Monday, August 17, 2020

A “Permitted Transferee” Is Not By That Reason A Member

A “Permitted Transferee” Is Not By That Reason A Member

      In a recent decision interpreting the Illinois LLC Act, the successor to one of the initial members alleged it was a successor member in the LLC. Interpreting this operating agreement, it was held that the assignee to whom the member had transferred his interest in the initial LLC was a mere assignee and did not succeed to status as a member. Grand-Waukegan, LLC v. GMAK Investments, LLC, 2020 Il. App (2d) 190432-U, 2020 WL 1922408 (Il. App. April 20, 2020).

      George X. Machris (“Machris”) was an initial member in Grand-Waukegan LLC (the “Company”), holding a 50% membership therein. The balance of the interest in the Company were held equally by John, Michael and Paul Svigos (the “Brothers”). In anticipation of his death, Machris transferred his interest in the Company to a new LLC, GMAK Investments, LLC. At issue in this appeal was a determination by the trial court that GMAK held only an economic interest in the Company and was not a member.

        Particularly relevant to this discussion was a provision of the operating agreement that defined a “permitted transferee” as “a Member’s spouse, his or her parent(s) or child(ren), grandchild(ren), great-grandchild(ren), or their spouses, his or her sibling(s), or a trust established for their benefit or to a self-declaration of trust established for the benefit of the Member, or any entity of which the Member and one or more Permitted Transferees owns the entire present interest.” Also relevant is a provision to the effect that while no member has the right to transfer any portion of his interest in the LLC without the vote of the other members, “[a] any Member may, without the consent of the other Members, transfer part or all of his, her[,] or its Interest to a Permitted Transferee.” After Machris died, a dispute arose between his widow, Vivian, and the Brothers, summarized by the court as:

Vivian claimed that GMAK, a “permitted transferee” under [the Company's] operating agreement, was a member of [the Company] with full rights to participate in and manage the company’s affairs. Vivian demanded, as a member of Grand-Waukegan, access to the company’s books and records. The [Brothers] disagreed, asserting that, while GMAK held a distributional interest, did not acquire membership rights. 2020 WL 1922408, *2.
      The trial court would hold, the Court of Appeals would affirm, that the “operating agreement’s plain and unambiguous language permitting a member to transfer, without approval, an ownership interest to a permitted transferee does not include assignment of membership status.” Id, *4. Parsing the language of the subject operating agreement, the court focused upon a number of points including the distinction between “membership rights” as contrasted with an “interest,” and as well the definition of an “interest Holder,” which may include and “unadmitted Assignee of a member.” Id. Giving effect to the status of a “permitted transferee” was section VI of the operating agreement, which provides:

Except as otherwise expressly provided in the Agreement, no Member may transfer all or any portion of his, her[,] or its Interest without the affirmative vote of the Members holding at least a sixty six (66%) percent Interest. Any transfer or attempted transfer by any Member in violation of this Section 6 shall be null and void and of no effect whatever. Any Member may, without the consent of the other Members, transfer, part or all of his, her or its Interest to a permitted transferee. Id., *5.
      One of the judges on the panel issued a dissenting opinion.

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