Case Title: Ott v. Monroe

Citation: 

Docket Number: 

State: virginia

Court: Virginia Supreme Court

Date: 2011-11-04T00:00:00Z

Document:
PRESENT:  All the Justices 
 
JANET M. OTT 
 
 
 
 
 
 
 
 OPINION BY  
v. 
Record No. 101278 
  
    
JUSTICE WILLIAM C. MIMS 
 
 
 
 
 
 
 
   November 4, 2011 
LOU ANN MONROE, ET AL. 
 
FROM THE CIRCUIT COURT OF STAFFORD COUNTY 
John R. Alderman, Judge Designate 
 
In this appeal, we consider whether membership in a 
Virginia limited liability company may be transferred by will. 
I. 
BACKGROUND AND MATERIAL PROCEEDINGS BELOW 
Admiral Dewey Monroe, Jr. (“Dewey”) and his wife Lou Ann 
Monroe (“Lou Ann”) formed a Virginia limited liability company, 
L&J Holdings, LLC (“the Company”), which was governed by an 
operating agreement they executed in April 2003 (“the 
Agreement”).  The Agreement provided that Dewey and Lou Ann were 
the sole members and that they held an 80% membership interest 
and a 20% membership interest, respectively.  It also provided 
that Lou Ann would be the managing member and Joseph G. Monroe 
(“Joseph”) would serve as the successor managing member in the 
event of her death, disability, removal, or resignation. 
Paragraph 2 of the Agreement provided that “[e]xcept as 
provided herein, no Member shall transfer his membership or 
ownership, or any portion or interest thereof, to any non-Member 
person, without the written consent of all other Members, except 
by death, intestacy, devise, or otherwise by operation of law.”  
 
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Paragraph 10(B) provided in relevant part that “[n]o Member 
shall, directly or indirectly, transfer, sell, give, encumber, 
assign, pledge, or otherwise deal with or dispose of all or any 
part of his Membership Interest now owned or subsequently 
acquired by him, other than as provided for in this Agreement.”  
Paragraph 10(C) provided in relevant part that, Paragraph 10(B) 
notwithstanding, “any Member . . . may transfer all or any 
portion of the Member’s Interest at any time to . . . [o]ther 
Members [or] [t]he spouse, children or other descendants of any 
Member.” 
Dewey died in 2004.  Through a will executed prior to the 
formation of the Company, he bequeathed his entire estate to his 
daughter, Janet.  After the will was admitted to probate, Janet 
asserted that Dewey’s bequest transferred his membership in the 
Company to her.  She called a meeting of the Company, sending 
notice to Lou Ann, with the intent to remove Lou Ann and Joseph 
from their positions as managing member and successor managing 
member, respectively.  Lou Ann responded that Janet had 
inherited only Dewey’s right to share in profits and losses of 
the Company and to receive distributions to which he would be 
entitled. 
Janet proceeded with the meeting and putatively removed Lou 
Ann and Joseph, electing herself as the Company’s new managing 
member and electing Susan Shackelford as successor managing 
 
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member in the event of her death, disability, removal, or 
resignation.  Thereafter, Janet filed a complaint in the circuit 
court seeking declaratory judgment that she had inherited her 
father’s full membership in the Company and Lou Ann and Joseph 
had been validly removed from their positions.  Lou Ann and 
Joseph filed a demurrer, again asserting that Janet had 
inherited only Dewey’s right to share in profits and losses and 
to receive distributions. 
The court denied the demurrer and the case proceeded to a 
bench trial.  At its conclusion, the court held that Dewey was 
dissociated from the Company upon his death by operation of Code 
§ 13.1-1040.1(7)(a).  Consequently, the court concluded that all 
his rights as a member to participate in the control of the 
Company’s affairs terminated and only the right to share profits 
and losses and to receive distributions survived to be inherited 
by Janet through his will.  Accordingly, the court ruled that 
Janet was not a member of the Company and thus lacked the 
authority to remove Lou Ann and Joseph from their positions.  We 
awarded Janet this appeal. 
II. ANALYSIS 
This appeal assigns error to the circuit court’s 
interpretation of the Agreement and the relevant statutes.  
Accordingly, we review the judgment de novo.  Uniwest Constr., 
 
