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. 

Death, Dissolution and Dissociation: Louisiana Court Considers the Effect of Seriatim Deaths

Death, Dissolution and Dissociation: Louisiana Court Considers the Effect of Seriatim Deaths

      In a recent decision from the Louisiana Court of Appeals considered the effect of the seriatim deaths of several members of an LLC and, ultimately, whether an action for judicial dissolution initiated by a member who subsequently passed away could continue. In this instance, the court found that the action for judicial dissolution of the LLC could continue.  Schauf v Schauf, No. 51, 919-CA, __ So.3d __, 2018 WL 1937068 (La. App. 2 Cir. April 25, 2018).

      Angela Schauf organized the Schauf Family LLC in 2001, keeping 50% of the ownership for herself and distributing to each of her four children a 12.5% interest. Those four children were Peter, Paul, Mary and Kathryn. Angela and all of the children executed an operating agreement; the LLC’s only asset was farmland that was leased out. Angela passed away, and her interest in the LLC was divided amongst the four children, resulting in each of them becoming a 25% member. Then, each of Peter and Kathryn passed away, leaving their interests in the LLC to their respective spouses, Jo Ann and Michael.

      Thereafter, there arose disagreements with respect to the LLC and each of Jo Ann (assignee of Peter) and Michael (assignee of Kathryn) as well as Mary, an original member, sought to dissolve the LLC, sell its assets and distribute the proceeds. Paul objected to any dissolution, and as well rejected the proposal that he buy out the other members. Nonetheless, everyone except Paul did vote to dissolve the LLC and appoint Jo Ann as its liquidator.

      Paul filed suit, asking for a ruling that the appointment of the liquidator and vote to dissolve the LLC was null and void. Then, Mary passed away, and a motion was filed to substitute Jo Ann, Mary’s executrix, in the lawsuit. In turn, the trial court granted Paul’s application for summary judgment, in which there was declared void the vote to liquidate and the appointment of Jo Ann as the LLC’s liquidator. Conversely, the defendant’s motion for summary judgment was denied on the basis that they had no authority to dissolve the LLC and liquidate its assets. The defendants filed this appeal.

      The court’s opinion begins with a review of the status of the estate of a deceased member under the Louisiana LLC Act. Specifically, the estate does not become a member (absent a contrary provision in either the articles or operating agreement).

“Thus, an LLC’s articles of organization or a written operating agreement could, but have not in this case, provide that a person who inherits a decedent member’s interest in the LLC would become a member of the LLC or would have certain rights that are provided only to members.”

      From there the court offered some observations as to the status of a decedent member’s estate vis-a-vie the LLC, namely:

The rule treating a decedent member’s legal representative as an assignee of the decedent’s interest may be problematic. As an assignee of the decedent member’s interest, the decedent’s legal representative is entitled only to receive distributions from the LLC as authorized by the LLC’s operating agreement or by the members, to share in the LLC’s profits and losses, and to receive allocations of the LLC’s items of income, gain, loss, deduction, and credit. A decedent member’s legal representative may not become a member of the LLC or exercise any of the rights or powers of a member unless the LLC’s articles of organization or a written operating agreement provides otherwise or the legal representative is admitted as a member of the LLC. Thus, the legal representative of a decedent member may not participate in the management of the LLC, vote on the LLC’s affairs, or inspect the LLC’s records unless the LLC’s articles of organization or an operating agreement specifically accords such management rights to the decedent’s legal representative or the legal representative is admitted as a member of the LLC. Without the right to vote or inspect records, a decedent member’s legal representative will have little ability to protect the interests of the decedent’s estate or heirs with respect to the decedent’s interest in the LLC. Id at *6-7.

      Still, the court noted that an action for judicial dissolution may be brought by any member on the grounds that it “is not reasonably practicable to carry on the business of the LLC in conformity with its articles of organization and operating agreement.” La. R. S. 12:1335. The court went on to find that Mary had been a member of the LLC at the time the petition for judicial dissolution was filed, that “[h]er death did not terminate the dissolution process once it had been initiated.” and that JoAnn, as Mary’s executrix, could continue the dissolution action. Id., *8.

      Almost in passing, the court rejected the suggestion that, consequent to the articles of organization providing that the LLC would dissolve after 25 years, it could not be dissolved prior to that time.

      If this decision is restricted to its facts, namely an action for judicial dissolution, it is an entirely reasonable outcome. At the time the action for judicial dissolution was filed, three of the four persons having a derivative economic interest in the LLC’s assets no longer wish to be in business together. Likewise, one half of the members did not want to be in business with the other half. It would be dangerous, however, to extend this decision beyond the context of an action for judicial dissolution. If, in contrast, the suit were to have involved a derivative action or a request to inspect documents by a member who then passes away, different policy concerns, they being focused upon the LLC’s internal management, would arise.

The Executrix of a Member Is Not An Member

The Executrix of a Member Is Not An Member

      In a decision earlier this year from Connecticut, there was examined the status of the executrix of a member vis-a-vis the LLC, a question considered in the context of whether the executrix may or may not seek the judicial dissolution of the LLC. In this instance, it was found there was not standing to bring that action. Faienza v. T-N-B Marble-N-Granite, LLC, HHDCV176082028S, 66 Conn. L. Rptr. 213, 2018 WL 1882686 (Conn. Sup. Ct. March 26, 2018).

       It was explained that under Connecticut’s prior LLC Act, upon the death of a member, most of the member’s rights, including the right to move for dissolution, passed to the member’s legal successor, the court citing in support thereof Warren v. Cuseo Family, LLC, 138 A.3d 1099 (Conn. App. 2016). However, effective July 1, 2017, Connecticut adopted the Revised Uniform LLC Act under which, absent a written operating agreement providing to the contrary, the law “strips the legal successor of some of those membership rights, giving the successor the status of a ‘transferee’ rather than a member.”, citing C. G. S. § 34-259(c).

      Finding that the right to bring an action for dissolution of the LLC is restricted to a member, and as the plaintiff executrix was a transferee, rather than a member, it was held that there was no standing to bring the action for dissolution.