In a recent (December, 2024) decision from Iowa court of appeals the court was called upon to assess the rights of a widow vis-a-vis her (now deceased) husband’s LLC. Those familiar with LLC disputes will recognize the all too-common elements recited in the first paragraph of the decision, namely:
After forty-six years of marriage, Sharon Kellogg believed that the property owned by her late husband, Bruce Kellogg, was her property, “just like my property was his property." This included a membership interest Bruce owned in D & K Ranch, L.C., a limited liability company. The district court disagreed and dismissed Sharon's petition to vacate a deed conveying the company's only asset—a 100-acre farm—to one of its members after Bruce's death. The court ruled that because Sharon “was never a manager or a member and the land was sold for more than market value,’ she “has no legal right, or any legitimate grounds, to complain.”
The LLC in question was owned by the decedent Bruce (although the decision is less than express on the point it seems Bruce was a 25% member) as well several relatives and a friend; Larry Kellogg, Bruce’s brother was appointed the managing member. It was provided that the LLC would dissolve upon the death of any of the members, and further it was agreed:
That in the event of the death of one of the parties, or the desire of one of the parties to sell his interest in the subject real estate, that the remaining parties be given the first opportunity to buy the fractional interest of the party who has died or has indicated the desire to sell, at the fractional appraised value, determined as of the date of death or the date the party has given written notice to the remaining parties of his desire to sell. The value shall be determined by either the value of the subject real estate set by the Chickasaw County Assessor or by independent appraisal. Said option shall be exercised within sixty (60) days of death or notice of intent by the party desiring to sell.
Larry, overseeing the LLC’s dissolution after Bruce’s death, offered Bruce’s estate $65,000 for his interest in the LLC, an offer Sharon refused. Thereafter Larry procured a valuation of the LLC’s farm (not shared with Sharon) that set the value, depending upon the classification of certain portions thereof, at either $408,000 or $420,000. The property was then sold by the LLC, represented by Larry, to Brian Kellogg, Larry’s son and another member of the LLC for $360,000; Larry sent Sharon a check for $86,465.26, that being one-fourth of the sale proceeds. Sharon objected (we knew that was coming or this dispute would not have proceeded to a court decision) and returned the preferred check, to which Larry’s attorney responded:
Larry's attorney returned the check to Sharon through her counsel, writing “the actions of the manager, Larry Kellogg, were . . . approved by the surviving members of the Company,” although that was not required by the operating agreement. In closing, Larry's attorney stated: “I hope this brings closure to this private family matter. I know how difficult this must be for Sharon, but she was never a member of this Company and that is something each of the members agreed to.”
Sharon then brought suit against the LLC and the other members (Larry in the meantime having passed-away) seeking to set aside the conveyance of the farm and alleging Larry did not follow the terms of the operating agreement At trial, after the conclusion of Sharon’s evidence, the defendants argued:
that Sharon was neither a member of the company nor owed any fiduciary duty by Larry as its managing member. In response, Sharon argued that Larry owed a duty of loyalty to all the members, which did not end at Bruce's death but continued to her as “the holder of [Bruce's] interest until it is disposed of by either winding up or sale.” The defendants disagreed, urging that as a transferee of Bruce's membership interest, Sharon was not “entitled to vote or have any managerial interest or do anything as regards to the company. She only was entitled to [an] accounting and to the distribution of the proceeds upon winding up of the business . . . .”
And here things got a bit squirelly -
The district court denied the motion for directed verdict, reasoning the question before it was not whether Sharon “had the right to vote” or whether “the other members could ratify a sale of the property without any input from her; it's whether [Larry's] choice to sell the asset at less than fair market value constitutes a fraudulent transfer or a breach of his fiduciary duty.” The court concluded,
I mean, basically, I don't think just because Bruce died that the remaining members can simply say, sorry, Sharon, you don't have an interest anymore; we're going to get rid of the assets and we're not going to give you any interest in it; we're going to sell them for far less than market value. I don't know if that's true or not. I'm waiting to hear your evidence that this was a sale at fair market value. And if that's true, then we don't have an issue.
But then after further trial proceedings and a “battle of the appraisers” as to the property’s value, the trial court determined Sharon:
had no right to see Greder's appraisal, no right to determine the market value of the real estate, and no right to object to or veto the sale to Brian for a price that every actual member of D & K Ranch agreed to. Sharon was only entitled to Bruce's one-fourth share of the sale proceeds that Larry attempted to give her.
On appeal, the court made numerous references to the Revised Uniform Limited Liability Company Act, which Iowa has adopted, as well as the comments thereon, and Professor Dore’s treatise on the LLC law of Iowa. With respect to Sharon’s assertion she is either a substitute member or is at least afforded the rights of a member in connection with the administration of the estate containing an interest in an LLC, the court found “For these reasons, we conclude that the district court did not err in failing to recognize Sharon's member status as Bruce's personal representative under section 489.504. She was instead a transferee (referred to as an ‘assignee’ under the operating agreement) with limited rights to information from the company.” Disposing of the assertion that she was the beneficiary of fiduciary duties owed in and among the participants in the LLC:
Because we agree with the district court that Sharon did not step into Bruce's shoes as a member of the company after his death, we reject her related claim that the court “erred in holding that Larry Kellogg did not breach his fiduciary duties” of loyalty and care under section 489.409(8)(a). As Sharon recognizes, those duties are owed by a manager in a manager-managed company to the company and the other members. The statute does not extend those duties to transferees, and Sharon does not argue, or provide us with any authority, for such an extension. (citations omitted).
As to claims that the sale was a related party transaction that Larry did not have the authority to effect, the court reviewed the operating agreement’s definition of an “affiliate,” determined that the purchaser was not as to Larry an “affiliate,” and set aside that procedural attack on the transaction. As to the allegation the sale was at below fair market value, “We need not address this issue because, as explained above, we agree with the district court that Sharon, as a transferee, was not owed any of the fiduciary duties she cites on appeal.” The plaintiff sought to appeal this decision to the Iowa Supreme Court, but that request was denied on the basis that it was filed out of time.
Last, a shout out to Professor Dore whose treatise on the Iowa LLC Act was cited by the Kellogg court.
Kellogg v. Kellogg, 2024 WL 5152373, 2024 Iowa App. LEXIS 886 (Iowa App. Dec. 18, 2024).