WillThere’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. Continue Reading Executor of Deceased Majority Member Appointed Receiver to Wind Up LLC

The rules surrounding the death of a partner or a shareholder are familiar to most practitioners. For general partnerships governed by New York’s Uniform Partnership Act, except as otherwise provided by agreement, a partner’s death automatically triggers dissolution and liquidation, unless the surviving partners continue the business in which event they are required to pay the estate the fair market value of the deceased partner’s interest. (The rules are different in states that have enacted the Revised Uniform Partnership Act.)

For close corporations, except as otherwise provided by agreement, the deceased stockholder’s shares may freely be transferred to his or her heirs as provided by will or intestacy laws, in which event the transferee (and, in the interim, the estate representative) possesses the full panoply of voting and other statutorily enshrined rights including the right to bring a shareholder’s derivative action and the right to petition for judicial dissolution.

What about limited liability companies? Are the rules that apply following the death of an LLC member more like those for partnerships or corporations?

The answer is, neither. LLCs have their own, distinct, statutory default rules applicable when a member dies. In addition, as illustrated by a recent decision discussed below, the disposition and rights associated with the membership interest of a deceased member are uniquely amenable to the preferences of the LLC members as expressed in the operating agreement.

Continue Reading Death of an LLC Member

The importance of having a well-designed buy-sell agreement among owners of a closely held business can never be over emphasized. A buy-sell agreement, when done right, will enable an owner who leaves the firm, or the estate of a deceased owner, to cash out the value of his or her equity interest for a fair amount in the absence of any public market for the interest, without threatening the firm’s continuity or financial stability, and without the prospect of potentially crippling litigation.

There are two basic varieties of buy-sell agreement: a cross-purchase agreement in which the individual owners or their estates are the buyer and seller, and a redemption agreement in which the company buys (redeems) the departing or deceased owner’s interest. Which one is best for any given situation depends on a number of factors and complex tax considerations requiring the advice both of legal counsel and a tax accountant. Another critical element, with its own set of tax considerations, concerns funding sources for the buy-out. A common funding source used in buy-sell agreements triggered by the death of an owner is life insurance.

A recent court decision by Nassau County Commercial Division Justice Timothy S. Driscoll, in Deerin v. Ocean Rich Foods, LLC, Short Form Order, Index No. 600536-2014 [Sup Ct, Nassau County Mar. 21, 2014], illustrates how badly things can go when the owners — whether deliberately or not I can’t say — don’t pay sufficient attention to the design and implementation of an insurance-funded buy-sell agreement, in this case leaving the family of a deceased owner without the certainty of being able to cash out the estate’s interest. Continue Reading How Not to Create an Insurance-Funded Buy-Sell Agreement