Monday, May 5, 2025

Death of a Member and the Status of the Heir as an Assignee

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).


The Ky LLC Act and Foreclosure of a Charging Order

In Stich v. Mattingly, the court was called upon to determine whether a trial court’s foreclosure sale of the charged interests in a SMLLC was proper; specifically, was for foreclosure sale of the entire interest including the right to manage the LLC, or was it restricted to the distributional rights that were liened by the charging order prior to the foreclosure sale.  The court cited this treatise for the application and effect of a charging order prior to foreclosure:


The charging order itself only placed a lien on Stich's interest in Haunt Brothers up to the amount of the judgment. It did not operate as an actual assignment. While the charging order was in effect, Stich still had the right to participate in the company as a member subject only to the limitation that his distributions were to go to the receiver to satisfy Mattingly's judgment against him. Assuming distributions had been made sufficient to satisfy the judgment, the charging order would have been lifted giving Stich the right to receive the distributions going forward. Implications of foreclosure for the LLC, 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:19. In this instance, Stich would have been freed of the effect of the charging order and distributions thereafter made with respect to his Haunt Brothers' interest would have been paid to him as a member in the normal course. Id. at § 10.17.


Turning to the effect of a foreclosure, Stich, the judgment debtor, argued that Mattingly could not by virtue of a foreclosure come into the management rights of the LLC, a proposition rejected by the Court of Appeals:


Stich asserts that the foreclosure order entered by the circuit court was in error   because it ordered his entire interest in Haunt Brother to be sold instead of limiting the foreclosable interest to the right to receive distributions up to the amount of the judgment. This interpretation ignores the fact that Mattingly already had a right to receive the distributions up to the amount of the judgment under the charging order pursuant to KRS 275.260(2). Adopting Stich's interpretation would render KRS 275.260(4) essentially meaningless and hollow, a result which we cannot countenance. Lewis v. Jackson Energy Co-op. Corp., 189 S.W.3d 87, 91 (Ky. 2005) (“Statutes should be construed in such a way that they do not become ineffectual or meaningless.”).


Having examined all sections of KRS 275.260 within the greater context of the Kentucky Limited Liability Company Act we are confident that "the limited liability company interest subject to the charging order" referred to in KRS 275.260(4) is the judgment debtor's entire transferable interest in the subject company. Thus, the circuit court did not err when it refused to limit the foreclosure to Stich's rights to distribution up to the amount of the judgment.


The error the court here made is that it assumed that the judgment-creditor would be the successful bidder that the foreclosure sale - in which instance it is in part true that the successful bid as to the foreclosed interest would not yield anything more to the judgment-creditor.  However, change the facts and assume that a third-party prevails - the amount paid at the foreclosure sale goes to the judgment-creditor and satisfies to the extent of those proceeds (and here assuming no third-party with superior claim thereon) the judgment.  


Curiously the court went on to properly state the effect of the foreclosure sale of a charge against all of the interests in a SMLLC, observing (and again citing this treatise):


The purchaser of the interest at the foreclosure sale would then receive "the rights of an assignee." Id. When the sole member of the limited liability company's interest is auctioned off via foreclosure, the sole member ceases to be a member. KRS 275.280(1)(c)3.; Implications of foreclosure for the LLC, 1 Ribstein and Keatinge on Ltd. Liab. Cos. § 10:19. This in turn would trigger dissolution pursuant to KRS 275.285(4).


Which explains away the court’s rational for treating the foreclosure sale as extending to the entire interest in the LLC rather than limiting it to the right to receive distributions - in fact even in that limited circumstance the judgment-creditor, now holding all of the economic interests in the LLC that is to dissolve, is able to access the proceeds of its assets (i.e., capital lock-in ceases) and can benefit therefrom, a position notably different that is that of the mere holder of a charging order.  I here must note that on this point the court made a common but significant error, namely assuming the purpose of the charging order is to protect the “pick-you-partner” principle of partnership law as carried forward into LLC law.  While this error is quite common it is still an error. The purpose of the charging order is to protect the asset partitioning effect of the LLC, and not pick your partner {member}; I reviewed this point in Thomas E. Rutledge, I May Be Lost But I’m Making Great Time: The Failure of Olmstead to Correctly Recognize the Sine Qua Non of the Charging Order, 13 J. Passthrough Entities 65 (Nov./Dec., 2010).


