It wasn't long ago that my partner, Peter Sluka, posted about the Andris case where the Appellate Division, Second Department, reinstated an LLC judicial dissolution proceeding brought by the estate of a deceased member.
Andris was a enigmatic ruling that raised as many questions as it answered, not least of all because, notwithstanding a number of prior lower court rulings denying non-economic member rights to estates of deceased members, such as the right to sue derivatively on the LLC's behalf, the respondent never contested the estate's standing to seek judicial dissolution under LLC Law 702, which can only be brought by a member.
Adding to the uncertainty, the decision failed to clarify or even address how the right to seek dissolution meshes with the language of LLC Law 608, which gives the estate of a deceased member 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, including any power under the operating agreement of an assignee to become a member" (italics added).
Whatever doubts Andris left behind, are no more. Last week, in a case called Weinstein v Wallace, the Second Department squarely held that the rights granted to the estate of a deceased LLC member by LLC Law 608 "include a member's voting rights."
The LLC
Weinstein involves a family-owned business that for decades has operated a funeral home in Brooklyn. The funeral home sits on realty originally owned by four Weinstein siblings as co-equal members of a single-asset LLC called Weinstein Family Services of New York, LLC ("WFS").
As of 2007, two of the four siblings sold their WFS interests to the other two, leaving brothers Seymour and Edward as 50-50 members. The LLC's operating agreement designated Seymour the sole Manager. It also provided that upon the Manager's death, disability, or removal for cause, a successor Manager "shall be elected by a vote of the Required Members [defined as the vote of a majority in interest of the members]."
The WFC Operating Agreement's Transfer Provisions
Transfers of membership interests in WFS are governed by Article VIII of the operating agreement:
- Section 8.1(b) sets forth certain rights of members to make lifetime and testamentary transfers, including by way of a member's will.
- Section 8.1(d) authorizes the representative of a deceased member's estate, in terms partially tracking LLC Law 608, the "rights of a Member solely for the purpose of settling or managing its estate and such power as the decedent . . . possessed to assign all or any part of his Membership Interest in accordance with the terms of this Agreement and to join with any such assignee in satisfying conditions precedent to such assignee becoming a substituted Member."
- Section 8.2, however, expressly makes the admission to membership of any "substituted" or "additional" individual, entity or trust contingent upon "the approval of the Manager in his sole and absolute discretion."
The Fight for Control Following Seymour's Death
Seymour died in 2012. Afterward, his two daughters, as personal representatives of the Estate, requested Edward's consent to transfer Seymour's WFS membership interest to the H. Seymour Weinstein Trust as provided in Seymour's will. The daughters also requested Edward's consent to appoint one of the daughters as WFS's Manager.
After Edward failed to respond, the Trust's trustee and the daughters on the Estate's behalf entered into an Assignment Agreement by which the Estate transferred to the Trust Seymour's membership interest including all economic rights and the right to become a member of WFC, but also expressly providing that until the Trust became admitted as a member of WFS in compliance with the operating agreement, the Estate "shall retain voting control" over the membership interest.
The Lower Court Declares Edward Sole Voting Member and Manager
In 2018, Edward filed suit against the Trust and the Estate seeking a judgment declaring that he is the sole voting member and the Manager of WFC.
Following completion of discovery and dueling summary judgment motions, in 2022 the lower court issued its decision in Edward's favor, construing Section 8.1(d) of the operating agreement as making "clear that Seymour's Estate, until becoming a 'substituted Member,' has no voting rights or other rights attendant to being a member in WFS LLC except with regards to assigning the Membership Interest."
The lower court went on to declare Edward to be the sole voting member and Manager of WFS, finding "peculiar" the Estate/Trust's assertion "that a vote was required to elect Edward as manager . . . where Edward was the only remaining member of WFS LLC upon the death of Seymour" (italics in original).
The Appellate Division Reverses
The Trust and Estate appealed from the lower court's judgment, arguing:
- The lower court misread the plain terms of Section 8.1(d) of the operating agreement in determining that the Estate obtained only the right to transfer Seymour's membership interest.
- Upon Seymour's death the Estate acquired his voting rights, where they remain to date regardless whether it formally became admitted as a "substituted member" of WFS.
- LLC Law 608 conveys Seymour's member voting rights to the Estate.
- Edward is not WFS's Manager because there has been no vote of the Required Members (including the Estate) electing a successor Manager.
In opposition, Edward essentially viewed the Estate as an assignee, arguing that under Sections 602, 603, and 608 of the LLC Law, unless admitted as a member, the Estate merely holds a non-voting, economic interest in WFC. He further argued that any voting rights possessed by the Estate "do not last indefinitely" and are limited to the purpose of winding down the Estate's affairs.
The Appellate Division's unanimous decision came down solidly on the side of the Trust and Estate, reversing the lower court's summary judgment for Edward and directing the lower court to enter judgment declaring that Edward is not the sole voting member or the Manager of WFS. Here's the meat of the decision (note the citation to Andris):
Section 8.1(d) of the WFS LLC operating agreement unambiguously provides that a deceased member's estate shall have all of the rights of a member for the purpose of settling or managing its estate, which would include a member's voting rights (see Limited Liability Company Law § 608; Matter of Andris v 1376 Forest Realty, LLC, 213 AD3d 923, 924; Crabapple Corp. v. Elberg, 153 AD3d 434, 435). Thus, pursuant to the operating agreement, upon Seymour's death, his estate became a voting member of WFS LLC for the purpose of settling or managing the estate. Furthermore, the plaintiff did not become the manager of WFS LLC upon Seymour's death, as section 5.1(c) of the operating agreement requires a successor or replacement manager to be elected by a vote of the members [citations omitted].
There's always the theoretical chance that the court's ruling in Weinstein, or a similar (or contrary) appellate ruling in a future case, could land in the Court of Appeals. Unless and until then, the Appellate Division's Weinstein ruling is valid precedent throughout the state. Having ruled that an estate holds member voting rights, I expect to see efforts by counsel for estates of deceased LLC members to file suits seeking to enforce the full panoply of statutory membership rights, including derivative actions.
There's also an interesting question which I will not attempt to answer, important to transactional lawyers tasked with drafting operating agreements, whether LLC Law 608 is a mandatory rule — it does not include the "unless provided otherwise in the operating agreement" default language — and therefore cannot be modified in the operating agreement.
Where Did the WFS Operating Agreement Go Wrong?
We can start with the easy answer: Edward and Seymour, who already were in their twilight years when they became 50-50 members in 2007, at a minimum should have amended the operating agreement's provision for appointing a successor Manager upon Seymour's death, disability, or removal for cause. A manager-managed LLC without a manager, whether it's a realty-holding or operating business, is asking for trouble, both from outside and inside. They could have designated Edward or one of more of their presumed heirs as the successor Manager, as Seymour's daughter proposed.
Depending on their long-term plan for the funeral home, they also could have avoided the problem by agreeing that the business and property (or just the property assuming its value outstrips that of the funeral home) be put on the market upon the death of one of the other. Of course, there could have been other solutions I'm in no position to suggest.
Edward and Seymour also should have sat down at that time with capable professional advisors to discuss a plan of succession for the affiliated realty and operating companies. Making matters even more likely to turn hostile between the two of them and their families, the operating agreement adopted in 2000 conspicuously omits any buy-sell provisions upon the death of a member of other voluntary or involuntary separation event.
Especially given their advanced ages when they became 50-50 owners, they did themselves and their respective families no favor when they ignored these problematic eventualities.
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