among members, ordinary business disputes, or isolated litigation do not suffice.
  • Sufficient triggers: Only when dysfunction, distraction, or acrimony has degraded the company’s ability to perform its core business functions while honoring members’ rights will dissolution be justified.
  • Same meaning across statutes: The Court held that “not reasonably practicable to carry on the business” has the same meaning in § 1040.1(5)(c) (expulsion) and § 1047 (dissolution).
  • Majority control is not dispositive: A controlling stake (here, 72.67%) does not immunize the company from dissolution if, as a factual matter, present circumstances show the company cannot function properly. The trial evidence showed paralysis, governance failures, unreliable financials, and the majority member’s categorical refusal to work with the minority.

4) No Statutory Preference for Expulsion over Dissolution; Dunbar Group’s “Present Circumstances” Principle

The Act does not require courts to attempt expulsion before dissolution or to prefer one remedy categorically. The sequencing is contextual:

  • In Dunbar Group, the court erred by dissolving after expelling a 50% member, because expulsion changed the present circumstances (eliminating the stated cause for dissolution).
  • Here, expulsion was denied; the status quo persisted. The trial court properly evaluated dissolution as of those unchanged circumstances and found the company unable to function.

Impact and Practical Implications

For Virginia LLC Governance and Litigation

  • Higher clarity on expulsion proof: Movants must connect the dots: identify specific conduct by the member and prove that conduct directly made ongoing business with that member not reasonably practicable. Generalized acrimony, mutual distrust, or “both-sides” narratives will not suffice.
  • Inspection rights are robust: Members’ statutory rights to information are independent of discovery and must be honored. Denying or obstructing access risks judicial intervention and undercuts expulsion efforts premised on the member’s requests.
  • Majority control is not a safe harbor: The presence of a controlling stake does not defeat dissolution if the company cannot perform core functions while observing members’ rights.
  • Litigation as a cause of impracticability: Litigation can support expulsion or dissolution only when it is so pervasive and destructive that it eliminates the practical ability to operate. Isolated suits are rarely enough.
  • Dunbar’s timing discipline: Trial courts must assess dissolution based on the operational reality at the moment of decision, taking into account any order (e.g., expulsion) that changes that reality. Counsel should structure remedies and trial presentations with this temporal lens in mind.

For Drafting and Transactions

  • Adopt a real operating agreement:
    • Define capital call mechanics, written contribution obligations, and consequences of non-payment.
    • Set inspection protocols and permissible limitations in compliance with § 13.1-1028(C) (unanimous written adoption or amendment).
    • Establish expulsion standards and procedures, including notice, cure, and buyout terms (keeping statutory baselines in mind).
    • Provide deadlock resolution, dispute resolution, and succession planning (especially in family entities).
  • Maintain clean books and related-party transparency:
    • Timely, accurate financials; avoid backdated entries and unexplained lump-sum accruals.
    • Document intercompany relationships and loans; avoid overstating shareholder/manager loans and interest.
  • Inspection-readiness:
    • Keep at least three years of tax returns and financial statements ready for member access.
    • Do not rely on prior discovery to satisfy statutory inspection obligations.
  • Plan for exits:
    • Include buy-sell provisions and valuation mechanics, so that expulsion or dissociation is not the only management tool.
    • Consider neutral managers or boards for high-conflict families, with clear authority bounds.

Complex Concepts Simplified

  • “Not reasonably practicable to carry on the business”:
    • Means the company cannot, in a practical sense, continue its core operations while respecting members’ legal rights.
    • It is a strict standard, but it does not require literal impossibility.
  • Direct cause under § 1040.1(5)(c):
    • The member’s conduct must itself bring about the impracticability of continued joint operation; mere participation in disputes or legitimate assertion of rights typically won’t suffice.
  • Wrongfulness in expulsion:
    • Required by § 1040.1(5)(a), not required by § 1040.1(5)(c). However, wrongfulness can be considered as evidence of causation; absence of wrongfulness may suggest the company’s reaction, not the member’s conduct, is the real problem.
  • Inspection rights vs. discovery:
    • Statutory inspection rights are ongoing governance rights; they exist apart from court-ordered discovery in litigation. Producing documents in discovery does not nullify members’ inspection entitlements.
  • Capital calls:
    • Members are only obligated to contribute if they signed a writing promising to do so. Without such a writing, a manager cannot unilaterally compel contributions.
  • Effect of expulsion:
    • An expelled member loses management and voting rights but remains entitled to the economic incidents of membership (as an assignee) unless the operating agreement provides otherwise consistent with statute.

