Deceased Member’s
Right of Redemption Subordinated to LLC’s Bank Obligations
A recent decision from
Louisiana councels that a member’s rights to distributions from an LLC, in this
instance a liquidating distribution upon death, may be subordinated to the
right of the LLC’s lender. Succession of Dinesh
Shaw, M. D. v. Alexandria Investment Group, LLC, 2017-1026, __ So.3d __,
2018 WL 4000485 (La. Ct. App. 3rd Aug. 22, 2018).
Shaw was a member of Alexandria
Investment Group, L.L.C. (“AIG”). AIG’s operating agreement provided, inter alia, that upon a member’s death,
they would receive the member’s percentage interest in the appraised fair
market value of the LLCs assets. Shaw passed away in May, 2016, and the
representative of his estate was appointed later that month. That
representative, Munsterman, advised AIG of Shaw’s death and requested that the
payout begin. When the LLC asserted that it was not obligated to affect a redemption,
but merely had the right to do so, Munsterman brought suit against the LLC seeking
Shaw’s portion of the value of its assets, an amount exceeding $1.3 million. In
turn, Red River Bank (“RRB”), AIG’s primary creditor, intervened in that
action, asserting it had a first priority security interest in substantially
all of AIG’s assets and that Shaw had assigned to it all claims he might have
against AIG. That assignment provided:
Guarantor
hereby assigns to lenders all claims which it may have or acquire against
Borrower or any assignee or trustee of Borrower in bankruptcy; provided that,
such assignment shall be effective only for the purpose of assuring the Lender
full payment of Borrower’s indebtedness guaranteed under this Guaranty.
Finding that the claim of Shaw’s
estate would have to await satisfaction of AIG’s debt to RRB, it was found
that:
We find most
compelling the language which found under the provision “Guarantor’s receipt of payment,”
wherein the Guarantor (Dr. Shaw) agreed to refrain from attempting to collect
or enforce his own collection and reimbursement rights against AIG “until such
time as all of [AIG’s] indebtedness that then remains is fully paid and
satisfied.” We find the facts of his case fall under this provision. The
Succession is attempting to collect from AIG the [death payment] of Dr. Shaw’s
Ownership Interest prior to AIG’s indebtedness being fully satisfied. This
action is truly prohibited under the terms of the Commercial Guaranty, to which
Dr. Shaw agreed. As such, we find the Succession does not have a right of
action to recover at this time, based on the prematurity of the claim.
This fact pattern, not
atypical, sets up a curious conflict. The LLC is obligated, within so many days
of the member’s death, to begin making a redemption payment, and the member’s
estate is not able to enforce that right. What then is the impact upon the estates
right to a liquidating distribution? Is it merely suspended until such time as
the bank covenants have been satisfied and, by contract, the LLC is permitted
to make the distribution, or rather is it lost, and the estate, absent a
separate negotiated agreement, is forever to be a transferee of the decedent?
If there is only a suspension of the right, is the valuation still determined
by the decedent’s date of death, or should the redemption price be reassessed
as of the date on which the redemption payment may be made.
It is also worth considering
what would be the outcome if the decedent had not assigned all of his rights against
the LLC to the bank and there was only either a bilateral guarantee of the bank
debt between the bank and each member? In addition, what would be the effect of
only a loan covenant between the LLC borrower and the bank to the effect no
distributions would be made until the loan was satisfied?
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