When business partners agree to create a Limited Liability Company (L.L.C.), they typically enter into an Operating Agreement which identifies them as members of the LLC, and by which they are contractually bound. The Operating Agreement permits the Members to agree to various contingencies, such as the death of a Member. Until the Ohio Supreme Court’s recent decision, Holdeman v. Epperson (Dec. 13, 2006), 111 Ohio St.3d 551, it was assumed that L.L.C. Members could limit the power of the executor of a deceased Member. In Holdeman, however, the Ohio Supreme Court held otherwise.
In Holdeman, the Members of an L.L.C. agreed, and memorialized in the Operating Agreement, that in the event of a Member’s death, the Executor of his Estate would become a successor-in-interest to the deceased Member. Under the Operating Agreement, the successor-in-interest was merely permitted to hold or distribute the deceased Member’s share of the profits of the L.L.C. The successor-in-interest was not, however, deemed an actual Member of the L.L.C. This meant that the successor-in- interest had none of the powers of a Member such as:
(1) voting rights,
(2) management rights, and
(3) entitlement to obtain full information regarding the business and financial condition of the company.
Pursuant to the Operating Agreement, a successor-in-interest only became a Member of the L.L.C. through the written consent of the other Member of the L.L.C.
As to Holdeman-Eros L.L.C., Daniel Holdeman, held a 51 percent interest, and Louise Epperson, held a 49 percent interest. Daniel Holdeman died leaving his widow, Jo Ann Holdeman as Executor of his Estate. Pursuant to the express, written terms of the Operating Agreement, Jo Ann Holdeman was merely permitted to hold or distribute Daniel Holdeman’s profits in the company. However, Jo Ann Holdeman sought to become a Member of the L.L.C. and requested consent from Louise Epperson, who refused.
Jo Ann Holdeman sued Epperson and the company seeking a declaration that she be given all those rights of a Member during the Estate’s administration which included the voting and management rights of the majority Member. Jo Ann Holdeman argued that Ohio’s Revised Code permitted her, as the Executor of Daniel Holdeman’s estate, all of the rights of a Member of the company. Louise Epperson argued that the Operating Agreement did not permit Jo Ann Holdeman to become a Member without his consent.
The Supreme Court of Ohio examined Chapter 1705 which governs L.L.C.s. Chapter 1705 includes codified “default” provisions. If Members of an L.L.C. do not provide for certain contingencies, then Chapter 1705 provides the procedures for the L.L.C. to follow.
In this case, the Ohio Supreme Court noted that the particular section of the code (R.C. § 1705.21(A)), regarding the rights of an Executor of a deceased Member, did not include language that it was a mere default law. Rather, this section of the code could not be sidestepped through an alternative provision in the Operating Agreement. The Court held that Jo Ann Holdeman was a full Member of Holdeman-Eros L.L.C. and that she owned a 51% interest in the company and had acquired majority management and voting rights upon the death of her husband for the purpose of settling his Estate. However, the Court failed to define the time period required for settling a Member’s estate or the scope of purposes for which an Executor could exercise her rights as a Member. Therefore, Jo Ann Holdeman became a full Member of the L.L.C. with majority voting and management rights for an indefinite period of time.
The Holdeman decision is significant in that it curtails efforts by Members of an L.L.C. to limit the power of an Executor to a deceased Member. However, there are other mechanisms by which Members of an L.L.C. can plan for the contingency of Member death. A buy/sell agreement whereby Members of an L.L.C. agree that upon the death of a Member, the other Members of the L.L.C. are entitled to purchase the deceased Member’s interest in the company is one solution to the problem caused by the Holdeman decision.
To request a copy of this decision or to discuss concerns about how the Supreme Court’s Holdeman opinion affects your Operating Agreement and the possible insertion of a buy/sell provision, please feel free to contact one of our corporate practice attorneys.