Can a Business Partner Freeze the Company Bank Account?

Who decides who can sign on a Minnesota company’s bank account?

Your company’s governing documents decide first: the operating agreement, the bylaws and board resolutions, or the partnership agreement. Where those documents are silent, the Minnesota statute for your type of entity supplies the rule. On the bank’s side, Minnesota’s UCC ties each payment to what the company authorized and to its account agreement with the bank.

For an LLC, Minn. Stat. § 322C.0110, subd. 1, makes the operating agreement govern relations among the members and the company’s activities, and subdivision 2 fills the gaps: “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter.” A general partnership works the same way under Minn. Stat. § 323A.0103(a).

Under Minn. Stat. § 336.4-104(a), a customer is a person “having an account with a bank,” so the business itself is the bank’s customer. Under Minn. Stat. § 336.4-401(a), “An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.” Before you call the bank or the other owner, I suggest gathering the governing agreement, any resolution naming signers, and the bank’s signature card or resolution form, because together they show who had authority to make the change.

How do Minnesota LLC rules decide whether one member can cut off another?

The answer turns on how the LLC is managed. A Minnesota LLC is member-managed unless its operating agreement provides otherwise. In a member-managed LLC, each member has equal management rights, and an ordinary-course disagreement may be decided by a majority of the members. In a manager-managed or board-managed LLC, the managers or the board decide.

Under Minn. Stat. § 322C.0407, subd. 1, an LLC is member-managed “unless the operating agreement” expressly provides for managers or a board. The three forms work differently:

1. Member-managed. “Each member has equal rights in the management and conduct of the company’s activities.” An ordinary-course difference “may be decided by a majority of the members,” and “An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members.” (Subd. 2.) In a two-member LLC, neither member alone is a majority, so a lockout between equal owners can turn into a deadlock between 50/50 owners.
2. Manager-managed. “Except as otherwise expressly provided in this chapter, any matter relating to the activities of the company is decided exclusively by the managers.” A member who is not a manager has no vote on signers under that default, but “A manager may be removed at any time by the consent of a majority of the members without notice or cause.” (Subd. 3.)
3. Board-managed. The board acts as a body, and “no individual governor has any right or power to act for the limited liability company.” A chief financial officer the board designates must disburse funds “as ordered by the board of governors.” (Subd. 4.)

Removing someone’s signing authority is a different step from removing the person as an owner. If the dispute has moved to ending a member’s ownership, the rules on expelling an LLC member apply.

How does bank-account authority work in a Minnesota corporation?

In a Minnesota corporation, the board of directors decides which banks hold the money and how checks are issued, unless the articles, a shareholder control agreement, or a unanimous shareholder vote places that power elsewhere. The chief financial officer deposits money in the banks the board designates and writes checks as the board orders. The board may also remove an officer, subject to any shareholder control agreement and the officer’s contract rights.

Minn. Stat. § 302A.201, subd. 1, states that “The business and affairs of a corporation shall be managed by or under the direction of a board, subject to the provisions of subdivision 2 and section 302A.457, and except as may be otherwise provided in the articles.” Section 302A.457 governs shareholder control agreements. Subdivision 2 provides that “The holders of the shares entitled to vote for directors of the corporation may, by unanimous affirmative vote, take any action that this chapter requires or permits the board to take.” Under Minn. Stat. § 302A.305, subd. 3, the chief financial officer shall deposit funds “in the banks and depositories designated by the board” and “disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the board.” Those are defaults, and subdivision 1 lets the articles, the bylaws, or a board resolution assign the duties differently.

Under Minn. Stat. § 302A.341, subd. 2, “An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present.” The removal “is subject to the provisions of a shareholder control agreement and is without prejudice to any contractual rights of the officer.” When the co-owners are also the directors, the first question about a changed signer is whether the board ever authorized the change.

What are the rules for partners in a Minnesota general partnership?

In a Minnesota general partnership without a different agreement, every partner has equal management rights. An ordinary-course disagreement may be decided by a majority of the partners, and an act outside the ordinary course needs every partner’s consent. A partner may use partnership property only on behalf of the partnership.

Minn. Stat. § 323A.0401(f) provides that “Each partner has equal rights in the management and conduct of the partnership business.” Under paragraph (j), “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners,” and an act outside the ordinary course “may be undertaken only with the consent of all of the partners.” Paragraph (g) governs the money itself: “A partner may use or possess partnership property only on behalf of the partnership.”

