A recent decision from the Texas Court of Appeals required
that it parse the language of the Texas LLC Act, applying certain rules of grammar, particularly the present perfect tense. Ultimately, the court would hold that a former member may be entitled to inspect books and records. Davis v. Highland Coryell Ranch, LLC, ___ S.W.3d ___, No. 07-18-00185-CV, 2019 WL 2524080 (Tx. Ct. App. Amarillo June 18, 2019).
Applying the Texas LLC, this case addressed the question of what is “the right, if any, of the former member of a limited liability
company to business records
of the company?” Flipping to
the other side of the coin, the court described
the problem
as can a former member of an LLC “be denied access [books and records] simply because he is not a current member of the company?” There the question would
turn upon the definition of a “member,” which, as set forth at § 1.002(53)(A) of the Business Organization Code,
is “a person who is a member or has been admitted as a member in the limited liability company
under its governing documents.”
In this instance, while Davis had been a founding member of Highland Coryell
Ranch, he relinquishes
his interest
in the company in 2005. In this instance, Davis did not satisfy the requirement
of “is a member” as that is a “present verb tense, that is, a verb tense requiring
the person to be an existing member of the company.” As Davis ceased to be a member in 2005, clearly that was not applicable.
From there the court would turn its attention to that portion of the definition of “member” that references one
who “has been admitted as a member in the LLC.” The court would characterize
the distinction
as follows:
The debate here focuses upon whether the phrase “has been
admitted as a member” encompasses a person who once was but no longer is a
member. Davis says “yes,” while Highland says “no.” Again, harkening back to
high school English would lead one to categorize “has been” as the present
perfect tense of the verb “to be.” Additionally, the present perfect tense of a
verb is susceptible to use in several different situations. It could refer to a
past action that continues. For instance, the sentence “she has gone to the
store” denotes the departure of a person who remains absent. In this sense,
“has been admitted as a member” of a limited liability company could mean that
the person was admitted sometime in the past and remains a member.
Present perfect tense may also describe a past action that
simply occurred at some time or another without continuing effect. For example,
let us envision Jim, Jack, and Joe talking over a cup of coffee. Let us also
picture Jim asking Jack if Joe ever lost his car keys. Jack may answer: “Yes,
Joe has lost his car keys.” In so replying, Jack is not suggesting that Joe’s
keys remain lost, but only that he lost them in the past at some time or
another. In that sense, “has been admitted as a member” of a limited liability
company could mean that the person was admitted at some time or another in the
past without requiring that his status as a member continues.
The court would reject Highlands’s interpretation because
doing so would render superfluous the
distinct clause
of the definition of who is a member; “is a member” and “has been admitted as a member” would be coextensive, violating the rule against reading
language in
a statute to be redundant. Under this reading, while Davis is not currently a member of Highland, in that he had been admitted as a member, he would have, subject to satisfaction of
other statutory
requirements such
as a demonstration of
a proper purpose, the right to inspect books and records.
While the opinion is as well noteworthy for
footnote
references to both the Godfather, Part III and the song Don’t Let Me Be Misunderstood by
the Animals, and while the analysis may make high school English teachers
quite happy, it somewhat strains credulity
to suggest that having been admitted as a member, one may thereafter always
inspect company
books and records. Allowing a former member, one who may have been entirely redeemed by the
company or one who assigned his or her interest therein
to an assignee, to inspect books and records would, even subject to a proper purpose requirement, simply encourage voyeurism
even as the LLC is required to expend assets in responding to
a request, even one that lacks a proper purpose. Also disturbing is
dicta in this opinion that would indicate that an operating agreement may not entirely eliminate a former member’s right to inspect company books and records. Id., *4.
While the Court of Appeals encouraged the Texas Supreme Court to take up the question and provide additional guidance, it would appear that the biggest problem is with the statutory language itself. Hopefully this will be taken up with the legislature, who will clarify that, absent contrary private ordering in the operating agreement, one who is a former member will not have the right to inspect books and records. It may want to consult the Indiana LLC Act, which at § 23-18-1-15 defines a “Member” as “a person admitted to membership in a [LLC] under IC 23-18-6-1 and as to whom an event of dissociation has not occurred.”
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