LLC Dissolved When Member’s Heirs Are Not Admitted as New Members

LLC Dissolved When Member’s Heirs Are Not Admitted as New Members

      An LLC must have a member; elsewise it dissolves.  A recent decision from Iowa considered whether the children and heirs of an LLC’s sole member had been admitted as members. Finding they had not it was held that the LLC had dissolved for lack of a member. Felt v. Felt, No. 18-0710, 2019 WL 2372321 (Iowa Ct. App. June 5, 2019).

      Richard Felt organized an LLC through which to hold certain farm properties. David, one of Richard’s sons, was appointed a co-manager of the LLC at the time of its formation. Richard was, however, the sole member. Richard had two other children, Daniel and Susan. Richard’s spouse Patricia pre-deceased the transactions subject to this dispute.  Richard’s will provided that his property would be divided equally between his three children.

      Richard died on November 4, 2015. Under the Iowa LLC Act, upon the loss of its sole member, an LLC will be dissolved unless a new member is admitted within ninety days. See Iowa Code § 489.401(4). “Once the ninety days passed, if the LLC had no member it dissolved as a matter of law. See Iowa Code § 489.701.” 2019 WL 2372321, *4.

      After the ninety-day period had elapsed, Daniel and Susan filed suit challenging a number of David’s actions and the continuing existence of the LLC. The trial court found that David had been admitted as a member in the ninety day period, and it was that determination that was the subject of this appeal. “The only question before us is whether the LLC had a member in compliance with the operating agreement following Richard’s death.” Id.

      The Court of Appeals began by noting the operating agreement did not, inter alia, provide that the heirs of the LLC interests would be admitted as members. In the face of David’s assertion that he admitted himself as a member, it was noted that he had not satisfied the operating agreement’s requirement that a new member execute a joinder to the operating agreement. Rather, while David had as a manager signed a joinder to the operating agreement at the time the LLC was formed, there was no joinder as a member. Id., *5.

       It was found that a letter from Richard’s attorney to his heirs that referenced the transfer of the interest (but which was silent as to the requirements for admission into membership) did nothing to constitute any of the children as a member. Last, an insurance policy for the LLC in which the three children were identified as “members” was held insufficient to remedy “the contractual deficiency of the missing joinder agreement.” Id., *7.

      Reversing the trial court the Court, of Appeals held:

On our review, we are constrained to construe the contract according to its terms and the statutory law. We determine the intent of the parties forming the company from the language of the contract. The operating agreement only provides one way for a potential member to show agreement to become a member: the joinder agreement. We find none of the unit holders of Felt Farms LLC complied with the contractual requirements for membership by signing a joinder agreement prior to the end of the ninety-day statutory period. Therefore, the LLC dissolved as of February 3, 2016. Id. (citation omitted).

      The Court of Appeals several times named the attorney who prepared the LLC for Richard, noting a lack of experience, the use of a form operating agreement acquired from the bar association, and a lack of appreciation for the distinction between assignees and members. While it made no determination as to those deficiencies, it may be that the Court was generally cautioning attorneys that LLCs are not that simple and that attorneys “dabble” in LLCs at their peril.

     For a case applying the then Alabama springing-member provision, see L.B. Whitfield III Family LLC v. Whitfield, 150 So.3d 171 (Ala. 2014).