For two equal partners, these defaults mean neither partner can outvote the other on who signs. A partnership agreement that names a managing partner or sets signing rules changes that answer, which is why the agreement is the first document to read.

Why can one signer close the account even when the other owners object?

Minnesota’s UCC lets any person authorized to draw on an account with more than one authorized person stop payment of a check or close the account by an order to the bank. That rule tells the bank whose instructions it may follow. Whether the owner who gave the order had the right to give it is decided under the entity rules and owner duties.

Minn. Stat. § 336.4-403(a) provides that “any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account or close the account by an order to the bank,” given in time for the bank to act. It adds: “If the signature of more than one person is required to draw on an account, any of these persons may stop payment or close the account.” A two-signature requirement on checks does not stop one signer from closing the account or stopping a payment. Under Minn. Stat. § 336.4-103(a), “The effect of the provisions of this article may be varied by agreement,” so I suggest reading the bank’s account agreement on this point as well.

That is how a lockout can happen in a single call to the bank. The owner left out then has to rely on the authority rules and owner duties to undo it. Payments by people with no authority at all, such as forged checks or hacked wires, are covered in unauthorized payments from a business account.

What duties limit the owner who controls the money?

Minnesota’s LLC and partnership statutes, and the corporation statute for closely held corporations, hold co-owners to a standard of honest, good-faith dealing. Some owners also owe fiduciary duties of loyalty and care, depending on the entity type and its management form. Whether a lockout meets these duties depends on its purpose and on how it is carried out.

1. LLCs. Under Minn. Stat. § 322C.0409, subd. 1, a member of a member-managed LLC owes the company and the other members “the fiduciary duties of loyalty and care.” Loyalty includes the duty “to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member: (i) in the conduct or winding up of the company’s activities; (ii) from a use by the member of the company’s property; or (iii) from the appropriation of a limited liability company opportunity” (subd. 2). Every member must act consistently with “the contractual obligation of good faith and fair dealing” in a manner “that is honest, fair, and reasonable” (subd. 4). In a manager-managed company the loyalty and care duties fall on the managers, and “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member” (subd. 7).
2. Closely held corporations. Minn. Stat. § 302A.751, subd. 3a, directs courts to weigh “the duty which all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation.”
3. Partnerships. Under Minn. Stat. § 323A.0404(b), a partner must account for and hold as trustee any benefit “derived from a use by the partner of partnership property.” Paragraph (c) limits the duty of care to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law,” and paragraph (d) requires good faith and fair dealing. Paragraph (e) adds: “A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.”

An owner who moves company money into an account only that owner controls, and then uses it for personal ends, faces the claims described in breach of the duty of loyalty.

What financial records can a locked-out owner still demand?

Losing access to the bank account does not end your right to the company’s financial information. Each Minnesota entity statute gives owners a right to inspect records, subject to conditions that differ by entity type. The corporation statute adds a court remedy that can include attorney fees.

1. Member-managed LLCs. Under Minn. Stat. § 322C.0410, subd. 1, a member may, “On reasonable notice,” inspect and copy company records on its “financial condition,” to the extent the information “is material to the member’s rights and duties under the operating agreement or this chapter.”
2. Manager-managed and board-managed LLCs. A member must seek the information for a purpose material to the member’s interest as a member and make “a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information,” and the information must be directly connected to that purpose. “Within ten days after receiving a demand pursuant to clause (2), item (ii), the company shall in a record inform the member that made the demand” what it will provide, or why it declines (subd. 2). The company may impose reasonable restrictions, but “the company has the burden of proving reasonableness” (subd. 7). An operating agreement may not “unreasonably restrict the duties and rights stated in section 322C.0410” (Minn. Stat. § 322C.0110, subd. 3).
3. Corporations that are not publicly held. Under Minn. Stat. § 302A.461, subd. 4, a shareholder “has an absolute right, upon written demand, to examine and copy,” at any reasonable time, the share register and the records listed in subdivision 2, which include “records of all proceedings of shareholders for the last three years,” “records of all proceedings of the board for the last three years,” and the financial statements. The corporation must make them available within ten days after an officer receives the written demand. Other records, such as bank statements, are available “only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination.” A court may “specifically enforce this section and award expenses, including attorney fees and disbursements.”
4. Partnerships. “A partnership shall provide partners and their agents and attorneys access to its books and records.” (Minn. Stat. § 323A.0403(b).) A partnership agreement may not “unreasonably restrict the right of access to books and records under section 323A.0403(b)” (Minn. Stat. § 323A.0103(b)).

