As I have written in the past, and repeat here, the statutes and judge-made law governing disputes among co-owners of closely held entities can vary significantly from state to state. Depending on the state, there also can be much in common, which is why I like to keep an eye on developments outside New York.

For this post I’ve selected three recent out-of-state appellate decisions, all involving disputes among LLC members:

• First up, a ruling by Montana’s Supreme Court in which it construes dueling provisions governing the necessary member consents to amend an operating agreement.
• Second, a California intermediate appellate court addresses jurisdictional issues concerning the scope of relief available in a dispute among members of a Delaware LLC.
• Third, a Connecticut intermediate appellate court determines a party’s claim to LLC membership based on whether the dispute falls under the state’s version of RULLCA adopted in 2017 or under its pre-RULLCA statute.

Amending the Operating Agreement: Which Provision Governs?

The Montana Supreme Court’s recent opinion in Barbier v Burns concerns a dispute between sibling members of a Montana LLC over an amendment to the operating agreement converting the LLC from a term-limited LLC to a perpetual LLC.

The LLC’s membership at its inception in 1994 included three siblings and their father. The LLC’s operating agreement and articles fixed a 30-year term with a dissolution date no later than December 31, 2024. (In those early days of LLCs, before the IRS’s adoption of check-the-box entity classification made effective in 1997, it was not unusual to find LLC agreements with term-limited dissolution dates.)

In 2004, the members executed an operating agreement replacing the 1994 agreement. The 2004 agreement contained two separate provisions governing its amendment. One of them (§ 6.k) tracked the statutory default rule by requiring the approval of members holding at least 67% of the ownership interests. The other (§ 13.j) provided that “The Members may amend this Agreement . . . upon execution of a written amendment signed by all of the Members.”

In 2015, one of the siblings gave written notice of his intent to withdraw from the LLC, which triggered a buyout of his interest. Before finalizing the purchase, the remaining three members held a meeting to vote to convert the LLC to a perpetual entity. The father and one sibling (Cameron, the eventual defendant) voted in favor. The other sibling (Lindsay, the eventual plaintiff) voted against. Shortly afterward the father filed Articles of Amendment converting the LLC to a perpetual term.

The father died in 2018 leaving Cameron in control of his estate including his membership interest. In 2021, Lindsay filed suit against Cameron, among other claims, seeking a declaratory judgment that § 13.j required unanimous member consent to amend and therefore the 2015 conversion to a perpetual entity was ineffective to avoid dissolution by operation of law on December 31, 2024.

Before the District Court, in a summary judgment setting Lindsay argued that § 13.j required unanimous consent to amend and thus conflicted with § 6.k, creating an ambiguity. Cameron argued there was no conflict between the two provisions and that the vote to amend was authorized under § 6.k. Cameron prevailed, setting up Lindsay’s appeal to the Supreme Court.

The Supreme Court also agreed with Cameron. Applying generally applicable rules of contract construction, the Court held that the 2004 agreement “unambiguously provides two valid and complementary pathways for amendment.” As the Court explained:

OA § 6.k.i provides for amendment of the OA by a 67% voting majority of members. OA § 13.j provides that the OA “may” be amended “upon execution of a written amendment signed by all of the Members.” Read in harmony, giving effect to each, these provisions allow for amendment upon (1) consent in writing where all members agree and (2) formal approval by a supermajority
vote where members are not in agreement. In short, § 13.j provides a consensus shortcut to formal meeting and voting requirements. . . . Here, it is apparent the parties intended § 13.j to provide an alternative to § 6.k.i’s formal voting requirements when members achieve consensus on amendment. Reading the OA, as Lindsay proposes, to mandate unanimous consent for all amendments would nullify § 6.k, an impermissible interpretation.

Lindsay alternatively argued that the father’s and Cameron’s votes in 2015 did not meet the 67% voting threshold under § 6.k because the vote was taken before the consummation of the buyout of the withdrawing sibling, who did not vote. The Court disagreed, citing the operating agreement’s provision stating that “a Member ceases to be a Member” upon the LLC “receiving notice of the Member’s express will to withdraw.”

No California Dreamin for Member Seeking Dissolution of Delaware LLC

It’s been almost five years since this blog last featured a case involving a court’s subject matter jurisdiction (SJM) to dissolve a foreign business entity. The wait is over, thanks to a ruling by a California intermediate appellate court in Iwanaka v Doi.

The case involves a family-owned Delaware LLC that operated exclusively in California where it owned and operated commercial real estate. In 2022, the plaintiff successfully petitioned the court to remove her brother as member and manager, order the LLC dissolved, and appoint the plaintiff as liquidating representative to wind up the LLC’s affairs.

