Deceased Member’s Right of Redemption Subordinated to LLC’s Bank Obligations

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. 3^rd 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?