Consent to Amended LLC Certificate is Dissociation

Withdrawal | Dissociation of LLC Member
We often think of the dissociation of a member from a limited liability company as a matter of expulsion. The majority typically wants to expel a problematic minority member from the LLC.

But one can also dissociate themselves by resigning as member, or, under the Revised Uniform Limited Liability Company Act (RULLC), by giving notice of their express will to withdraw as a member.  This lawsuit tells us that there are no specific words required; the intent to quit if expressed to the LLC, will be sufficient.

Dissociation by Express Will of Member

In this Idaho Supreme Court case, the most carefully examined issue was the applicability of the Dead Man’s Act under Idaho law and the attempt of one of the Members to testify about an oral agreement made with the decedent.

But the opinion in Slavens v. Slavens (Idaho November 3, 2016) also contains a cautionary tale about ambiguous conduct, oral agreements and even the uncertainty of the human condition – to wit, we can die unexpectedly – that some business owners should heed.

Family Limited Liability Company Formed for Asset Protection

The Slaven family owned a limited liability company Twin G, LLC. The founder and one of the owners and general managers, James Slaven, was killed in a car accident in December 2012. The litigation that followed concerned whether Jim’s brother, Johnny Slaven, owned 99 percent of a limited liability company or whether he had been dissociated when he consented to an amendment of the LLC’s certificate of formation.

The two brothers formed Twin G for asset protection purposes. Jim owned one percent and Johnny owned 99 percent although he had no active management role in the business.

The brothers then had a falling out over a botched real estate transaction and Johnny made clear he didn’t want to have the company carry properties in his name. There was an “addendum” – to what is not clear – in which Johnny conveyed his interests to Jim’s children.

LLC Certificate of Organization Deletes Member

Then, the following day, an amended certificate of organization was circulated in which Johnny purported to delete himself as a member and be replaced by Jim’s daughter. Johnny signed and returned the certificate but it was never filed.

After the death, Johnny claimed continued membership in the limited liability company as a result of an oral agreement that his withdrawal would be effective only if the amended certificate was actually filed. The Court held that an affidavit recounting this purported agreement was inadmissible.

In sending the case back to the trial judge, the Court advised the trial judge that Johnny was “dissociated as a member at the moment he communicated his agreement to sign the Amended Certificate.

Withdrawing Member of LLC Manifests ‘Express Will’

“Quite clearly, Johnny manifested notice of his ‘express will to withdraw as a member under Idaho Code Section 30-[25]-602(1) by communicating his agreement to sign the Amended Certificate, which recited he was ‘[d]elet[ing] himself as a member,” the Court reasoned.

The Supreme Court was referring to Section 602 of the Revised Uniform Limited Liability Company, which provides that a member of an LLC is dissociated: when “the limited liability company knows or has notice of the person’s express will to withdraw as a member.”

The Court is not clear on exactly what it means that Johnny dissociated himself, since a dissociated member has the status of an assignee of the LLC. Assignees have the right to receive profits or losses when they are distributed, but do not have management rights.

The opinion is unclear whether Johnny’s express will to withdraw relegates him to an assignee – the holder of a financial interest – or whether the transaction is undone and he is truly deleted as an owner.

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