This case has been overturned by statute. Check out this blog post for the details.

We have written about the importance of operating agreements to help succession planning for your limited liability company (“LLC”). Operating agreements can help the company with procedures to remove a member, or with procedures to permit a member to leave the LLC on his own accord. This blog post reviews a recent Virginia Supreme Court case that shows the importance, and limitations of your LLC operating agreement to set forth succession planning of a member’s interest when that member dies.

LLC Agreements

In the case of Ott v. Monroe, there were 2 members of an LLC, a husband and wife. The husband (“Dewey”) owned an 80% membership interest, and his wife (“Lou Ann”) owned the remaining 20% and was the managing member. When Dewey passed away, his Will showed that he bequeathed his entire estate to his daughter, Janet. Janet proclaimed that because her father’s estate included the LLC membership interest, she became the majority member of the LLC. Janet  immediately removed Lou Ann as the managing member and took control of the LLC herself. Consequently, the issue in the case was “What rights did Janet have in the company by succeeding to her father’s membership interests?”

The Virginia Supreme Court noted that a membership interest in an LLC is composed of two components: a control interest, which permits the member to participate in the administration of the LLC’s affairs, and a financial interest, which allows the member to share in the company’s profits and losses, and to receive distributions from the business’ income and assets. The Court looked to the Virginia statutes that permit an LLC member to unilaterally assign his financial interest in the company, but to obtain the control interest, the member must obtain the “consent of a majority of those members exercising the direct management of the company.”

Janet received her father’s membership interests by a unilateral assignment through her father’s Will, and because the only remaining member, Lou Ann, did not consent to Janet’s membership in the LLC, the Virginia Supreme Court ruled that Dewey’s Will could not make her a member of the company upon his death. Therefore, Janet “inherited only Dewey’s financial interest in the Company – the right to share in profits and losses and to receive distributions.” Furthermore, even if the company’s operating agreement provided for a procedure to transfer membership interests upon the death of a member, the Virginia Supreme Court stated that “it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company.”

Does your limited liability company’s operating agreement set forth procedures for dealing with the membership interests of a member upon death? As shown in this case, the remaining members of your company could be in a state of flux jeopardizing the LLC’s survival. You may not have reviewed your operating agreement since your company was formed. When in doubt, contact your experienced business lawyer to review your operating agreement for peace of mind.

^{Tarley Robinson, PLC,  Williamsburg, VA – Attorneys and Counsellors at Law}

John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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