True, a third-party (even a lieutenant of the judgment-debtor) might prevail at the foreclosure sale, in which instance the judgment-creditor would not have the ability to unlock the value of the LLC’s assets, but presumably the order directing the sale could (and should) provide partitions against abusive sales, and if the judgment-creditor credit bids the full amount of the judgement, and a third-party bids more, all else being equal the judgment-creditor is made whole and cannot complain that she/he did not enjoy a windfall. 


Stich v. Mattingly, No. 2023-CA-0032-MR, 2024 WL 2788210, 2024 Ky. App. LEXIS 42        (Ky.App. May 31, 2024).

KRS 275.150(3) and Member Personal Liability

The Kentucky LLC Act provides that members enjoy “limited liability” from the debts and obligations of the LLC.  The Act goes on to provide, consistent with the general rules of agency, that a member may be personally liable for claim arising not solely from acting on the LLC’s behalf (KRS 275.150(3); “Subsection (1) of this section shall not affect the liability of a member, manager, employee, or agent of a limited liability company for his or her own negligence, wrongful acts, or misconduct.”). Which leaves open the determination of what are and are not “his or her own negligence, wrongful acts, or misconduct”?

This provision was squarely addressed in Elk Horn Coal Co., LLC v. Deane Mining, LLC, wherein the plaintiff sought to hold certain agents of the defendant personally liable for certain trespasses to call that was improperly mined.  At the trial a directed verdict was entered in favor of each, a determination the plaintiff sought to reverse upon appeal.  Finding that the individuals had reason (the court did not set a standard such as that they had a “good faith basis”) to believe their actions were proper.  

In view of the record below, we cannot conclude that the circuit court erroneously granted a directed verdict dismissing Jensen, Suave, and Taylor. It must be remembered that the "centerpiece" of a limited liability corporation (sic) is the feature of actually limiting liability of its members and managers, as well as employees and agents. Racing Inv. Fund 2000 v. Clay Ward Agency, 320 S.W.3d 654, 656 (Ky. 2010). In this case, during the First Period, it would be reasonable to assume that upon the acceptance of royalty payments by Elk Horn, the lease was still in effect. And, in the Second Period, mining continued yet Elk Horn took no legal action to restrain or enjoin the mining until Deane Mining ceased operations on the property. Simply put, the evidence was insufficient to demonstrate that Jensen, Suave, or Taylor individually breached a duty owed to Elk Horn or were otherwise personally liable for Deane Mining's trespass to mine the coal on Elk Horn's property.


Elk Horn Coal Co., LLC v. Deane Mining, LLC, No. 2023-CA-0412-MR, 2024 WL 4714575, 2024 Ky. App. Unpub. LEXIS 626 (Ky. App. Nov. 8, 2024).

Kentucky Business Organizations "Created" by a Secretary of State Filing

 I am happy to report that the Kentucky Law Journal Online last Friday released my article Kentucky Business Organizations “Created” by a Filing with the Secretary of State.

As set forth in the Corporate Transparency Act, whether or not a company organized in the U.S. and for purposes of this article in Kentucky is subject to the CTA’s beneficial ownership reporting requirements is dependent upon whether that company (business corporation, nonprofit, corporation, limited liability, company, partnership, etc.) was “created” by a filing with the Kentucky Secretary of State. This article reviews the entire spectrum of Kentucky’s business organization statutes, including rarely employed forms such as the statutory trust, the limited cooperative association, and the unincorporated nonprofit association, both as to how exist currently and as they have existed over time, to assess whether there was a “creation” by a Secretary of State filing.

While the full implications thereof are a discussion for another day, the recently promulgated interim final rule exempts all domestic entities from the CTA‘s reporting obligations. Still the CTA statute has not been revised, and the statutory mandate, along with the statutory penalties for noncompliance, have not been amended or repealed. For at least that reason the analysis in this piece remains pertinent.

