In 2011 Ott v. Monroe threw a monkey wrench into the transferability of Virginia LLC member control interests. The Virginia Supreme Court ruled that a member’s control interest is not transferable on the member’s death without the consent of the other members, notwithstanding provisions in the LLC’s operating agreement allowing such a transfer. Ott v. Monroe, 719 S.E.2d 309 (Va. 2011). The Virginia LLC Act was recently amended to change that result.
The case involved a two-member LLC. The 80% member, Admiral Dewey Monroe, Jr., died and bequeathed his interest to his daughter, Janet Monroe. After the will was probated, Janet called a member meeting and voted her 80% to substitute herself as the manager of the LLC. The other member objected and a lawsuit ensued.
Section 2 of the LLC’s operating agreement appears to allow a member to transfer the member’s ownership by will without consent of the other member:
Except as provided herein, no Member shall transfer his membership or ownership, or any portion or interest thereof, to any non-Member person, without the written consent of all other Members, except by death, intestacy, devise, or otherwise by operation of law.
Id. at 310. The trial court, however, ruled that the deceased member was dissociated upon his death by operation of the LLC Act, and that therefore only the deceased member’s economic rights, i.e., his rights as an assignee, survived to be inherited. Section 13.1-1040.1(7)(a) of the LLC Act lists a number of events, including the death of a member, that will cause the member’s dissociation unless otherwise provided in the articles of organization or operating agreement.
Supreme Court. Janet argued that Section 2 of the operating agreement superseded Section 13.1-1040.1(7)(a). But the court pointed out that Section 2 does not explicitly address statutory dissociation and does not state an intent to supersede that section, and concluded that therefore “[Section 2] lacks specific language that would constitute an exception to the rule of dissociation set forth in Code § 13.1-1040.1.” Id. at 312. The decedent was therefore dissociated on his death, and Janet “became a mere assignee by operation of Code § 13.1-1040.2, entitled under Code § 13.1-1039 only to his financial interest.” Id.
The court then went further, and stated that “[e]ven if Paragraph 2 had superseded dissociation under Code § 13.1-1040.1, it is not possible for a member unilaterally to alienate his personal control interest in a limited liability company.” Id. The court reached that conclusion because of the structure of Section 13.1-1039:
A. Unless otherwise provided in the articles of organization or an operating agreement, a membership interest in a limited liability company is assignable in whole or in part. An assignment of an interest in a limited liability company does not of itself dissolve the limited liability company. An assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member. Such an assignment entitles the assignee to receive, to the extent assigned, only any share of profits and losses and distributions to which the assignor would be entitled.
The court pointed out that the phrase “unless otherwise provided in the articles of organization or an operating agreement” applies only to the first sentence. Therefore, said the court, the operating agreement could not alter the last two sentences’ prohibition on transfers of control. “Thus it was not within Dewey’s power under the Agreement unilaterally to convey to Janet his control interest and make her a member of the Company upon his death because the Agreement could not confer that power on him.” Id. at 313. Janet could only become a member if the other, remaining member approved her admission. Va. Code Ann. § 13.1-1040(a).
Surprisingly, the court omitted any consideration of Section 13.1-1001.1(C), which requires the LLC Act to be construed so as to give maximum effect to the principles of freedom of contract and of enforcing operating agreements. And, other than a passing reference in its initial review of the background, the court also omitted consideration of Section 13.1-1040(a), which states that, except as provided in the LLC’s articles of organization or operating agreement, an assignee may become a member only by the consent of a majority of the members or managing members. That section seems to allow operating agreements, such as the operating agreement for Janet’s LLC, to provide for certain classes of assignees to receive control rights along with economic rights.
The Amendment. The Virginia Bar Association sponsored Senate Bill 779, which was passed by both houses of the General Assembly and signed by Governor McDonnell, effective July 1, 2013:
§ 13.1-1039. Assignment of interest.
A. Unless otherwise provided in the articles of organization or an operating agreement, a membership interest in a limited liability company is assignable in whole or in part. An assignment of an interest in a limited liability company does not of itself dissolve the limited liability company. An Except as provided in subsection A of § 13.1-1040, an assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights of a member. Such Unless otherwise provided in the articles of organization or an operating agreement, such an assignment entitles the assignee to receive, to the extent assigned, only any share of profits and losses and distributions to which the assignor would be entitled.
(Changes in bold and italics.) The amendment clarifies that an LLC’s operating agreement can allow an assignee of a member’s interest to also receive the associated control rights, or in other words to allow the assignee to automatically be admitted as a member. The report of the Virginia Bar Association and the legislative summary indicate that the measure is intended to overturn Ott v. Monroe’sholding limiting the transferability of an interest in an LLC.
This is a welcome amendment, and it puts Virginia in line with most if not all other states’ provisions regarding the primacy of an LLC’s operating agreement and its power to control and define which types of assignments will result in the assignee receiving control rights and being admitted as a member.