Court Opinion

ID: 1057971
Source: CourtListenerOpinion
Date Created: 2013-10-09 18:28:18.49842+00
Date Added: 2024-06-11T08:37:43.660127
License: Public Domain

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.”
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.

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