Deadlock and Dissociation in a Three-Member LLC
Alma, Ben, and Carla formed an LLC with equal capital contributions. The operating agreement says only that a member may withdraw on 30 days' notice and that the remaining members may continue the business. It is silent on death, bankruptcy, and buyouts. Alma dies; her estate demands fair value and an accounting. Two weeks later Ben files Chapter 7 bankruptcy; the trustee demands the value of Ben's interest. Carla sends both the estate and the trustee a letter stating that she is continuing the business and will not pay until a court orders it. Carla then uses LLC funds to pay herself a $25,000 bonus and to hire her brother as manager without member approval. The LLC has no other assets beyond a leased storefront and inventory. The estate and trustee sue. The court must determine whether the LLC dissolved, what interests the estate and trustee hold, and whether Carla breached duties.
1. Did Alma's death or Ben's bankruptcy dissolve the LLC?
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Under the RULLCA default rules, Alma's death and Ben's bankruptcy each dissociate the member. Dissociation does not always dissolve an LLC. In an at-will LLC, a dissociated member's exit triggers dissolution unless a majority of the remaining members consent to continue within 90 days. Here, the operating agreement says the remaining members may continue, but it does not specify how many must consent. After Alma dies, Ben and Carla remain. Ben files bankruptcy, leaving Carla as the only non-dissociated member. Carla alone is not a majority of the two remaining members, so the default dissolution rule may be triggered. If the operating agreement is read as allowing any remaining member to continue, Carla might continue, but that reading is doubtful because it would let one member override the others. The LLC likely dissolved and must wind up unless the estate and trustee consent to continue.
2. What rights do Alma's estate and Ben's bankruptcy trustee have in the LLC?
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The estate and trustee are transferees of economic interests, not members. A deceased member's estate and a bankrupt member's trustee generally have only the right to receive distributions and the fair value of the interest; they do not have governance or management rights. If the LLC dissolved, they are entitled to their share of the assets after winding up and payment of creditors. If the LLC continues, they are entitled to a buyout at fair value as of the dissociation date. The operating agreement is silent on buyouts, so the statutory default applies. Carla's letter refusing to pay until court order does not eliminate the obligation. The estate and trustee can seek an accounting and judicial determination of value. They cannot force a sale of LLC assets outside winding up unless the statute allows.
3. Did Carla breach fiduciary duties by paying herself a bonus and hiring her brother?
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Carla may have breached fiduciary duties. As a member-manager, she owes duties of loyalty and care. Using LLC funds to pay herself a $25,000 bonus without member approval may be self-dealing, especially after the estate and trustee demanded an accounting and while the LLC's status was disputed. Hiring her brother as manager without approval may also be a conflict of interest if the hiring was not in the ordinary course or was not at arm's length. The duty of loyalty requires her to act in the LLC's best interest and not to usurp opportunities or take improper personal benefits. The duty of care requires informed, reasonable decisions. Carla's unilateral actions may be voidable or subject to damages. The court should order an accounting and determine whether the bonus and hiring were fair to the LLC.