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Expulsion provisions in partnership and LLC agreements implicate a familiar tension between private ordering and abuse of power.
On the one hand, expulsion provisions embody the quintessential exercise of private ordering: owners, anticipating potential disagreement or misconduct, agree ex ante upon a mechanism to remove an owner whose participation is deemed undesirable. On the other hand, expulsion is among the remedies most susceptible to abuse by those with the power to expel.
Even the most carefully-drafted expulsion provisions cannot insulate against the possibility of its opportunistic misuse. And, in theory, New York Courts can intervene to prevent the majority from exercising its expulsion rights in bad faith. A recent case from the Second Department S. Shore Eye Care, LLP v Lane, 2025 NY Slip Op 05272 (2d Dept Oct. 1, 2025), however, illustrates just how narrow the path is for an ousted owner seeking to undo expulsion on that basis.
The Partnership and Expulsion Clause
The dispute in South Shore starts with the partnership agreement for South Shore Eye Care LLP, an ophthalmology practice in Long Island. SSEC had five equal partners, but the Partnership Agreement designated only one—Mark Stein—as the "Managing Partner."
The Partnership Agreement bestowed broad power on the Managing Partner to expel members. It provided that a partner can be expelled if "the Managing Partner determines that such Partner shall be expelled from the Partnership (with or without cause)."
The Partnership Agreement further provided that "[i]mmediately upon the occurrence of a Partner's Withdrawal, the Withdrawing Partner's Partnership Interest shall terminate, and the Partnership shall . . . purchase the interest of the Withdrawing Partner." Worse, the Partnership Agreement fixed the buyout price: "the value of such Withdrawing partner's Capital Account" as determined by the Partnership's accountant, with certain adjustments for things like fixed assets and accounts receivable.
The LLC and Operating Agreement
Sometime after the partnership began, the partners elected to purchase the property that housed SSEC's office. They formed 689 Realty, LLC and executed an LLC Operating Agreement.
And 689's Operating Agreement expressly provided that membership in 689 was dependent on being a partner in SSEC.
Specifically, the Operating Agreement provided that a member of 689 was subject to "Involuntary Withdrawal," when "there is, with respect to the Member, a 'Withdrawal of a Partner' within the meaning of any provision of Article IX of the South Shore Eye Care, LLP, Partnership Agreement." So, when a Partner is expelled from SSEC, they are involuntarily withdrawn as a member from 689.
Upon the expulsion of a member from 689, the Operating Agreement requires the company to purchase the interest of the expelled member pursuant to a mostly straightforward appraisal process.
The Managing Partner Expels Lane, Who Claims Bad Faith
In early 2021, Stein and another partner advised Howard Lane that they were looking into the possible benefits of a private equity buyout. Lane was skeptical of the potential buyout. According to his counterclaims, the buyout skewed the proceeds too much toward Stein, as founder, and not enough toward the more "productive" partners.
And Lane's objection could scuttle the deal: Section 6.8 of the Partnership Agreement required the partners' unanimous consent for the "sale of Partnership property other than in the ordinary course of business," which the proposed private equity buyout unquestionably was.
The entire partnership had some discussions about the potential buyout, including discussions with counsel retained by Lane to evaluate the offer.
By September 2021, however, the potential private equity deal was off the table. But sour feelings remained. Stein and others thought that Lane had frustrated the deal by expressing his concerns and "lawyering up." So on the evening before Thanksgiving, Stein expelled lane from the Partnership, escorted him from the premises, changed the locks, and began calling Lane's patients encouraging them to rebook with another partner.
The Partnership's accountant later calculated the value of Lane's capital account—the anemic buyout price called for in the Partnership Agreement: Lane was entitled to payment of roughly $48,000.
To Lane, the expulsion was the utmost bad faith: not only was it an attempted end-run around the unanimous consent requirement of the Partnership Agreement, but it was also a coup of his patients and profits: Lane lost access to his patient files and contact information, and SSEC immediately began poaching Lane's patients. On those grounds, Lane contested the validity of his expulsion both from the Partnership and from 689 Realty.
