Collateral Assignment, Member Rights, and Judicial Dissolution in a Kentucky LLC
Ridgeview Analytics, LLC is a Kentucky limited liability company with three members: Alvarez (40%), Boone (30%), and Chen (30%). Its operating agreement gives the manager authority over hiring and says nothing about transfers, withdrawal, or dissolution; it has no stated term. Boone, the manager, signs a collateral assignment of 'all right, title, and interest in my membership interest' to First Fidelity Bank to secure a $150,000 loan. The bank notifies Ridgeview, demands member voting rights, and asks for the company's tax returns. Alvarez and Chen refuse. Boone then stops attending meetings, and Alvarez and Chen cannot agree on a replacement operations director. Boone petitions a Kentucky circuit court for judicial dissolution, alleging deadlock and that the company is 'failing.' Alvarez and Chen move to dismiss, arguing Boone transferred away his membership and lacks standing.
1. Is First Fidelity a member with voting and inspection rights? Explain.
Read the worked answer
No. Kentucky's LLC Act separates economic rights from governance rights. A transferee of a membership interest ordinarily receives only the assignor's distributions and allocations; it does not become a member, vote, manage, inspect books, or demand tax returns unless the operating agreement so provides or all members consent. A collateral assignment is also not an outright sale: Boone retained the underlying membership and the bank took a security interest. The bank may perfect that interest, but its demand for member rights fails. The company should provide only the information required by the statute and operating agreement, not treat the bank as a member.
2. On these facts, should the court order judicial dissolution? What must Boone show?
Read the worked answer
Judicial dissolution is an extraordinary remedy. Boone must show that it is not reasonably practicable to carry on the business in conformity with the articles and operating agreement-typically deadlock that paralyzes management, oppression, waste, or irreparable injury. A single disagreement over hiring, coupled with Boone's own refusal to attend meetings, is not enough, especially where the operating agreement gives the manager authority and there is no proof of insolvency or operational failure. Courts defer to the members' agreement and will not dissolve a viable company merely because relations are strained. The motion to dismiss should likely be granted, though Boone may amend if he can plead concrete financial failure or a true management paralysis.
3. Assume the operating agreement instead stated that no member may withdraw before the fifth anniversary and Boone assigned his interest in year two. What consequences follow for Boone?
Read the worked answer
If Boone's assignment amounted to a withdrawal before the stated term, it is a wrongful dissociation. Boone remains liable for damages caused by the premature exit, including costs of finding a replacement manager and any lost business, and those damages may be offset against future distributions owed to him. Wrongful dissociation does not give him a stronger claim to judicial dissolution; a court may deny dissolution where the petitioner's own breach created the problem. The bank still is not a member-it is at most an assignee of economic rights-and Boone's wrongful conduct does not enlarge those rights.