An Inherited LLC Interest is not a Full Membership Interest
Under California Corporations Code section 17701.02(r), an LLC membership interest includes three components:
- a transferable interest (right to receive distributions in accordance with the operating agreement);
- a voting right (and in member-managed LLCs, a management right); and
- a right to information (books and records).
If someone inherits an LLC membership interest, does the inherited interest include all of the above?
In an opinion recently filed by California’s Third Appellate District — Zack v. Stickells — the Court of Appeal addressed this issue. While the opinion is unpublished and therefore not binding precedent, it still provides useful guidance.
Facts: daughter inherits mother’s LLC interest; files action for judicial dissolution and breach of fiduciary duty
Zack Ranch, LLC is a California limited liability company formed in 1997. One of the LLC’s members was Ann Zack.
Ann died in 2015, and her daughter Andrea inherited Ann’s interest in the LLC. At that time, the LLC’s other members were Andrea’s siblings Frederick Zack, Jane Zack Simon, Kathryn Zack, and Thomas Zack, as well as Sierra Alfalfa, LLC.
After her inheritance, Andrea filed a lawsuit alleging mismanagement and abuse of authority by the LLC’s majority members and the manager, Peter Stickells. Her complaint sought judicial dissolution of the LLC as well as damages for breaches of fiduciary duty. She alleged the damage claim directly, not derivatively.
The defendants filed a motion for summary judgment.
Trial court: summary judgment for defendants; no standing
The trial granted summary judgment.
The court held that Andrea lacked standing to sue for judicial dissolution because she was not a member of the LLC; instead, she held only a transferable interest. The court also held that Andrea’s claims for damages could not be pursued directly because the primary alleged harm was to the LLC.
Andrea appealed.
Court of Appeal: affirmed; Andrea was not a full LLC member
The Court of Appeal affirmed.
The court recited Andrea’s argument that she was a member of the LLC, which was essentially that she inherited Ann’s interest upon Ann’s death pursuant to the terms of Ann’s trust documents.
The court observed that under Corporations Code section 17706.02(f)(1), a person is “dissociated” as a member when the person dies. Under section 17706.03(a)(1) and (a)(3), when a person dissociates as a member, the person’s right to vote or participate as a member in the management and conduct of the LLC terminates, and the transferable interest remaining is owned “solely as a transferee.” And under section 17705.02(a)(3), when a person receives a transferable interest as a transferee, the transfer does not entitle the transferee to vote or otherwise participate in the management or conduct of the LLC or to have access to the LLC’s books and records.
As such, Andrea was a transferee, not a member. Under the judicial dissolution statute (section 17703.03), a claim for judicial dissolution may be filed only by a manager or member of the LLC. Andrea lacked standing to pursue this claim.
The court also agreed with the trial court that Andrea’s damage claims were derivative in nature, not direct, because they all alleged harm to the LLC and its members. Because she did not pursue the claims derivatively, there were properly dismissed.
Lesson
Inheriting an LLC interest usually results in a transferable interest and “transferee” status, which provides only the right to receive distributions. The operating agreement might provide a pathway for the owner of a transferable interest to eventually become a member. But otherwise, the person remains a mere transferee and cannot participate in voting or management and cannot sue for judicial dissolution.