Score Another Round For The Estate: First Department Upholds Right Of Deceased LLC Member's Executor To Pursue Member Rights

In recent years this blog has closely followed caselaw developments concerning the powers of estate representatives of deceased LLC members to exercise member rights under Section 608 of the LLC Law.

The tension reflected in the relatively sparse caselaw stems from two fundamental, conflicting aims embedded in the LLC Law. The first is the pick-your-partner principle which would withhold management and voting rights from transferees unless admitted as members by the remaining members, as reflected in LLC Law 603. The second is LLC Law 608 which gives estate representatives of deceased LLC members the right to "exercise all of the member's rights for the purpose of settling his or her estate or administering his or her property."

The issue has yet to reach New York's top court, the Court of Appeals. But a handful of decisions in recent years by the state's intermediate appellate courts has coalesced on the side of the estate, including a decision last month by the Manhattan-based Appellate Division, First Department, in Bodenchak v 5178 Holdings LLC. There, quoting as I just did from Section 608, the court affirmed the trial court's order granting the application of the wife/executor of a deceased minority member of an LLC, to substitute as petitioner in a dissolution proceeding commenced by her husband before his death.

The Path to Bodenchak

The path to Bodenchak, at least at the appellate level, traces back to Crabapple Corp. v Elberg, a 2017 ruling by the First Department. The case centered on a fight for control between Sibling A, who held a minority interest in the LLC, and Sibling B who, along with Sibling A, was co-executor of the estate of their deceased father who had been the majority member and sole manager of the LLC. The trial court granted Sibling B's motion to remove Sibling A as manager based on alleged breaches of fiduciary duty. Sibling A appealed, contending that he was sole managing member upon his father's death. The First Department reversed, but not on the ground contended by Sibling A. Instead, the court held that the father's "controlling interest in the LLCs passed to his estate upon his death" and the two siblings as co-executors "had the authority to act as co-managers of the LLC," citing LLC Law 608.

The next two appellate decisions, Andris v 1376 Forest Realty, LLC and Weinstein v Wallace, decided by the Appellate Division, Second Department in 2023 and 2024, respectively, were both treated on this blog here and here. As in Crabapple, the decisions employed LLC 608's explicit language conferring on estate representatives the authority to exercise "the [deceased] member's rights for the purpose of settling his or her estate." They also expanded Crabapple's scope by doing so in cases involving some of the most potent powers available to LLC members, namely, the powers to seek judicial dissolution and to appoint a managing member.

Andris involved a dispute between a decedent 50% member's executor, who petitioned for judicial dissolution, and the surviving 50% member. The Second Department affirmed the lower court's order dismissing the dissolution petition on the merits but, citing Crabapple, in reaching that result it explicitly recognized the executor's standing to exercise the deceased member's right under Section 608 to seek judicial dissolution under LLC Law 702.

Last year's Second Department ruling in Weinstein builds on Crabapple and Andris in the setting of a fight among family members for control of a realty holding LLC following the death of one of the two 50% members (brothers) who also was sole managing member. The surviving brother brought suit for a judgment declaring that upon his brother's death, he became the sole voting member and the manager of the LLC. The trial court agreed and summarily granted the requested judgment. On appeal by the co-executors of the estate of the deceased member, the Second Department reversed and granted judgment for the co-executors declaring that the surviving brother is not the sole voting member (i.e., could not alone vote to make himself the successor manager) based on the voting rights exercisable by the co-executors under LLC Law 608 and similar language in the LLC agreement.

Bodenchak

In Bodenchak, the one-third member who sought judicial dissolution died shortly after filing his petition. His widow subsequently moved in the dissolution proceeding to be substituted as the named petitioner in her capacity as executor of her late husband's estate. The respondent members opposed on the ground that the decedent's membership terminated upon his death and that the executor of his estate, as an "assignee" holding only an economic interest, lacked standing to seek judicial dissolution under LLC Law 702. The trial court granted the executor's motion to be substituted, citing Crabapple and Section 608.

