Tuesday, June 25, 2019

The Mississippi LLC Act and the Rights of a Deceased Member’s Estate

The Mississippi LLC Act and the Rights of a Deceased Member’s Estate

      In a decision rendered earlier this month, the Mississippi Court of Appeals considered and applied a provision of the Mississippi LLC Act that provides, inter alia, that the estate of the deceased member may, with respect to the LLC, continue to exercise the decedent’s right to participate in the LLC’s management. As applied, those continuing rights have the effect of forcing the LLC’s property into foreclosure and, it is anticipated, the LLC’s members will have to perform on certain personal guarantees of that debt. Coast Plaza LLC v. RCH Capital LLC, No. 2017-CA-01036-COA, 2019 WL 2428751 (Miss. Ct. App. June 11, 2019).
      Coast Plaza LLC, organized in Mississippi, had as members Michael J. Thompson and Milton L. Gagnon. The LLC’s only asset was a strip mall. It served as security for a promissory note that was in turn personally guaranteed by each of Thompson and Gagnon. RCH, at the times here relevant, was the holder of the note. Gagnon died in mid-2016.  Later that year, RCH issued a notice of default for undefined failures to perform under the promissory note.

      There then followed a number of email exchanges with respect to a possible resolution of foreclosure by the voluntary surrender of the property which, if accomplished, would as well result in no deficiency judgment to which the guarantees would be subject. Those efforts did not, however, go smoothly for a variety of reasons including questions as to title and whether the proposed settlement had been approved by the members of Coast Plaza. At this juncture, the somewhat atypical Mississippi LLC Act came to bear; the LLC itself had no separate operating agreement. First, the Act requires the approval of at least a majority of the members for any sale or other disposition of the assets that “would leave the [LLC] without a significant continuing business activity.” Miss. Code Ann. §§ 79-29-233(a),(c); 2019 WL 2428751, *6, ¶ 21. In addition, the Mississippi LLC Act provides, inter alia, that after the death of individual member, the personal representative of the estate “may exercise all rights for the purpose of settling the estate, including the governance rights that were held by such member at the time of the member’s death and any other power under an operating agreement of an assignee to become a member. Miss. Code Ann. § 79-29-709(2); 2019 WL 2428751, *6, ¶ 22. Most states do not afford the estate of a deceased member the right to exercise management rights in the LLC.
      RCH eventually revoked the offer to settle. Coast Plaza sued to enforce the alleged settlement agreement. After the chancery (trial) court determined that there had been no settlement agreement reached between the parties, this appeal followed.
      The Court of Appeals was able to dispose of the argument that there existed an agreement to settle the dispute by surrendering the property on the basis that there existed no binding agreement, on behalf of Coast Plaza LLC, to enter into such agreement. Rather:
Pursuant to section 79-29-233(c), the LLC needed the approval of both Thompson and the Gagnon Estate to agree to dispose of its sole asset via a deed in lieu of foreclosure to RCH. Nothing in the record shows that the Gagnon Estate voted to accept RCH’s offer, consented in writing to accept RCH’s offer, or timely authorized Thompson to vote as its proxy. Rather, the record reflects that the LLC lacked the necessary authority to accept RCH’s offer on November 30, 2016. Accordingly, the LLC could not validly accept RCH’s offer, and there was no agreement for the Chancellor to enforce.
2019 WL 2428751,*8, ¶ 27.
      As additional grounds, it was noted that consequent to the timeline for resolution of the Gagnon Estate, the LLC would not have been in a position to deliver the deed in lieu of foreclosure for several years. Id., ¶ 28. There being no contract that could be enforced, claims for violation of the implied covenant of good faith and fair dealing were likewise set aside. Id., ¶ 29. 

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