Case Details and Context

Key Facts and Procedural Timeline

  • 1982: Ticonderoga Farms, Inc. formed; later converted to LLC in 2015 under Peter’s direction.
  • 2011 onward: Intra-family disputes over ownership percentages and governance.
  • 2015: Conversion to LLC; “Stock Case” results in a ruling favorable to Peter on share allocation, but later disputes proliferate.
  • 2016–2018: Multiple lawsuits among family members and entities; persistent acrimony.
  • June 2020: Peter issues $5.5 million capital call; minority members sue for declaratory relief and inspection rights; Peter counterclaims to expel minority members under § 1040.1(5).
  • Trial evidence:
    • CPA expert identifies serious accounting “red flags,” including inconsistent income reporting, overstated loans and interest, backdated entries, and opaque affiliate dealings.
    • Peter testifies he cannot continue in business with the minority members.
  • Trial rulings:
    • No valid operating agreement; default Act applies.
    • Capital call unenforceable (§ 1027(E)).
    • Inspection rights enforced (§ 1028).
    • Expulsion denied under § 1040.1(5)(a), (b), and (c).
    • Dissolution ordered under § 1047; trustee appointed to wind up.
  • Court of Appeals: Affirms (2–1).
  • Supreme Court of Virginia: Affirms, clarifying causation and dissolution standards.

Notable Doctrinal Clarifications

  • Direct-causation requirement for expulsion under § 1040.1(5)(c): The member’s conduct must directly make it not reasonably practicable to carry on the business with that member.
  • “Reasonably practicable” is identical across expulsion and dissolution provisions: Uniform interpretation for § 1040.1(5)(c) and § 1047(A).
  • Wrongfulness not required under § 1040.1(5)(c): But wrongfulness (or its absence) can inform the causation analysis.
  • No statutory preference for expulsion vs. dissolution: Courts select the remedy that fits the proven, present circumstances; Dunbar Group’s present-circumstances review governs timing.
  • Inspection rights are independent and must be honored: Discovery in other litigations does not substitute for statutory inspection compliance.
  • Capital calls require a signed writing: Absent a signed promise, members cannot be compelled to fund.

Practice Pointers

  • For majority managers:
    • Do not conflate resistance to management decisions with expellable conduct.
    • Honor inspection rights promptly; refusing access undermines expulsion efforts and may support dissolution.
    • If seeking expulsion under § 1040.1(5)(c), develop a fact record proving the member’s conduct directly produced the impracticability, not merely that conflict exists.
  • For minority members:
    • Frame requests within § 1028’s reasonableness; document purpose and scope.
    • Retain independent experts early (e.g., forensic CPA) to substantiate “red flags” and establish legitimate aims.
  • For transactional counsel:
    • Draft operating agreements that pre-commit capital structures, information rights, expulsion triggers, buyouts, and dispute mechanisms.
    • In family entities, consider independent governance and dispute resolution triggers before dysfunction becomes existential.

Minor Editorial Note

The opinion’s conclusion references “Code § 13.1-1049.1(5)(c)” when discussing expulsion; context indicates a scrivener’s error, and the intended provision is Code § 13.1-1040.1(5)(c).

Conclusion

Ticonderoga Farms advances Virginia LLC law in several consequential ways. It crystallizes a direct-causation requirement for expulsion under § 13.1-1040.1(5)(c), clarifies that wrongfulness is not an element under that subsection, aligns the meaning of “not reasonably practicable” across expulsion and dissolution provisions, rejects any categorical preference for expulsion over dissolution, and underscores the force of statutory inspection rights and the writing requirement for capital calls. On the facts credited by the trial court, the minority members’ assertion of statutory rights and their litigation posture did not directly cause the company’s incapacity; instead, the company’s ongoing dysfunction—despite the majority’s control—made it not reasonably practicable to carry on the business, warranting dissolution.

The decision provides a clear roadmap for trial courts and litigants: identify specific conduct, prove its direct causal role in operational impracticability if expulsion is sought, and evaluate dissolution based on the company’s present operational reality. For practitioners and business owners, the case reaffirms the centrality of a well-crafted operating agreement, robust recordkeeping, and respect for statutory member rights as the first and best bulwarks against the extraordinary judicial remedies of expulsion and dissolution.

Case Details

Year: 2025
Court: Supreme Court of Virginia

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