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 Respect to
Assigned Interests


      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, Achaian and 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, LLC v. 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.

This 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 member.

      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.

So there 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 assigned interest.

      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.  See Tenn. 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.

See NC 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:

This 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.


Thanks to Bill Callison, Joan Heminway, Warren Kean and Lisa Jacobs for leads on various cases and the Louisiana decision           

No comments:

Post a Comment