Tuesday, November 6, 2018

Exercise of Voting Rights After Death

Exercise of Voting Rights After Death

       The recent decision from Louisiana is focused upon the obligation to make distributions to an assignee, in this case an estate, and the question of whether the surviving member’s failure to make distributions was dischargeable in bankruptcy. There is, however, an interesting side question with respect to voting rights. Free v. Winborne, Civ. Act. No. 17-1606, 2018 WL 4265254 (W.D. LA. Sept. 6, 2018).
      Samuel Free and James Winborne were each 50% owners in two real estate related businesses. Windborne passed away, and the plaintiff in this action, Leasa Winborne, was appointed to administer his estate. She would eventually bring suit against Free alleging he was converting assets belonging to the LLCs and withholding her rights to 50% of the net proceeds.
      As recited by the court, basing its analysis upon the work of the underlying Bankruptcy Court, “The operating agreements also provide that upon the member’s death, that member’s successor shall become an asset in the of the deceased member’s interests in the companies.” 2018 WL 4265254, *2. Those same operating agreements went on to provide that “an assignee has no management rights and the member for whom the assignee acquired its interest retains their voting rights until such time as the assignee is admitted as a Member.” Id. In this instance, the Leasa Windborne, the assignee, was never admitted as a substitute member. It was provided in the operating agreements that the LLCs would dissolve with the consent of a Majority in Interests of the Members.” Id. *3.

      Free asserted that he had voted to dissolve both of the LLCs in his capacity as the sole remaining member, thereby giving effectively unanimous consent to that transaction. This argument was set aside on the basis that:
However, the Bankruptcy Court determined that Free did not account for Mr. Winborne’s remaining voting rights, noting that per the terms of the operating agreements Free did not have a Majority in Interest because his share was only 50%. Id. at *3.
      And there the problem arises. Any action requiring a majority vote of the members would, necessarily, have to include the deceased Mr. Winborne. Alternatively, Free would need to admit Winorne’s widow, Leasa, as a member. Absent one of those actions, it would seem that the LLC could not take any action. It is somewhat difficult to accept that that was their intent in drafting the operating agreement. Still, it was part of the holding in this decision.
      Also featured in the opinion is a most curious reading of the provision addressing the “Events of Dissolution” of this LLC. As recited by the court, it read:
The Company shall be dissolved upon the occurrence of any one of the following events: (a) expiration of the Company’s term; (b) entry of an order for relief with respect to the Company under Chapter 7 of the Bankruptcy Code; (c) entry of the judgment of dissolution of the Company pursuant to La Rev Stat Ann section 12:1335; and (d) consent to dissolve the company by a Majority in Interest of the Members.
      The Bankruptcy Court had found that, even in the context of a consent to dissolve given by a Majority in Interest of the Members, that alone would not be effective absent entry of a decree of dissolution pursuant to La. Rev. Stat. Ann. section 12:1335. This interpretation is most curious in that the lead-in provision of the clause referred to “any one of the following events.” How the “and” between subsections (c) and (d) could be read as requiring both elements is, a curious question.

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