Thursday, April 24, 2025

Beware Greeks Bearing Greeks

Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.

      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources.  The story would not find, however, its full development until Virgil’s Aeneid.

      Some modern historians have attempted to explain the story as an analogy, suggesting that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – was the reason for the fall of Troy’s walls.  I, for one, would rather retain the literal interpretation as it affords more credit to Odysseus.  FYI, a new movie on Odysseus is in the works for release in 2026, and a new translation of the Odyssey, it by Daniel Memnelsohn, has been recently released.

      Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he never entered the city.

            Some might consider the Trojan War to be ancient history.  It’s all matter of perspective.  At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years. 

Wednesday, April 23, 2025

Getting Started Again

Tomorrow is the anniversary of the last posting I made to this blog, it in 2021. Is my intention, starting tomorrow, to reinvigorate this effort.

Repeating what many of you already know, in early 2021 I was progressively feeling worse and worse, often find myself exhausted and short of breath. Finally, and at the insistence of Laura D’Angelo, I visited my physician. He ran a few test and told me I needed to go to the emergency room. I asked if I could go the next day, and he responded “If I had your numbers I would not be able to stand up.” So I did what you would expect me to do, namely go home to make sure my huskies were taken care of, and then I went to the emergency room. Then, for the first time since I was in eighth grade, I was admitted to a hospital. My initial diagnosis was severe anemia.

I was released the next day after significant blood and saline transfusions. There then started a week of tests, culminating on a Thursday afternoon bone marrow biopsy.  Friday morning my phone began blowing up with calls from the hospital telling me to get over there immediately to visit with the oncology team; it turns out I had fairly advanced AML (leukemia).

I was that afternoon admitted to the oncology unit of Norton Women’s and Children’s Hospital and began chemotherapy. I would be remiss to not report that the in-patient and out-patient care I received from the doctors and nurses was excellent. Then, around Thanksgiving of 2021, at the Dana-Farber Cancer Institute in Boston, after a week of really intensive chemotherapy intended to create a clean slate, I received a bone marrow stem cell transplant to “cure“ the leukemia. That worked, but unfortunately I came down with debilitating side effects to the transplant referred to as “graft/host disease“; essentially, I developed an allergy to the transplant. Since then I have been in treatment for the graft/host disease.

Most importantly to my already questionable mental stability, my Siberian Huskies Achilles and Hector are back with me, and although I am still not back to where I was, it seemed that this anniversary was the proper time to restart my blog. I hope you from time to time find it helpful or at least entertaining.


P.S. - Achilles and Hector are not allowed to read the Iliad, but then they can’t read Greek anyway.

Saturday, April 24, 2021

Beware Greeks Bearing Gifts

 

Beware Greeks Bearing Gifts

      Today marks the anniversary of the traditional Fall of Troy in 1184 B.C., thereby bringing to its culmination the Trojan War.

      The Fall of Troy is not recounted in Homer’s Iliad, the iconic epic, it rather covering only a period of ten days to two weeks within the supposed ten-year span of the war.  The Fall of Troy through the subterfuge of the Trojan Horse is briefly mentioned in the Odyssey and is referenced in several other Greek sources.  The story would not find, however, its full development until Virgil’s Aeneid.

      Some modern historians have attempted to explain the story as an analogy, suggesting that an earthquake – Poseidon, whose portfolio included horses, was as well the god of earthquakes – was the reason for the fall of Troy’s walls.  I, for one, would rather retain the literal interpretation.

      Regardless it is a great story, especially the fall of Achilles to Paris after the former killed Hector.  Speaking of which, the movie Troy misstated the story, likely because they wanted to keep Brad Pitt on the screen.  Achilles was killed before the fall of Troy; he never entered the city.

            Some might consider the Trojan War to be ancient history.  It’s all matter of perspective.  At the time of the Fall of Troy the Egyptian civilization had been flourishing already for 2000 years.