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Inc. v. Amtech Elevator Servs., 280 Va. 428, 440, 699 S.E.2d 
223, 229 (2010). 
When interpreting a contract, we construe it as a whole.  
When its terms are clear and unambiguous, we give them their 
plain meaning.  We harmonize its provisions and give effect to 
each of them when it reasonably can be done.  Id.  Similarly, we 
construe statutes as a consistent and harmonious whole to give 
effect to the overall statutory scheme.  Virginia Electric & 
Power Co. v. Board of County Supervisors, 226 Va. 382, 388, 309 
S.E.2d 308, 311 (1983).  We apply the plain meaning of a statute 
unless its terms are ambiguous or doing so would lead to an 
absurd result.  Covel v. Town of Vienna, 280 Va. 151, 158, 694 
S.E.2d 609, 614 (2010). 
Janet argues that the circuit court erred in ruling that 
Dewey was dissociated upon his death by operation of Code 
§ 13.1-1040.1(7)(a) because that provision is preceded by the 
proviso, “[e]xcept as otherwise provided in the articles of 
organization or an operating agreement.”  She asserts that 
Paragraph 2 of the Agreement constitutes such an exception and 
supersedes dissociation under the statute.1  We disagree. 
                                                 
 
1 Janet also asserts that statutory dissociation is 
preempted by Paragraph 10(A), which states that “no Member shall 
have any right to voluntarily resign or otherwise withdraw from 
the Company . . . without the prior written consent of all 
remaining Members of the Company.  Any attempted resignation or 
withdrawal without the requisite consent shall be null and void 
 
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A.  THE VIRGINIA LIMITED LIABILITY COMPANY ACT 
We begin our analysis by examining the statutory framework 
governing Virginia limited liability companies, the Virginia 
Limited Liability Company Act, Code § 13.1-1000 et seq. (“the 
Act”).  “The [limited liability company] is a hybrid entity, 
borrowing from both the corporate and partnership models” to 
combine a corporation’s limited liability for its owners with a 
partnership’s pass-through treatment for income tax purposes.  
S. Brian Farmer & Louis A. Mezzullo, The Virginia Limited 
Liability Company Act, 25 U. Rich. L. Rev. 789, 790 (1991).  
When the Act was enacted in 1991, federal tax regulations denied 
the pass-through treatment afforded partnerships if a business 
entity possessed three of the four principal characteristics of 
corporations:  (1) perpetual existence, (2) central management, 
(3) limited liability of owners, and (4) free transferability of 
ownership interests.  Id. at 813-15.  Because limited liability 
was an indispensible characteristic of limited liability 
companies, the provisions of the Act were drafted to avoid the 
three remaining corporate characteristics.  Id. at 815-21.  
Thus, the transferability of a member’s interest in a limited 
                                                                                                                                                             
and have no legal effect.”  Nothing in the record of this case 
establishes that Dewey’s death was a voluntary attempt to resign 
or otherwise withdraw from the Company.  Paragraph 10(A) 
therefore is not implicated. 
 
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liability company is analogous to the transferability of a 
partner’s interest in a partnership. 
When the Act was enacted in 1991, the Uniform Partnership 
Act expressly provided that 
[a] conveyance by a partner of his interest in 
the partnership does not . . . entitle the 
assignee, during the continuance of the 
partnership, to interfere in the management or 
administration of the partnership business or 
affairs, or to require any information or account 
of partnership transactions, or to inspect the 
partnership books; but it merely entitles the 
assignee to receive in accordance with his 
contract the profits to which the assigning 
partner would otherwise be entitled. 
 
Former Code § 50-27(1) (Repl. Vol. 1989).2 
Implicit within this language was the recognition that a 
partner’s interest in a partnership comprises two distinct and 
divisible components.  The first component, the control 
interest, encompasses the partner’s entitlement to participate 
with the other partners in the administration of the 
partnership’s affairs.  The second component, the financial 
interest, encompasses only the sharing of profits and losses of 
the partnership and receipt of distributions from its 
accumulated income and assets.  Under the statute, only the 
financial interest is alienable.  Thus, the control interest in 
                                                 
 
2 This limitation was preserved in Code § 50-73.106 when 
Chapter 1 of Title 50 was repealed and replaced upon the 
enactment of the Virginia Uniform Partnership Act in 1996.  1996 
Acts ch. 292. 
 
