An Unsettling Decision from Louisiana on Inspection of Books and Records

An Unsettling Decision from Louisiana on Inspection of Books and Records

      A recent decision from the Louisiana Supreme Court, in a perhaps troubling decision, held that the executor of the estate of a deceased member of an LLC has limited rights to inspect the LLC’'s books and records. Succession of McCalmont, No. 2019-C-0359, 2019 WL 2181408 (La. May 20, 2018).

      In the decision of the Louisiana Court of Appeals, it assessed a pair of operating agreements and the LLC Act to determine whether the executor of the estate of an individual member in several LLCs could inspect the LLC’s books and records. Applying that law, the Court of Appeals held that the executor did not have a right to inspect the books and records even as it acknowledged that this could place the executor and any other successor in a Catch-22 situation, namely an entitlement to receive distributions when and as made even as there are no information rights with respect to what those distributions should be. As to that point, the Court of Appeals noted:

We further note that the law as written allows for the creation of situations whereby an assignee of a deceased member's rights, while due distributions, may never be able to see company records to ensure he is actually receiving those distributions in full, because remaining members can simply withhold records that would show what, if anything, may be owed. However, the Limited Liability Companies Act and the limited jurisprudence dealing with the transfer issue before us clearly limit what Jay, as an assignee, is entitled to. While Jay and the estate may be entitled to distributions from the LLCs, they are not entitled to the records which they seek.

Succession of McCalmont, 2018 WL 6521176, *8 (La. App., Cir. 3, Dec. 12, 2018).

      The Louisiana Supreme Court would in part reverse, holding that the executor has the right “to inspect the records of the limited liability companies in which Ms. McCalmont had an interest in so far as those records arose prior to the date of her death.”

       One justice, concurring, suggested that the executor should have the right to inspect all books and records of the LLC, whether arising before or after the date of death.

      For myself, this decision is troubling. Notwithstanding the circumstance suffered by the executor as identified by the Court of Appeals, that is the natural consequence of treating the estate as the assignee of the decedent. It is just as much a stranger to the LLC as is any other third-party. If the legislature believed that “death is a sufficiently high transaction cost to preclude abuse” such that inspection of books and records by an estate should be permitted, it could have easily written that in the statute. It did not. If the members of the LLC thought that the estate of a deceased member should be entitled to inspect books and records, that could easily have been written into the operating agreement. In this instance, that was not done. To afford the executor of a member’s estate the right to inspect the LLC’s books and records as they existed prior to the date of death is equivalent to saying that an assignee of a membership interest has the right to inspect the books and records for the period before the assignment. That is, however, antithetical to what has always been the law of unincorporated business organizations. Some LLC Acts, an example being that of Massachusetts (see M.G.L.A. 1526 C § 42), provide that the estate of a member has the rights of a member. Louisiana could have adopted a statute to that effect. It did not. It seems inappropriate for the court to be creating rights that were at least implicitly rejected in the drafting of the controlling statute.