Pitfalls of Assigning an LLC Interest

One of the objectives in a enterprise divorce is finality – ending a enterprise relationship as soon as and for all. But what if the tip isn’t actually the tip?

When members of restricted legal responsibility corporations (LLCs) promote their pursuits within the LLCs to a 3rd celebration, they could assume that the sale offers the specified finish of their rights and obligations associated to the corporate. But that will not be the case. It is feasible that even after promoting and assigning an LLC curiosity, the assignor might proceed to owe fiduciary duties to the LLC and its members. This publish opinions some of the pitfalls of assigning an LLC curiosity and discusses methods which will assist to keep away from these issues.

The Texas LLC Act – Provisions Governing Assignments of LLC Interests

Chapter 101 of the Texas Business Organizations Code (the “LLC Act”) governs LLCs. The LLC Act offers {that a} member of an LLC might switch his or her membership curiosity to a different celebration in complete or partly. But the project of an LLC curiosity is totally different from the switch of membership within the firm. The project of the LLC curiosity does not give the assignee the rights to (1) take part within the administration and affairs of the corporate; (2) turn into a member of the corporate; or (3) train any rights of a member of the corporate. The project of the LLC curiosity offers the assignee with the best to obtain distributions issued by the corporate and details about the corporate’s funds, however that’s about it.

The LLC Act spells out these rights of the assignee: “An assignor of a membership curiosity in a restricted legal responsibility firm continues to be a member of the corporate till the assignee turns into a member of the corporate.” Further, the assignor doesn’t have the best below the LLC Act to withdraw as a member from the corporate. (An LLC member additionally can’t be expelled from the corporate.) The result’s that even after assignors assign the LLC curiosity and are having fun with “life on the seashore,” they could nonetheless owe fiduciary duties as a member of the corporate.

As a aspect word, this dialogue has assumed that there are fiduciary duties owed inside the LLC at subject. But that isn’t at all times the case. The LLC Act permits the members to agree within the  firm’s certificates of formation or working settlement to switch and even remove all fiduciary duties which can be owed to the corporate and its members by the managers of the LLC. Tex. Bus. Org. Code § 7.001(d)(3). While together with such a provision will surely make it safer for a member to assign an LLC curiosity, doing so poses its personal set of dangers whereas the corporate is working.

A Case Study: Villareal v. Saenz

The downside of fiduciary duties persisting after an project might sound far-fetched, however it’s a actual concern. In Villareal v. Saenz, the co-owners of an LLC agreed to a enterprise divorce wherein Saenz assigned the whole thing of his curiosity within the firm to Villareal. 5:20-cv-571, 2021 WL 1986831, at *2 (W.D. Tex. May 18, 2021). The project was half of a broad launch of claims, each identified and unknown. Villareal later filed go well with, alleging that earlier than signing the discharge, Saenz had engaged in numerous acts of misconduct, together with misappropriating firm commerce secrets and techniques and embezzling funds, and that after the discharge, Saenz had taken over the corporate’s net and e mail area, pulled down the web site, and provided to promote it again to Villareal for $7,000.

A Justice of the Peace decide within the Western District of Texas advisable that each one claims primarily based on alleged acts arising earlier than the discharge needs to be dismissed for failure to state a declare. But the Justice of the Peace decide additionally advisable that the claims in opposition to Saenz primarily based on actions that allegedly occurred after the discharge – together with these for breach of fiduciary obligation – ought to proceed. The courtroom concluded that Saenz had not demonstrated that his fiduciary duties ended when he assigned his curiosity within the firm to Villareal, and he might have breached these fiduciary duties by sustaining dominion and management over the corporate’s e mail server and web site.

Conclusion and Recommendations

The key takeaway from Villareal v. Saenz is that disputes between house owners relating to the fiduciary duties that exist after an project could be prevented by extra clearly wording the corporate settlement or project. The following are particular steps that potential assignors can take earlier than their assign their LLC pursuits to a different celebration:

  • First, assignors can make it possible for the project offers an finish to their membership within the firm by settlement of all members, together with a mechanism set forth for the assignee to imagine the membership curiosity.

  • Second, assignors can embrace an categorical written launch and waiver of any post-assignment duties to the corporate or its members (fiduciary or in any other case). This needs to be signed by the corporate and all of its members to make sure it’s efficient.

  • Third, and most significantly, assignors can be certain that on the outset, when forming the corporate, that the working settlement offers a mechanism for switch of the membership curiosity in reference to an project, specifying what occurs to the member’s duties (fiduciary or in any other case) when the switch takes place.

The backside line is that when assignor is making an attempt to exit the corporate, she or he doesn’t wish to have any persevering with duties to the corporate. To guarantee this takes place, the project paperwork and the phrases of the LLC Agreement ought to affirm that these duties now not exist after the project takes place.

© 2022 Bradley Arant Boult Cummings LLP
National Law Review, Volume XII, Number 67


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