Monday, December 16, 2019

Dissolution of LLC Upon a Member’s Death Waived

Dissolution of LLC Upon a Member’s Death Waived

      In his blog New York Business Divorce, Peter Mahler has reviewed a decision from New York where dissolution of an LLC was sought based upon the death of the member. This LLC’s operating agreement dictated that upon a member’s death the LLC would dissolve unless the remaining members agreed to continue the company within 180 days after that death. Here, where the members waited some 11 years, that effort was rejected. The case is Sternlicht v. Daniel Z. Rappaport Associates, L.P., 2019 NY Slip Op 08141, 2019 WL 5876099 (N.Y. App. Div. Nov. 12, 2019). The posting as to this decision is titled LLC Survives Member’s Death. Dissolution Petition Doesn't; HERE IS A LINK to Peter’s review.

      This case arises out of the efforts by certain minority members in the LLC to compel its liquidation in order that they can capture its value, they having rejected offers from the other members to redeem their interest at what they alleged to be a “steep discount, far below its value.” Initially, notwithstanding the death of the original member, it was found that his interest in the company had been transferred to a niece and a nephew, each of whom fell within the scope of a “family member” to whom interest could be transferred without the requirement of satisfaction of any other transfer limitations in the operating agreement. 

      Also, in that the death upon which the plaintiffs relied had taken place some 11 years prior, the court noted that they had not in that period of time acted as if the LLC had been dissolved. Further, upon a subsequent death, the plaintiffs and the other incumbent member purchased the interest of that now deceased member, which the court took as evidence that they saw the LLC as continuing.

      I would recommend to you Peter’s review and for a more detailed analysis. Further, I would adopt and endorse the last paragraph of his posting, it provide:

A well-designed buy-sell agreement is one that allows continuation of the business with minimal (or at least tolerable) economic disruption while allowing departing owners to liquidate their interest at a fair appraised value or pursuant to a reasonable formula. And, of course, the optimal and likely last best chance to devise a fair buy-sell agreement is at the outset of the venture, when no one knows for sure whether ultimately they’ll be a buyer or a seller.

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