Expulsion Rights and Bad Faith
Two cases make up the body of caselaw on the bad faith defense to expulsion:
In 1977 New York's highest court considered whether an expelled partner could be bound by the restrictive covenants in his partnership agreement, and in answering that question gave a toehold for a potential bad faith defense to enforcement of an expulsion provision (Gelder Med. Group v Webber, 41 NY2d 680, 681 [1977]). The Court of Appeals first held that a provision providing for "dismissal of one of their number on the majority vote of the partners" is enforceable "so long as the provisions for dismissal work no undue penalty or unjust forfeiture, overreaching, or other violation of public policy."
The Court went on, however, to suggest that bad faith may be an adequate defense:
Even if bad faith on the part of the remaining partners would nullify the right to expel one of their number, it does not follow that under an agreement permitting expulsion without cause the remaining partners have the burden of establishing good faith. . . . On the other hand, if an expelled partner were to allege and prove bad faith going to the essence, a different case would be presented."
Seven years later, the Second Department decided Levy v Nassau Queens Med. Group, 102 AD2d 845, 845 (2d Dept 1984). That case considered a former partner's challenge to his expulsion by a vote of the majority of partners, who had allegedly voted to expel the plaintiff because he was more than 70 years old. The plaintiff argued he was terminated in bad faith, citing other septuagenarian-partners who were not so expelled.
The purpose of the termination clause was to provide a simple, practical and speedy method of separating a partner from the partnership, and in the absence of undue penalty or unjust forfeiture, the court may not frustrate this purpose . . . . While bad faith may be actionable, there must be some showing that the partnership acted out of a desire to gain a business or property advantage for the remaining partners."
Lane Disputes Expulsion, Prompting Lawsuit and Appeal
Lane disputed that he was properly expelled from both the partnership and the LLC. Ultimately, the remaining partners sued seeking a declaration that Lane was properly expelled. Lane shot back with counterclaims for breach of the Partnership Agreement and Operating Agreement, breach of the implied covenant of good faith and fair dealing, and accounting, all arising from his ouster.
The Trial Court upheld Lane's expulsion, finding that both the Partnership Agreement and the 689 Operating Agreement contained unambiguous expulsion provisions, and that the Managing Partner had complied with those provisions when he expelled Lane.
Lane's appeal focused on Gelder and Levy. Lane argued that: (i) Gelder and Levy establish that even when an expulsion is carried out in accordance with the owners' agreement, the enforceability of that expulsion can be defeated by a showing that bad faith went to the essence of the expulsion; and (ii) Lane sufficiently alleged bad faith with his allegations that the expulsion was designed to end-run around the unanimous consent requirement for a buyout, engineer an unjust buyout, and steal his patients and contacts.
No Bad Faith Sufficient To Undo Expulsion
The Appellate Division, Second Department upheld Lane's expulsion from both the Partnership and the LLC. Apparently agreeing with his view of the law, the Second Department went against Lane on the facts, holding:
Lane failed to establish that his expulsion was in bad faith and, therefore, that the enforcement of the expulsion clause should be precluded . . . "[A]t the heart of the partnership concept is the principle that partners may choose with whom they wish to be associated" . . . Here, Lane failed to demonstrate the existence of bad faith, as he failed to establish that there was any undue penalty or unjust forfeiture that resulted from his expulsion."
The Court directed the trial court to enter a judgment declaring that Lane is expelled as a partner from SSEC and ceases to be a member of 689 Realty LLC.
What Remains of the Bad Faith Defense?
The Second Department apparently was unpersuaded by Lane's contention that his expulsion got him pennies on the dollar: the value of his capital account for his 20% of the partnership and valuable book of clients. And equally unmoved by Lane's theory that the private equity buyout was a means for Stein to collect a windfall.
After South Shore, it's hard to say whether the bad faith defense to an expulsion claim is a viable path, or merely just a figment of the courts' imagination. South Shore marks the third case (along with Gelder and Levy) where the Court acknowledged the potential of the defense, but rejected it on the facts. And—as far as I can tell—Lane had strong allegations (at least meriting discovery) in support of his bad faith claims.
Until we see a court willing to substantively entertain the bad faith defense, owners subject to an expulsion provision would be wise to brush up on the unjust forfeiture/public policy defense to an expulsion complying with the governing agreement.
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