After the plaintiff later moved to enforce the judgment, the trial court questioned its SJM and power to dissolve a Delaware LLC. After a hearing the court concluded that it lacked SJM, vacated the judgment and dismissed the case.

On appeal, the plaintiff did not challenge the trial court’s SJM ruling but the appellate court’s opinion nevertheless addressed the issue “as useful background for the contested matter of whether the trial court erred by vacating its order removing [the brother] as a member and manager of [the LLC].”

I won’t go into the details of the court’s analysis. Suffice it to say that the court’s opinion initially discusses the internal affairs doctrine before turning to cases from California, Delaware, New York and Tennessee representing the “near-universal view” that “the courts of one state do not have the power to dissolve a business entity formed under another state’s laws.”

Having agreed with the trial court’s declination of SJM, the appellate court reached the opposite result with respect to the trial court’s vacatur of its orders removing the brother as a member and manager and giving the plaintiff control of the LLC. Those claims and remedies, the court held, do not fall outside the internal affairs doctrine allowing a California court to apply Delaware law.

In With the Old LLC Act, Out With the New

Paquette v Thompson, decided last week by the Appellate Court of Connecticut, has a decidedly unusual set of facts which I’m about to grossly simplify.

Starting in 1999 Paquette and Thompson become 50/50 partners devoted to acquiring, renovating, and “flipping” residential properties, which over time they did with some 50 properties. In 2004, as 50/50 members they formed an LLC named 53 Westwood Lane LLC (Westwood LLC) to acquire a property at that address. In 2005 they sold the property at a profit which they shared equally, after which Westwood LLC was inactive for several years.

In 2008, Paquette proposed to Thompson that they purchase the “Blue Hills Property”. Thompson didn’t have the funds and backed out. Paquette agreed to provide the funds. For some reason not explained in the opinion, Thompson took title to the Blue Hills Property and the same day executed a declaration of trust stating that he was holding the property in trust for the benefit of Thompson and agreeing to convey the property to Thompson at any time.

The next year, Paquette executed a quitclaim deed transferring title to Westwood LLC. The deed also stated that Thompson “hereby transfer[s] all of my membership interest” in Westwood LLC to Paquette.

After renovating the Blue Hills Property, Paquette leased it for the next 11 or 12 years. In 2020 Paquette found a purchaser. Thompson, at Paquette’s request, sent Paquette an email confirming his grant to Paquette in 2009 of the property and his interest in Westwood LLC. In 2021 he sent Paquette a resolution likewise confirming that all sale proceeds go to Paquette.

In 2021, the Blue Hills Property was sold resulting in a profit of about $155,000. While the funds were still in the hands of the settlement agent, a dispute arose between Paquette and Thompson with respect to the disposition of certain other properties, at which point Thompson instructed the settlement agent not to release the sale proceeds and stated that he was revoking his prior resolution.

In Paquette’s subsequent lawsuit against Thompson, Thompson relied on a section of the Connecticut Uniform LLC Act (CULLCA), adopted in 2017, to the effect that an unrecorded transfer that purports to transfer all of a member’s interest in an LLC alone does not cause a dissociation of the member, that Thompson remains a member of Westwood LLC, and that Westwood LLC is the rightful owner of the sale proceeds in which Thompson has an interest.

Paquette, relying on Thompson’s various writings granting his membership interest to Paquette and disclaiming any interest in the Blue Hill Property sale proceeds, argued that the disposition of the sale proceeds was governed not by CULLCA, but by its predecessor, the Connecticut LLC Act (CLLCA), providing that a member who assigns its entire membership interest “ceases to be a member or to have the power to exercise any rights of a member when any assignee of his interest becomes a member with respect to the assigned interest.”

On appeal from the trial court’s decision holding that Paquette was the sole member of Westwood LLC and therefore entitled to 100% of the sale proceeds, the appellate court’s analysis focused on determining whether the “operative year for purposes of determining which law applies to this case” was 2009 when Thompson transferred his interest in Westwood to Paquette (Paquette’s position) or 2021 when the Blue Hills Property was sold (Thompson’s position).

The appellate court concluded that 2009 was the operative year in which Paquette transferred his membership interest to Paquette and therefore the court “must look to the law in effect in 2009 — CLLCA — to determine the legal effect of Thompson’s transfer of his interest in Westwood [LLC].”

From that conclusion it was only a small step for the court to rule in Paquette’s favor under CLLCA’s provision terminating a membership interest upon assignment of the interest to someone who becomes a member with respect to the assigned interest. As the court wrote:

In the present case, the plaintiff already was a member of Westwood Lane when Thompson transferred “all of [his] membership interest” in the company to the plaintiff; thus, Thompson ceased to be a member upon that transfer. Accordingly, the trial court properly determined that the plaintiff is the sole member of Westwood Lane, and the defendants’ claim, therefore, fails.