This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Tuesday, March 28, 2017
Louisiana Court Holds That Assignee Member Is Not a Member With Respect to Assigned Interests
Louisiana Court Holds That Assignee Member Is Not a Member With
Every LLC Act, as a default rule, requires some threshold of the members to
approve the admission of an assignee as a member in the company. Often left
unaddressed is whether an assignment among the members results in (a) the
assignee being, with respect to the assigned interest, treated as a member or
(b) treats the assignee, with respect to the assigned interest, as an assignee.
In an article recently published in the Journal of Passthrough Entities,
I reviewed two decisions, one from Delaware and one from North Carolina.Rutledge, Interest Assignments Among Members, J. Passthrough Entities (March/April
2017) 53; HERE IS A LINK to that article. The Delaware decision, Achaian, Inc. v. Leemon Family LLC, is
of little assistance in that it is the interpretation of what can be fairly
characterized as curious language in the subject limited liability company
agreement. 25 A.3d 800 (Del. Ch.
2001). This case is also reviewed in J.
William Callison, Achaianand interest transfers among existing partners
and members, Research Handbook on Partnerships, LLCs and Alternative Forms of
Business Organizations (Edward Elgar Publishing, 2015).In a similar vein, Ault v. Brady, 37 Fed. App, 222 (8th Cir. 2002), turned
on the wording of the particular operating agreement at issue.
The second decision reviewed in that article is Blythe v. Bell, 2012 NCDC 60,
2012 WL 6163118 (N.C. Super. Dec. 10, 2012). The one advantage of the Blythe decision is that it interpreted
essentially the default rules of the statute. In this decision, the North
Carolina Business Court determined that upon an assignment of all of the
interest from one incumbent member to another: (i) the management rights are
fully conveyed to the assignee; (ii) the assignee may exercise the management
rights related to the assigned interest.
The recent decision from Louisiana, Bourbon
Investments, LLCv. New Orleans
Equity LLC,207 So.3d 1088 (La. App. 4 Cir. 2016), came to the opposite
conclusion as did the Blythe court.
Curiously, the Blythe decision was
not referenced by the Louisiana court.
dispute arose out of a failed effort to acquire the famous Galatoire’s
Restaurant (as well as a related restaurant in Baton Rouge). One of the issues
in contention was whether the suit filed against the prior owners was
legitimate turned on the question whether it had been validly approved. In
support of the notion that there had not been valid approval of the lawsuit,
the defendants pointed to certain interest transfers amongst the members of the
plaintiff, claiming that required majority approval had not been received. In
opposition, the plaintiffs “maintain[ed] that the general rule that requires
unanimous consent for the transfer of full membership interest in an LLC does
not apply where such transfer takes place between current member.” The LLC at
issue not having a written operating agreement, the question turned on state
law, the court observing that:
La. R.S. 12:1330 provides that a membership interest in a limited
liability company is assignable, but such assignment entitles the assignee to
only “receive such distribution or distributions, to share in such profits and
losses, and to receive such allocation of income, gain, loss, deduction,
credit, or similar item to which the assignor was entitled to the extent
assigned.” La. R.S. 12:1332 provides that, except as otherwise provided in the
articles of organization or in an operating agreement, “[a]n assignee of an
interest in a limited liability company shall not become a member or
participate in the management of the limited liability company unless the other
members unanimously consent in writing.” The statute further states that an
assignor continues to be a member unless and until the assignee becomes a
Again, the plaintiff would argue “that the transfer restrictions set forth in
La. R.S. 12:1332 apply only when the assignment is made to a third party who
wishes to become a member of the LLC.” Rejecting this assertion, the court
would find that:
The literal language of the statue does not support Plaintiffs’
interpretation of La. R.S. 12:1332.The
plain language of the statute requires unanimous written consent of all members
for an assignee to become a member of or participate in the management of the
LLC. The statute does not differentiate between a third party assignee and a
current LLC member assignee.The fact
that the legislature did not draft a separate set of rules for membership
transfers between current LLC members further supports the conclusion that the
default transfer restrictions apply regardless of whether the assignee is a
third party or a current member.
you have it. At least under the North Carolina LLC Act, an interest assignment
among the members is not subject to the requirement of member approval to
constitute the assignee as a member with respect to the assigned interest. In
contrast, in Louisiana, the opposite is true, and the consent of the incumbent
members is required to constitute a member with respect to an additional
Several state statutes, with greater or lesser precision,
address this point. Tennessee exempts the transfer of management rights among
members from any requirement of consent from another member.SeeTenn. Code Ann. § 48-249-508(b)(1)
(“A member may, without the consent of any other member, transfer governance
rights to another member.”) Utilizing a different statutory formula, the
same result is dictated by the North Carolina LLC Act.
SeeNC LLC Act § 57D-5-04(b): [A] transferee of an ownership
interest [(a term of art defined to mean all of the rights and obligations
(economic, management, and others) of an interest owner in a LLC] or portion
thereof who is or becomes a member
has to the extent transferred to the transferee (i) the rights and powers and
is subject to the restrictions and liabilities of a member under the operating
agreement and this Chapter with respect to the transferred ownership
interest….” (emphasis added).
The new Pennsylvania LLC Act, albeit in a rather cryptic formula,
likewise exempts an assignment among members from any requirement of consent. See 15 Pa.
C.S. § 8851(b) (“Only right that may be transferred. – A person may not
transfer to a person not a member any rights in a limited liability company
other than a transferable interest.”) See
also Pa. Drafting Committee Comment:
section is patterned after Uniform
Limited Liability Company Act (2006) (Last Amended 2013) § 501.
Absent a contrary provision in the operating agreement or the consent of the
members, a “transferable interest” is the only interest in a limited liability
company that can
be transferred to a non-member. See
15 Pa.C.S. § 8852. As to whether a member may transfer governance rights
to a fellow member, the question is moot absent a provision in the operating
agreement changing the default rule, see
5 Pa..S. § 8847(b)(2), allocating governance rights per capita. In the default
mode, a member’s transfer of governance rights to another member: (i) does not
increase the transferee’s governance rights; (ii) eliminates the transferor’s
governance rights; and (iii) thereby changes the denominator but not the
numerator in calculating governance rights.
Bill Callison, Joan Heminway, Warren Kean and Lisa Jacobs for leads on various
cases and the Louisiana decision