Can resignation from a parent company trigger withdrawal from an LLC? McNeil Engineering v. Bennett Explained

In McNeil Engineering v. Bennett, the Utah Court of Appeals addressed whether an LLC member’s resignation from the parent company that leased employees to the LLC constituted withdrawal under the operating agreement’s withdrawal provision.

Background and Facts

Scott McNeil restructured his engineering business by creating multiple LLCs, including McNeil Engineering and Land Surveying (ME&LS). The parent corporation, McNeil Engineering Inc. (MEI), acted as an umbrella company that leased employees to the LLCs rather than the LLCs hiring direct employees. Bennett was a member of ME&LS but technically employed by MEI, which leased his services to ME&LS. When Bennett resigned from MEI in 2005, he claimed this did not constitute withdrawal from his ME&LS membership, while ME&LS exercised its option to purchase his membership interest under the operating agreement’s withdrawal provision.

Key Legal Issues

The central issue was whether the term “employment” in the operating agreement’s withdrawal provision was facially ambiguous. The provision stated that a member withdraws when the member “voluntarily resigns or terminates the Member’s employment with the Company.” The trial court found this language unambiguous, requiring direct employment with ME&LS for withdrawal to occur.

Court’s Analysis and Holding

The Court of Appeals reversed, applying established contract interpretation principles. The court found the withdrawal provision facially ambiguous because both parties’ interpretations were reasonably supported by the contract language. ME&LS argued that “employment” should include leased employees since the LLC had no direct employees, making Bennett’s interpretation render the withdrawal provision meaningless. Bennett contended “employment” meant only direct employment with ME&LS. The court noted that Utah appellate courts have looked beyond employment arrangement forms to their substance in other contexts, and that dictionary definitions of “employment” support both interpretations.

Practice Implications

This decision highlights the importance of precise drafting in LLC operating agreements, particularly for businesses using employee leasing arrangements. The court’s analysis demonstrates that extrinsic evidence may be considered to determine facial ambiguity, and that parties’ conduct and statements can create factual disputes about contractual intent. Practitioners should anticipate that withdrawal provisions may require fact-intensive analysis when employment relationships involve multiple entities.