I suggest making the demand in writing, naming the records and the reason, because a written demand starts the corporate and manager-managed LLC response periods and shows a court what you asked for. The pages on demanding company financial information and shareholder inspection rights cover the demand itself.

When does a Minnesota court step in over a bank-account lockout?

A Minnesota court can act when the lockout is part of conduct the entity statutes reach. For corporations, that includes unfairly prejudicial conduct by those in control and misapplied assets. For LLCs, it includes a member’s direct action and oppressive conduct by those in control. Partners may sue for legal or equitable relief, with or without an accounting.

1. Corporations. Under Minn. Stat. § 302A.751, subd. 1, “A court may grant any equitable relief it deems just and reasonable in the circumstances or may dissolve a corporation” when a shareholder establishes, among other grounds, that those in control acted “in a manner unfairly prejudicial toward one or more shareholders” of a corporation that is not publicly held, or that “the corporate assets are being misapplied or wasted.” Written agreements among shareholders “are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements” (subd. 3a). The court may order a buyout “if the court determines in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case” (subd. 2). If a buy-sell agreement, the bylaws, or the terms of the shares already set a price, the court orders the sale on those terms unless it finds them unreasonable.
2. LLCs. Under Minn. Stat. § 322C.0901, subd. 1, “a member may maintain a direct action against another member, a manager, a governor, or the limited liability company to enforce the member’s rights and otherwise protect the member’s interests.” The member “must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company” (subd. 2). A member may also apply for dissolution when those in control “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant” (Minn. Stat. § 322C.0701, subd. 1), and the court may order “A remedy other than dissolution,” including a sale of the member’s interest for fair value to the company or one or more of the other members (subd. 2).
3. Partnerships. “A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business” to enforce the partner’s rights under the agreement and the statute. (Minn. Stat. § 323A.0405(b).)

I suggest checking which deadlines apply to your claims early instead of waiting to see whether access comes back. A lockout can be one piece of a shareholder oppression claim, and the remedy that resolves it may be buying out a co-owner.

How should an owner who suspects misuse restrict a co-owner’s access?

An owner who suspects misuse should restrict access only through the person or body with authority, for a reason the owner can document, and with notice to the co-owner. The restricted owner’s information should keep flowing. In a proceeding under the corporation statute’s court-relief section, a court that finds a party has acted arbitrarily, vexatiously, or otherwise not in good faith may in its discretion award reasonable expenses, including attorney fees, to the other parties.

The only time I have recommended a lockout is when there was evidence of embezzlement. When that evidence exists, I suggest five steps, because each one keeps the protective move from becoming the next claim against you:

1. The evidence, saved first. I suggest saving the statements, transfers, or records that show the problem before you change anything, because the documented reason is what shows the lockout was a protective step.
2. The authority you actually hold. In a member-managed LLC or a partnership, that is the vote the statute or agreement requires. In a corporation, it is the board, unless the articles, a shareholder control agreement, or a unanimous shareholder vote places that power elsewhere. In a manager-managed LLC, it is the managers.
3. The narrowest restriction that protects the money. A read-only login can protect funds while the co-owner keeps a view of the account.
4. Notice to the co-owner. I advise explaining the lockout to the other owner, because silence makes a protective step look like a squeeze-out.
5. Continued information. The information rights described above continue during the dispute, so I suggest answering record requests on time.

Under Minn. Stat. § 302A.751, subd. 4, “If the court finds that a party to a proceeding brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties.” The owner on this side of the dispute should also expect the arguments covered in defending an oppression claim.

Getting Back Into the Account

A co-owner can change who signs on a Minnesota company’s account only with authority from the company’s documents or the statute’s default rules. The bank side runs separately: unless the account agreement provides otherwise, any one of several authorized signers may stop payment or close the account by an order to the bank, and the owners then resolve whether that order was authorized among themselves or in court. Your information rights survive the lockout, and the duties of loyalty, care, and good faith limit how the owner in control may use the money. More on these disputes is collected under Minnesota business ownership disputes. If a co-owner has changed who can sign on your company’s account, email [email protected] with a brief description of what changed and when.