Assignees and Rights to Inspect Books and Records

Assignees and Rights to Inspect Books and Records

      In a recent column from his blog New York Business Divorce, Peter Mahler reviewed a trial court decision in which a Minnesota court afforded the assignees of certain interest in an LLC the right to inspect the LLC’s books and records. That case, otherwise unreported, is Lotton v Savich Herfords, LLC. Professor Dan Kleinberger, a mutual friend of Peter Mahler and I, served as an expert witness in this case arguing that, at least upon the facts there presented, the assignees should be afforded the right to inspect books and records so as to protect their rights, as assignees, to distributions from the venture. Peter’s review of this issue is titled Can the Bare Naked Assignee Demand Access to LLC Records. HERE IS A LINK to that blog posting.

From my perspective, the holding in that case was wrong.

      Partnership law, going back to the UPA (1914), has embodied the principle of In Delectus Personae, often rendered as “pick your partner.” To that end, while the economic rights in a partnership are freely transferable, the right to participate in the partnership's management is restricted to those persons who have been admitted as partners. See generally Rutledge, In Delectus Personae and Proxies, 14 J. Passthrough Entities 43 (July/Aug. 2011); HERE IS A LINK to that article. This rule was carried forward into limited partnership law, the RUPA (1997) and every LLC Act that has been adopted in the country. That an assignee is not afforded the right to inspect books and records is the natural consequence of the rule that they do not participate in the management of the venture. That this is the rule, and that this rule may at times impose burdens upon assignees, is recognizing by the fact that certain states, via statute, have afforded assignees the right to inspect books and records. It cannot be said that denying assignees document inspection rights is an oversight or unintended consequence of the law.

      In the Lotton decision, the judge wrote:

In cases where the member who transferred the financial rights remains alive and retains governance rights, that member can act to protect the rights of his assignees. Where, as here, the rights were transferred upon the death of a member, there is no one left with governance rights to protect the interests of the assignees and there must be some mechanism for the assignees to protect their financial interest.

Further, the court recited the axiom of equity, namely that where there was a right, there must be a duty whose breach would give rise to a remedy.

      What, in my view, the court failed to acknowledge is that not every perceived imposition involves a legally cognizable right. There is a venerable principle of equity law, Damnun Absque Injuria, that not every damage gives rise to a legally cognizable injury, is here applicable. As described in the United States Supreme Court in Alabama Power Co. v. Ickes, 302 U.S. 464, 479 (1938).

“if the act complained of does not violate any of his legal rights, it is obvious, that he has no cause to complain…” Want to write and want of remedy are justly said to be reciprocal.… The converse is equally true, that where, although there is damage, there is no violation of the right no action can be maintained.

Setting aside those few legislatures that, in particular statutes, have afforded an assignee the right to inspect books and records, which rights should pursuant to those laws be enforced, the objections of assignees that they are denied the right to inspect books and records falls within Damnun Absque Injuria. While a mere assignee may believe they are being damaged, none of their rights have been negatively impacted.  The organizational statutes governing the partnership/limited partnership/LLC provide that the assignee has no right to inspect books and records. The courts should not view themselves as in a position to, under the guise of equity, modify this rule.  Yes, it is entirely true that this leaves an assignee, previously characterized by Professor Kleinburger as being a “bare naked assignee,” with few if any remedies, absent the venture’s dissolution, to enforce the rights to receive the distributions that would have otherwise gone to the assignor. The fault of that situation arising lies with the assignor for not putting in place mechanisms to protect the interests of his or her assignees. Neither the venture nor the other participants therein should bear the burden of that lack of forethought.