Exercise of Voting
Rights After Death
The recent decision from
Louisiana is focused upon the obligation to make distributions to an assignee,
in this case an estate, and the question of whether the surviving member’s
failure to make distributions was dischargeable in bankruptcy. There is,
however, an interesting side question with respect to voting rights. Free v. Winborne, Civ. Act. No. 17-1606,
2018 WL 4265254 (W.D. LA. Sept. 6, 2018).
Samuel Free and James Winborne
were each 50% owners in two real estate related businesses. Windborne passed
away, and the plaintiff in this action, Leasa Winborne, was appointed to
administer his estate. She would eventually bring suit against Free alleging he
was converting assets belonging to the LLCs and withholding her rights to 50%
of the net proceeds.
As recited by the court, basing
its analysis upon the work of the underlying Bankruptcy Court, “The operating
agreements also provide that upon the member’s death, that member’s successor
shall become an asset in the of the deceased member’s interests in the
companies.” 2018 WL 4265254, *2. Those same operating agreements went on to
provide that “an assignee has no management rights and the member for whom the assignee
acquired its interest retains their voting rights until such time as the assignee
is admitted as a Member.” Id. In this
instance, the Leasa Windborne, the assignee, was never admitted as a substitute
member. It was provided in the operating agreements that the LLCs would
dissolve with the consent of a Majority in Interests of the Members.” Id. *3.
Free asserted that he had voted
to dissolve both of the LLCs in his capacity as the sole remaining member,
thereby giving effectively unanimous consent to that transaction. This argument
was set aside on the basis that:
However, the
Bankruptcy Court determined that Free did not account for Mr. Winborne’s
remaining voting rights, noting that per the terms of the operating agreements Free
did not have a Majority in Interest because his share was only 50%. Id. at *3.
And there the problem arises.
Any action requiring a majority vote of the members would, necessarily, have to
include the deceased Mr. Winborne. Alternatively, Free would need to admit Winorne’s
widow, Leasa, as a member. Absent one of those actions, it would seem that the
LLC could not take any action. It is somewhat difficult to accept that that was
their intent in drafting the operating agreement. Still, it was part of the
holding in this decision.
Also featured in the opinion is
a most curious reading of the provision addressing the “Events of Dissolution”
of this LLC. As recited by the court, it read:
The Company
shall be dissolved upon the occurrence of any one of the following events: (a)
expiration of the Company’s term; (b) entry of an order for relief with respect
to the Company under Chapter 7 of the Bankruptcy Code; (c) entry of the
judgment of dissolution of the Company pursuant to La Rev Stat Ann section
12:1335; and (d) consent to dissolve the company by a Majority in Interest of
the Members.
The Bankruptcy Court had found
that, even in the context of a consent to dissolve given by a Majority in Interest
of the Members, that alone would not be effective absent entry of a decree of
dissolution pursuant to La. Rev. Stat. Ann. section 12:1335. This
interpretation is most curious in that the lead-in provision of the clause
referred to “any one of the following events.” How the “and” between
subsections (c) and (d) could be read as requiring both elements is, a curious
question.
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