There’s been very little case law defining the powers of the executor of a deceased LLC member under New York LLC Law § 608, enabling the executor or other estate representative 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.”
Perhaps the dearth of section 608 case law stems from the fact that even the most basic LLC operating agreements usually include provisions governing the disposition of a deceased member’s interest.
For example, the agreement may trigger mandatory redemption or buy-out of the deceased member’s interest. Or, as in the Budis case, it may track the default rules under sections 603 and 604 permitting the assignment of LLC interests to any person who, unless admitted as a member by the surviving members, obtains only an assignee’s right to receive the distributions and allocations of profits and losses the deceased would have received, i.e., receives no voting rights and therefore lacks member standing to participate in management, seek judicial dissolution, sue derivatively, demand access to books and records, etc.
A case from neighboring Connecticut may help to fill in at least some of the gaps in New York’s section 608 case law. A decision last month by the Appellate Court of Connecticut — that state’s intermediate appellate court — in Warren v Cuseo Family, LLC, AC 37239 [May 3, 2016], dealt with an interesting set of facts involving the estate of the majority owner of a family-owned LLC and produced an unusual but not surprising ruling giving the executor extraordinary power as temporary receiver to wind up the LLC’s affairs in order to settle the decedent’s estate.
The case involves a Connecticut LLC formed in 1995 as a single-asset realty company whose four members were Yvonne Cuseo holding a 57% membership interest and her son and two grandsons holding the balance. The commercial property was leased to a company owned by one of the grandsons.
Ms. Cuseo died in 2010. Her will left her interest in the LLC to the other three members. In 2012, upon approval of his interim accounting showing that the estate did not have sufficient liquid assets to meet its expenses, the Probate Court issued a decree authorizing the executor to bring an action in Superior Court to dissolve the LLC, which he did the following year also seeking to place the company in receivership.
In 2014, after holding a joint hearing on the executor’s receivership application and the grandson’s appeal from the Probate Court’s order, the Superior Court issued a decree approving the interim accounting and appointing the executor as temporary receiver of the LLC.
The grandson then appealed to the Connecticut Court of Appeals, whose opinion summarized his primary argument against the executor’s standing to seek dissolution and receivership thusly:
The defendant’s first claim is that the plaintiff lacked standing to bring the receivership action and seek dissolution of the company because the decedent’s estate is not a member of the company. He asserts that the operating agreement prohibited the decedent’s interest in the company from becoming part of her estate upon her death. His argument essentially is that the decedent’s interest in the company is a non-probate asset, and thus the plaintiff does not have standing to bring the receivership action.
The argument fell flat with the court. After citing Connecticut law governing the powers of executors generally and the statute analogous to New York’s section 608, the court wrote:
The defendant’s assertion that the plaintiff lacked standing because the decedent’s interest in the company is not part of the estate is based on a misinterpretation of the operating agreement and a misunderstanding of the law regarding the administration of estates. The operating agreement does not support the defendant’s assertion that the decedent’s interest in the company passed immediately outside of probate to the remaining members. The decedent’s interest in the company was personal property that became a part of her estate upon her death. The plaintiff, as executor, had the duty to gather all of the personal property belonging to the estate and to administer it for the benefit of all the estate’s beneficiaries subject to the supervision of the Probate Court. An executor, by statute, has the power to represent a decedent’s personal property interest that is part of the estate. We thus conclude that the plaintiff had standing to bring the receivership action.
Unfortunately for us, the decision does not provide any details concerning the contested provisions of the operating agreement. It does, however, relate several critical facts found by the trial court from which we can deduce that the executor’s appointment as receiver was consistent with the executor’s authority, in the words of both the New York and Connecticut statutes, to “exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property.”
- The LLC had been dissolved under the express terms of its operating agreement because the decedent’s death constituted an event of dissociation, and a non-judicial dissolution had occurred because a supermajority of the non-dissociated members did not consent in writing to continue the business of the company within ninety days.
- Since shortly after Ms. Cuseo’s death, the LLC’s members were deadlocked as to the election of a liquidating member, pursuant to the operating agreement, to wind up the company’s affairs and file articles of dissolution.
- The LLC did not file income tax returns in 2010, 2011, and 2012, and was not enforcing its rights as landlord to collect rent under the lease agreement with the grandson’s company which had not paid rent or real estate taxes since his grandmother’s death.
- The grandson had been making decisions on the LLC’s behalf without the consent and against the interests of the other members.
Although not mentioned in the appellate court’s opinion, its ruling also draws support from the Connecticut LLC Act’s default rule, mirroring New York’s LLC Law § 703 (a), giving to the members the authority to wind up the affairs of a dissolved LLC, unless otherwise provided in the operating agreement.
Given that the LLC in Warren was formed in 1995, and assuming the operating agreement was made at that time — which was before the IRS instituted check-the-box partnership taxation for LLCs — I’m guessing that the agreement tracked the then-prevalent default rule triggering non-judicial dissolution of the LLC upon the death of a member unless the remaining members consented to continue it. After check-the-box, in the late 1990s most if not all states flipped the default rule, and most operating agreements since then likewise no longer provide for automatic dissolution following the death of a member. Had the Cuseo Family, LLC amended its operating agreement consistent with the amended statute, the case might have played out differently.
Finally, it’s also worth pondering whether the outcome would have differed had the decedent not held a majority interest, or if the two other members of the Cuseo Family, LLC had opposed the executor’s application to be appointed receiver, or if all of the other members including the adverse grandson weren’t the beneficiaries under her will of Ms. Cuseo’s interest in the LLC.