Who Runs This LLC?
Under California law, LLCs can either be managed by all of the members (member-managed) or by a designated manager (manager-managed). Manager-managed LLCs are more common for complex, multi-party ventures. The basic idea is to facilitate effective decision-making by not having “too many cooks in the kitchen.”
Usually, the identity of the LLC’s manager is clear based on a quick reading of the LLC’s governing documents, including the operating agreement.
But sometimes it’s messy.
A recent opinion filed by California’s Second District Court of Appeal — Reid v. Rosenberg — features a trial court’s attempt to sift through competing management claims on a motion for summary judgment. While the Reid opinion is not published (and therefore not binding precedent), it provides a useful guidepost.
Facts: father diagnosed with cancer sets up LLC for grown daughters; after father passes the daughters fight over managerial control
Stanley Diller, a successful real estate investor and businessman, was diagnosed with pancreatic cancer in May 2011. In August 2011, Diller formed SD Sheryl Brigette LLC for the benefit of his two grown daughters, Sheryl Rosenberg and Brigette Reid. Diller formed the LLC with the assistance of his attorney Jance Weberman. Weberman filed articles of organization for the LLC with the Secretary of State. The articles provided that the LLC would be managed by all of its members.
Diller transferred several of his assets to the LLC: his majority interest in an entity controlling the ground lease of a seven-story medical office building near Beverly Hills, his minority interest in a joint venture owning and operating a convalescent hospital in Downey, and a commercial property in Long Beach. Diller then assigned his interest in the LLC equally to Rosenberg and Reid.
Diller died on January 4, 2012.
Around the time of Diller’s death, Rosenberg produced an operating agreement — signed only by Rosenberg — purporting to name her as the sole member and sole manager of the LLC. Rosenberg contended that Reid held only a non-voting economic interest in the LLC.
Reid filed a lawsuit challenging Rosenberg’s assumption of control over the LLC.
Trial court: summary judgment for Rosenberg
The trial court granted Rosenberg’s motion for summary judgment.
The court was swayed by declaration testimony from family members and Diller’s attorney that Diller “intended and implemented a plan” for Rosenberg to be the sole member and manager of the LLC. While both daughters were assigned a membership (and economic) interest in the LLC, the trial court noted that the assignment was expressly “subject to the terms and conditions of the operating agreement,” which, in turn, stated Rosenberg owned 100 percent of the membership of the LLC and was the sole managing member.
Reid appealed.
Court of Appeal: reversed; too many disputed facts for summary judgment
The Court of Appeal reversed the trial court’s ruling, and reinstated Reid’s claims for trial. The court held that there were simply too many disputed factual issues for the case to be determined on a motion for summary judgment.
Rosenberg’s evidence in support of her motion in the trial court (primarily Rosenberg’s declaration and a declaration by attorney Weberman) suggested that the operating agreement was prepared by Weberman with Diller’s approval, and that Rosenberg signed the agreement at Diller’s direction in August 2011.
Reid, however, presented competing evidence in the trial court that Rosenberg did not sign the operating agreement until near the time of Diller’s death, suggesting that Rosenberg unilaterally adopted the operating agreement without Diller’s approval. While other documents purportedly signed in August 2011 were notarized, the operating agreement was not. Reid also presented evidence showing that in September 2011 (a month after Rosenberg contended the operating agreement was signed), Diller attempted to transfer the commercial property from the LLC back to his living trust, and signed the attempted transfer as “manager” of the LLC. Further, attorney Weberman’s bill for October 2011 reflected that he spent time that month drafting the operating agreement. Given all of these disputed facts, summary judgment was not appropriate.
Finally, the Court of Appeal held that in light of the articles of organization — stating the LLC was managed by all of its members — Rosenberg could not unilaterally change that with an operating agreement signed only by her. The court concluded:
Common sense dictates that when an LLC is comprised of two equal members, neither member could lawfully eliminate the other member’s interest by unilaterally adopting an operating agreement to that effect.
Lesson
An LLC’s governing documents usually clarify who holds managerial control. When those documents are ambiguous and the issue of control is riddled with factual disputes (as in the Reid case), the dispute generally cannot be resolved on a motion for summary judgment.