Ott v. Monroe ( 2011 )

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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