The respondents appealed to the First Department. Their supporting brief (read here) argued both that the estate as "assignee" lacked standing under Section 702 and that Section 608 does not otherwise authorize an executor to pursue a dissolution claim. As to the latter contention, the respondents argued that the trial court misread Section 608 as "automatically" making the estate a "member" and that such misreading would (improperly) render superfluous the section's provision giving an estate representative "any power under the operating agreement of an assignee to become a member."

Respondents also argued ipse dixit that Section 608's bestowal upon the estate representative the power to exercise all the member's rights "for the purpose of settling his or her estate or administering his or her property," is a "limited right" that excludes "forcibly destroying a company" by way of dissolution under Section 702.

Finally, they sought to distinguish Crabapple on the ground it "says nothing about whether the estate (or executors) became members of the LLC under LLC Law 608 or whether dissolution of a [company] under LLC Law 702 constitutes settling an estate or administering property."

Petitioner's opposing brief (read here) argued that under Section 608, the estate is not and does not need to be a member, and that the "clear and unambiguous" text of Section 608 was "dispositive" and does not "limit the estate representative's authority to the narrow powers of an assignee." Naturally, they also cited the First Department's Crabapple decision and discussed at even greater length the Second Department's Andris decision insofar as it upheld an executor's standing to petition for judicial dissolution.

The respondents' reply brief (read here) characterized petitioner's argument, that Section 608 does not require the estate to be a "member," as a "concession" that the petitioner lacked standing to seek dissolution under Section 702. It also sought in a single sentence to distinguish Andris on the ground it "held that the petitioner could not maintain a dissolution action because the LLC's operating agreement 'contain[ed] no provision entitling the petitioner to dissolution of the LLC as a matter of law."

The First Department's unanimous decision handed petitioner a clear win. It affirmed the lower court's order and crisply rejected the respondents' arguments, writing:

Not that it would have changed the outcome, but why, you may ask, did the decision not cite the Second Department's Weinstein case decided a full year earlier? I can think of three reasons: (1) The parties' briefs were filed before the Weinstein decision came out. (2) The petitioner possibly did not hand up the Weinstein decision as additional authority at the oral argument of the appeal. (3) The court attorney who likely drafted the decision possibly relied solely on the cases cited in the briefs and did not look for newer cases on point.

Member, Assignee, Successor, or None of the Above?

In the wake of these appellate decisions, what status does an estate fiduciary have under Section 608, and what powers flow from that status?

Is the estate representative a "member"? Clearly not. I imagine that would only be the case, and an extremely odd one at that, if the LLC agreement automatically designated an estate representative a member with voting and management rights.

Is the estate representative an "assignee" with limited powers to settle and administer the estate only in respect of the economic interest associated with the decedent's membership interest? Clearly not. That argument was made and rejected implicitly by the First Department in Bodenchak. (That same argument also was made and rejected explicitly in a 2021 decision by a Brooklyn Commercial Division judge in Estate of Lindenberg v Winiarsky where the court ruled that under Section 608 the estate's administrator could pursue direct claims against the surviving member.)

Is the estate representative a "successor" or other breed of transferee? Again, clearly not. The estate's executor, administrator, or other fiduciary does not succeed to an ownership interest directly or indirectly of the decedent's membership interest, all of which remains as part of the estate.

If not a member, assignee, or successor, what status and what powers does the estate representative have? Based on the caselaw, it seems to me the answer is in plain sight: under Section 608's express terms, the executor or other estate fiduciary acts in a representative capacity wielding power to exercise all of the decedent member's rights for purposes of winding up the estate, whatever those member rights were as of when the decedent died.

In other words, the rights of the member survive the member, until such point in time the estate is wound down. How long the estate remains open can depend on any number of factors including but certainly not limited to provisions of the operating agreement mandating a buyout of the decedent's interest in the LLC, or perhaps provisions of the decedent's will or applicable trust instrument concerning the disposition of the interest.

There's one final point worth making that's not mentioned in any of the court decisions discussed above. The LLC Law's provisions come in two flavors: default and mandatory. The former are distinguishable from the latter by inclusion of the proviso, "except as provided in the operating agreement." Section 608 does not include the proviso hence its provisions appear to be mandatory, which suggests that the operating agreement can enlarge, but not diminish, the powers granted by Section 608 to the executor or other estate representative.