Waiving the Few Rights of a Decedent’s Estate

Waiving the Few Rights of a Decedent’s Estate

Certain states, including New York, have a default statute that affords the estate of the deceased member certain rights (FYI, Kentucky does not). That said, a recent decision from New York applied an operating agreement that waived even those rights. Pappas v. 38-40 LLC, 2018 NY Slip op 30329(U) (Sup.Ct. NY County Feb. 22, 2018).

In this instance, Pappas had been a 25% member in an LLC controlled by Kirsch (70%). After Pappas passed away, his personal representative filed a direct and derivative complaint against Kirsch alleging that the company was being looted. Under the New York Limited Liability Act, specifically Section 608 thereof, “The member’s executor…  may exercise all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any partner under the operating agreement of an assignee to become a member.” All else being equal, the question would be whether this provision affords the executor the ability to bring a derivative action on the LLC’s behalf. That, however, would not be the focus of this case as the operating agreement modified that rule.  In this instance, a member’s death was defined as being a “Withdrawal Event” and went on to provide:

In the event of a Withdrawal Event with respect to any Member, any successor in interest to such Member (including without limitation any executor, administrator, heir, committee, guardian, or other representative or successor) shall not become entitled to any rights or interests of such Member in the Limited Liability Company other than the allocations and distributions to which such Member is entitled, unless such successor in interest is admitted as a Member in accordance with this Agreement.

In this instance, the executor was not admitted as a successor member in the LLC. Applying then the continuous ownership requirement for bringing a derivative action, the derivative claims were rejected. Further, on the basis that the alleged injuries were to the LLC and not uniquely to the decedent, the direct claims were rejected.

Peter Mahler, in his blog New York Business Divorce, provides a longer review of this decision, as well as a link to it. HERE IS A LINK to that review.