Locked Out or Frozen Out
by Your Business Partners.
You still own part of the business, but your partners have taken your name off the bank account, cut off your pay, stopped answering your questions, or started moving the business somewhere you cannot see it. Your rights depend on whether the business is an LLC, a corporation, or a partnership, and on what you signed when you formed it. Here is how New York law sorts it out, and what to do first.
What a Freeze-Out Looks Like
- You are removed as an officer, a manager, or a signer on the company's accounts.
- Your salary or draw stops, while the other owners keep paying themselves.
- Distributions stop, even though the business is still making money.
- You are no longer told about meetings, contracts, or loans.
- Your requests for the books, bank statements, or tax returns go unanswered.
- Customers, employees, or contracts start moving to a new company that one of your partners owns.
- You are offered a buyout price that bears no relation to what the business is worth.
Each of these, alone or together, can support a claim. Which claim depends on the entity.
What to Do First
Keep your own copies
Save the formation documents, the operating or shareholders' agreement, your K-1s and tax returns, and any emails or texts about money, roles, and decisions. Do not take company property or delete anything.
Do not answer self-help with self-help
Draining an account, locking your partners out in return, or diverting customers yourself hands the other side a counterclaim and can damage your credibility with the court.
Make a written demand for the records
New York gives owners of every type of entity a right to information. A written demand starts that process and creates a record of any refusal.
Do not sign anything new
Releases, resignations, consents, and "updated" agreements offered in the middle of a dispute are rarely in your favor. Have them reviewed first.
If the Business Is an LLC
Start with the operating agreement, which controls how the company is managed and whether a member can be removed. Any member may inspect and copy the company's required records, including its tax returns and financial statements for the three most recent fiscal years, for any purpose reasonably related to the member's interest (LLC Law 1102[b]). A manager must act in good faith and with the care of an ordinarily prudent person (LLC Law 409[a]), and a deal between the LLC and a manager's own business can be avoided unless it was properly disclosed and approved or the manager proves it was fair and reasonable (LLC Law 411[b]).
New York does not give LLC members the corporate "oppression" remedy. The court may dissolve an LLC only when it is "not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement" (LLC Law 702), a standard the Second Department has read narrowly (Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121, 131 [2d Dept 2010]). See LLC Member Disputes.
If the Business Is a Corporation
A shareholder holding at least 20 percent of the votes of a closely held corporation may petition to dissolve it when those in control have been guilty of "illegal, fraudulent or oppressive actions" toward the complaining shareholders, or when assets are being "looted, wasted, or diverted for non-corporate purposes" (BCL 1104-a[a]). Being frozen out of a job, a share of the earnings, or a role in management that you reasonably expected when you invested is the kind of conduct the Court of Appeals has described as oppression (Matter of Kemp & Beatley (Gardstein), 64 N.Y.2d 63, 72-73 [1984]). The corporation or the other shareholders can then elect to buy your shares at fair value (BCL 1118[a]). Every shareholder of record also has inspection rights on written demand (BCL 624[b]). See Minority Shareholder Rights in New York.
If the Business Is a Partnership
A partner who is "wrongfully excluded from the partnership business or possession of its property by his copartners" has a statutory right to a formal account of the partnership's affairs (Partnership Law 44[1]). A partner may also ask the court to dissolve the partnership where another partner's conduct "tends to affect prejudicially the carrying on of the business," where a partner willfully or persistently breaches the partnership agreement, or where "other circumstances render a dissolution equitable" (Partnership Law 63[1]). See Partnership and LLC Disputes.
How These Cases Usually End
Most freeze-outs end with one side buying out the other. The legal claims, the records demand, and, where the facts support it, a dissolution petition are what bring the other side to a fair number. My job is to read what you signed, find out what the books show, and put you in the strongest position to negotiate that exit, or to litigate it in Supreme Court if the other side will not.
Talk to a Lawyer About Being Frozen Out
Send me your formation documents and agreement, and a short account of what changed and when. I will tell you where you stand and what I would do first.
Phone: 212-233-0666 | Email: fabramson@abramsonlegal.com
Related: LLC Member Disputes · Minority Shareholder Rights · Dissolution and Deadlock · Breach of Fiduciary Duty · Business Disputes
Attorney Advertising. Prior results do not guarantee a similar outcome. The information on this page is general and is not legal advice. Consult an attorney about the specific facts of your matter. Law Office of Frederic R. Abramson, 160 Broadway, Suite 500, New York, NY 10038. 212-233-0666.
Frequently Asked Questions
My business partners cut off my salary. What can I do?
It depends on the type of entity and what you agreed to. In a closely held corporation, cutting off a shareholder's job or share of the earnings can be oppression under BCL 1104-a if those were reasonable expectations central to the investment. In an LLC or a partnership, the first question is what the operating agreement or partnership agreement provides.
Can my partners take my name off the company bank account?
Signing authority is a management question, usually governed by the operating agreement, shareholders' agreement, or partnership agreement. Losing signing authority does not take away your ownership, your right to the company's records, or your legal claims.
Should I resign or stop working at the business?
Not before you understand your rights. A resignation, or a long absence, can be used against you later in a buyout or dissolution dispute. Get the governing documents reviewed first.