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Executor of LLC Member’s Estate May Exercise All Powers Decedent Held as Living Member
2005-1642. Holdeman v. Epperson, 2006-Ohio-6209.
Clark App. No. 2004-CA-49, 2005-Ohio-3750. Judgment affirmed.
Moyer, C.J., Resnick, Pfeifer, O'Connor and Lanzinger, JJ., concur.
Lundberg Stratton and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourtofohio.gov/rod/newpdf/0/2006/2006-Ohio-6209.pdf
(Dec. 13, 2006) In a decision announced today, the Supreme Court of Ohio held that the executor of the estate of a deceased member of an Ohio limited liability company (LLC) has all rights that the member had prior to death, for the limited purpose of settling the member's estate or administering his property. The Court's 5-2 majority opinion was authored by Justice Judith Ann Lanzinger.
The case involved a Springfield-area marketing services business called Holdeman-Eros, LLC that was established in May 2002 as a limited liability company by its two principals, Daniel Holdeman and Louise Eros Epperson. The principals entered into a detailed operating agreement setting forth their respective ownership interests and joint authority over operational management of the business. That agreement included a provision stating that, upon the death of any member, the “successor in interest” to the deceased member (the executor of the member's estate if he had named no other successor) would be entitled to the deceased member's financial interest in the company but would not become a “member” with a right to participate in the management of the company unless the surviving member(s) agreed to grant that person membership status.
Holdeman died in November 2003, and his wife, Jo Ann Holdeman, was appointed as executor of his estate. In the course of resolving her husband's estate, Mrs. Holdeman was dissatisfied with her interactions with Ms. Epperson regarding her husband's interest in the LLC, including Epperson's refusal as the surviving member to grant Mrs. Holdeman status as a full “member” of the firm under the operating agreement. Mrs. Holdeman obtained a declaratory judgment from the Clark County Common Pleas Court that, notwithstanding the operating agreement, she was entitled by law to exercise all membership rights her husband had held in Holdeman-Eros while he was alive, including his power as chairman of the board of directors and holder of a 51 percent voting interest to control all of the company's management decisions.
Epperson appealed and the 2nd District Court of Appeals affirmed the trial court's judgment. The appellate panel ruled that the terms of the operating agreement dealing with the death of a member were in conflict with statutory language in R.C. 1705.21(A), and held that when such conflicts arise, the statute takes precedence over the operating agreement. Louise Epperson and Holdeman-Eros, LLC appealed the 2nd District's decision, and the Supreme Court heard oral arguments in the case earlier this year.
Writing for the majority in today's decision, Justice Lanzinger cited language in R.C. 1705.04(A) that sets the requirements for a company's articles of incorporation. “Besides setting forth the name of the company and the period of its duration, the articles of organization can include any other provisions ‘that are not inconsistent with applicable law.' As a result, to the extent the (Holdeman-Eros) operating agreement is in conflict with the statute, the statute takes precedence,” wrote Justice Lanzinger.
She noted that “R.C.1705.21(A) … specifically sets forth the rights of legal representatives for a deceased member and grants the executor ‘all of [the deceased's] rights as a member for the purpose of settling his estate or administering his property.' Because this section does not state ‘except as otherwise provided in the operating agreement,' we can infer that the General Assembly did not intend R.C. 1705.21(A) to be restricted by contrary language within an operating agreement.”
Justice Lanzinger concluded that: “In enacting R.C. 1705.21(A), the General Assembly ensured that the legal representative of a decedent's estate has the ability to carry out an executor's fiduciary obligations to the estate's beneficiaries. The membership rights granted are limited in time and in purpose for settlement of the estate. Accordingly, we affirm the judgment of the Clark County Court of Appeals and hold that an executor of the estate of a deceased member of a limited liability company has all rights that the member had prior to death, for the limited purpose of settling the member's estate or administering his property.”
Justice Lanzinger's opinion was joined by Chief Justice Thomas J. Moyer and Justices Alice Robie Resnick, Paul E. Pfeifer, and Maureen O'Connor.
Justice Evelyn Lundberg Stratton entered a dissent, joined by Justice Terrence O'Donnell, in which she disputed the majority's interpretation of R.C. 1705.21(A) as “contrary to the express language contained in other sections of Chapter 1705.” Justice Stratton wrote that in her view, “Interpreting R.C. 1705.21(A) in pari materia (in combination) with the remaining sections of R.C. Chapter 1705 mandates the conclusion that an executor has only the rights of an assignee of a member and not the full rights of a member unless the operating agreement provides otherwise.”
Justice Stratton wrote further that, under the majority's interpretation, “the executor (in this case) is now a majority member of the board with authority to control the company, even though the executor may be unqualified for the task. … I believe that we should define the statutory phrase ‘settling the member's estate or administering his property' as taking only those actions necessary to collect, evaluate and distribute the assets due the estate, which is, effectively, fulfilling the duties of an executor.”
Contacts
Neil F. Freund, 937.222.2424, for
Louise Epperson.
Thomas L. Czechowski, 937.449.2800, for Holdeman-Eros, LLC.
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