One of the most difficult periods in the lifecycle of a closely-held company is the period following the death of an owner. Apart from having to fill whatever business responsibilities the deceased owner left behind, the surviving owners often find themselves amid prime conditions for dispute: they wish to continue the business without interruption from the deceased owner’s estate, while the estate is interested in liquidating the deceased owner’s interest at any cost.
In New York, the rights of the estate of a deceased LLC member are codified in Section 608 of the LLC Law. That section provides:
The member’s executor, administrator, guardian, conservator or other legal representative may 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.
Two important takeaways from this language. First, for the purpose of settling the estate, the executor can exercise whatever rights that the deceased member had. And second, upon the death of a member, the estate does not automatically become a member; it can choose to exercise any power under the operating agreement of “an assignee to become a member.” The reference to the rights of an assignee invokes Section 603 of the LLC law, under which the assignee of a member’s interest becomes an “economic interest holder,” but not a full-fledged member, unless the remaining members consent or it is expressly authorized by the operating agreement.
There’s some tension between those two takeaways. On the one hand, the deceased member had the common-law right under Tzolis v Wolff to sue derivatively for injury to the LLC and the statutory right under Section 702 of the LLC law to petition for dissolution of the LLC. But those rights are expressly reserved only for members; a mere assignee has no standing to sue derivatively (see Kaminski v Sirera, 169 AD3d 785 [2d Dept 2019]) or petition for dissolution of the LLC (see LLC Law 702 [“upon application by or for a member“]).
How is that tension resolved? We previously covered the cases of Budis v Skoutelas, Short Form Order, Index No. 702060/13 [Sup Ct, Queens County July 16, 2014] and Pappas v 38-40 LLC, 2018 NY Slip Op 30329(U) [Sup Ct NY County Feb. 22, 2018], in which the court held that the estate of a deceased LLC member had no standing to assert derivative claims on the LLC’s behalf. What’s more, Section 608 is identical to Section 18-705 of the Delaware LLC Act, and Courts interpreting that provision have also held that upon the death of a member, the member’s estate becomes an “economic interest holder,” who lacks standing to prosecute derivative claims or to seek dissolution (see Estate of Calderwood v ACE Group Intl. LLC, 157 AD3d 190, 194 [1st Dept 2017] [derivative claims]; In re Carlisle Etcetera LLC, 114 A3d 592, 597 [Del Ch 2015] [dissolution]).
But if those cases make a trend, it may have been bucked by the Second Department’s recent decisions in Andris v 1376 Forest Realty, LLC, at 2023 NY Slip Op 00995 and 2023 NY Slip Op 00996, which together reinstated a dissolution claim brought by the estate of a deceased member.
1376 Forest Realty LLC
In 2006, Elizabeth Ayvis and Astrid Spatola formed as equal 50% members 1376 Forest Realty LLC (“1376 LLC”), and they transferred ownership of certain Staten Island real property to the LLC. They never executed an operating agreement governing the affairs of 1376 LLC.
Ayvis died in 2016. In 2019, Ayvis’ Estate petitioned for dissolution of 1376 LLC based on the allegations that: (i) the Estate was a 50% member of 1376 LLC, (ii) Spatola was mismanaging the LLC, and (iii) continuing the business of the LLC was financially unfeasible. The Estate also sought an accounting of the company.
Spatola moved to dismiss the accounting claim. In response, the Estate cross-moved for summary judgment on its dissolution petition (a strange procedural move as I see it, since there’s little difference between the dissolution petition itself and a motion for summary judgment on the petition). Finding that an earlier-executed survivorship agreement between the parties governs, the trial court denied the Estate’s cross motion for summary judgment on its dissolution petition.
Following the court’s denial of the Estate’s cross motion, Spatola sought summary judgment dismissing the dissolution petition, arguing that since the Court denied the Estate’s motion for summary judgment, “there are no further issues left to be determined by the Court.” The Estate opposed Spatola’s motion; just because its motion for summary judgment on its dissolution claim was denied, the Estate contended, does not mean that the petition should be dismissed. The trial court granted Spatola’s motion and dismissed the dissolution petition.
Spatola curiously did not argue that Ayvis’ Estate lacked standing to seek dissolution and the Court did not raise the issue on its own. Notwithstanding the language of Section 608 of the LLC law, all of the trial court submissions assume that upon Ayvis’ death, her Estate became a full-fledged, 50% member of the LLC with standing to seek dissolution.
Ayvis’ Estate appealed both the order denying its motion for summary judgment dissolving 1347 LLC and the order granting Spatola’s motion for summary judgment dismissing the dissolution petition. Again, no party on appeal contested whether the Estate had standing to seek dissolution.
In a pair of decisions published last week, the Second Department reinstated the dissolution claim by (i) affirming the trial court’s denial of the petitioner’s motion for summary judgment on her dissolution claim and (ii) reversing the trial court’s grant of summary judgment in favor of respondent. In its order reversing the trial court’s grant of summary judgment dismissing the dissolution petition (2023 NY Slip Op 00996), the Second Department held:
The Supreme Court should have denied the respondents’ motion, in effect, for summary judgment dismissing the cause of action for dissolution of the LLC, as the respondents failed to establish their prima facie entitlement to judgment as a matter of law. Contrary to the determination of the court, the respondents did not eliminate all triable issues of fact as to the cause of action for dissolution of the LLC in that they failed to show, as a matter of law, that it is “reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement”
In its companion order affirming the trial court’s denial of the Estate’s motion for summary judgment on dissolution (2023 NY Slip Op 00995), the Second Department commented directly on the ability of the Estate to seek dissolution:
Although the death of a member of a limited liability company does not trigger dissolution of that limited liability company (see Limited Liability Company Law § 701[b]), Limited Liability Company Law § 608 provides that a deceased member’s executor “may exercise all of the member’s rights for the purpose of settling his or her estate” (see Crabapple Corp. v Elberg, 153 AD3d 434, 435). Thus, contrary to the respondents’ contention, the petitioner, as executor of the decedent’s estate, has the authority to exercise the decedent’s rights in the LLC for the purpose of settling the estate. . .
According to the Second Department, therefore, Section 608 gives the estate of a deceased member standing to pursue a dissolution claim, despite the language in Section 702 stating that only a member can petition for dissolution.
LLC Members: Memento Mori
Based on my research, 1376 Forest is the first Appellate Division case that supports an estate’s right to seek dissolution of an LLC based on the decedent’s status as a former member. But proceed with caution: because neither party raised the issue of the Estate’s standing in any submissions to the trial court or the Second Department, a narrow reading of 1376 Forest might conclude that the case’s impact on the rights of the estate of a deceased member is mere dicta, particularly since lack of standing is an affirmative defense that is waived if not timely raised.
Can 1376 Forest be harmonized with Budis and Pappas? Perhaps. Both Budis and Pappas considered LLCs with operating agreements providing that the “successor in interest” of a deceased LLC member shall succeed to the decedent’s economic rights but shall not acquire member status. It’s therefore possible to view those cases as ones where the operating agreements alter the default rules of LLC Law 608, while 1376 Forest deals exclusively with the default rules. But I’m not convinced. The “successor in interest” language of the operating agreements in Budis and Pappas strikes me as consistent with Section 608, not as a modification to it.
Until a more definitive case comes along, I expect estate counsel to cite 1376 Forest and LLC Law 608 as altering the balance of power in disputes with the surviving members of an LLC, whether over dissolution or conceivably asserting derivative claims. The best way to avoid that dispute is with a well-crafted buy-sell agreement specifying a means for valuing and liquidating the deceased member’s interest upon their death.