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a partnership is personal to the partner and cannot be bestowed 
on another by the unilateral act of a partner even if the words 
of his conveyance do not expressly limit its scope. 
The division of a partner’s interest into a control 
interest, which may not be transferred unilaterally, and a 
financial interest is mirrored in the Act.  Both when the 
Company was formed and when Janet inherited through Dewey’s 
will, Code § 13.1-1039 provided that 
[u]nless otherwise provided in the articles of 
organization or an operating agreement, a 
membership interest in a limited liability 
company is assignable in whole or in part. . . .  
An assignment does not entitle the assignee to 
participate in the management and affairs of the 
limited liability company or to become or to 
exercise any rights of a member.  Such an 
assignment entitles the assignee to receive, to 
the extent assigned, only any share of profits 
and losses and distributions to which the 
assignor would be entitled.3 
 
Thus, an assignee of a financial interest has no control 
interest in a limited liability company without becoming a 
member.  Code § 13.1-1040(A) provides the means by which the 
assignee of a financial interest may become a member:  “Except 
as otherwise provided in writing in the articles of organization 
or an operating agreement, an assignee of an interest in a 
limited liability company may become a member only by the 
                                                 
 
3 Code § 13.1-1039 was subsequently amended and reenacted to 
add a new subdivision not relevant to this appeal.  2006 Acts 
ch. 912. 
 
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consent of” a majority of those members exercising the direct 
management of the company. 
In light of this statutory background, we turn to Janet’s 
argument. 
B.  DIRECT INHERITANCE OF MEMBERSHIP IN A 
 LIMITED LIABILITY COMPANY BY DESCENT OR DEVISE 
Janet argues that she inherited Dewey’s membership directly 
by operation of his will.  She asserts the Agreement permitted 
her to inherit directly because Paragraph 2 superseded Code 
§ 13.1-1040.1(7)(a).  However, Paragraph 2 merely prohibits any 
member from transferring any part of his membership except (a) 
where specifically allowed under the terms of the Agreement, (b) 
with the consent of all the other members, or (c) upon death, 
intestacy, devise, or otherwise by operation of law.  It does 
not address statutory dissociation and does not state an intent 
to supersede Code § 13.1-1040.1(7)(a).  Consequently, it lacks 
specific language that would constitute an exception to the rule 
of dissociation set forth in Code § 13.1-1040.1.  Dewey thus was 
dissociated from the Company upon his death and Janet became a 
mere assignee by operation of Code § 13.1-1040.2, entitled under 
Code § 13.1-1039 only to his financial interest. 
Even if Paragraph 2 had superseded dissociation under Code 
§ 13.1-1040.1, it is not possible for a member unilaterally to 
alienate his personal control interest in a limited liability 
 
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company.  Code § 13.1-1039(A).  The words “[u]nless otherwise 
provided in the articles of organization or an operating 
agreement” in Code § 13.1-1039 make it possible for a limited 
liability company to restrict the assignment of members’ 
financial interests because they modify the remainder of the 
sentence, which continues “a membership in a limited liability 
company is assignable in whole or in part.”  The words “[u]nless 
otherwise provided in the articles of organization or an 
operating agreement” do not make it possible for a limited 
liability company to allow a member to assign his control 
interest because they do not modify the separate sentence, which 
states that “[a]n assignment does not entitle the assignee to 
participate in the management and affairs of the limited 
liability company or to become or to exercise any rights of a 
member.”  Additionally, Code § 13.1-1023(A) provides that an 
operating agreement may not contain provisions inconsistent with 
the laws of the Commonwealth.  Thus it was not within Dewey’s 
power under the Agreement unilaterally to convey to Janet his 
control interest and make her a member of the Company upon his 
death because the Agreement could not confer that power on him. 
III.  CONCLUSION 
For the foregoing reasons, the circuit court did not err in 
holding that Janet inherited only Dewey’s financial interest in 
the Company – the right to share in profits and losses and to 
 
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receive distributions.  Because she was not a member, the 
circuit court did not err in holding that she lacked authority 
to remove its managing member and successor managing member.  
Accordingly, we will affirm the judgment of the circuit court. 
Affirmed.