(Fear) the Reaper, LLC: Court of Chancery Clarifies LLC Governance Rights Upon Member Death

A recent decision from the Delaware Court of Chancery, Gurney-Goldman v. Goldman, C. A. 2023-1124-JTL (July 12, 2024), addressed a matter of first impression: What is the power of an estate’s executor to exercise an LLC member’s corporate governance rights after that member dies or becomes disabled? The case reveals a tension between the “pick your partner” principle behind much of Delaware LLC law (members choose to enter into an agreement with the other members, and not their executors) and a policy of fairness to that member who has died or suffered a disability. After evaluating the relevant statutes, Vice Chancellor Laster reasoned that, under the default rule, the executor has seemingly broad power characterized as “a proper purpose, defined as the settlement of the estate or the administration of property.” But the decision also makes clear that parties to an LLC agreement are free to contractually define “the member rights that the executor can potentially exercise.” As the decision succinctly put it: “Let a thousand contractarian flowers bloom.”

Factual Background: A Family Power Struggle Over a Billion Dollar Enterprise

Gurney-Goldman arose out of a family feud involving “one of the largest private real estate empires in New York City.” This empire was founded by a Brooklyn grocer’s son named Sol Goldman. By the time of his death, Goldman had amassed the largest estate to ever enter New York probate (valued at approximately a billion dollars). At issue in Gurney-Goldman was a contest for control over an entity called SG Windsor, which ultimately managed the empire. The primary litigants were Sol’s daughter Jane and his grandson (Jane’s nephew) Steven.

Each of Sol’s four children — Jane, Diane, Amy, and Allan — possessed a 25% membership share in SG Windsor. While the siblings were technically equal members, Jane and Allan emerged as the “key decision-makers” of the LLC, and took on the bulk of its day-to-day management over a 35 year span. But the other siblings were consulted on “major issues,” including the handling of development sites and application for loans during the COVID pandemic.

Allan died, and named his son Steven as the executor of his estate. Allan’s will sought to empower Steven with: (1) the authority to administer and settle Allan’s estate; and (2) Allan’s management powers “with regard to any ‘rights and interests in . . . real estate businesses or enterprises.’” The will was supplemented by an “Appointment of Successor Manager” document, appointing Steven as the successor manager of “each Goldman Family Entity” that Allan previously managed.

Under the supposed authority of Allan’s will and the supplementary document, Steven attempted to act as a member of SG Windsor. Jane rebuffed these efforts. The litigation followed.

Three Key Legal Questions

The Delaware Court of Chancery addressed two threshold issues at the outset: (1) whether the LLC was member-managed or manager-managed (Jane argued that it was manager-managed, and that she was now the sole-manager); and (2) whether the membership interests could pass to Steven’s estate, and thus his heirs. After answering these, the court addressed the power of an executor to exercise an LLC member’s governance rights.

1. LLC’s are Member-Managed Absent Evidence to the Contrary

The court answered the first question by holding that the LLC was member-managed, citing to Delaware’s LLC Act provision that LLCs are member-managed by default. To create a manager-managed structure, “the LLC agreement must expressly vest authority in one or more managers.” SG Windsor lacked a written LLC agreement, but Jane contended that it was governed by an implied agreement that defined Jane and Allan as managers. The court agreed that such an LLC agreement could be implied, but that Jane had failed to carry her burden that it existed here. While Jane and Allan acted as “colloquial managers” by “[running] the . . . family business,” they were not “managers” within the meaning of the LLC Act. Because the other siblings were involved in “consulting and reaching consensus on significant decisions,” they were not simply “passive investors,” but rather member-managers. Responding to Jane’s contention that the other siblings should have taken a more active role in managing the LLC, the court stated that “nothing prevents a member-managed entity from relying on agents,” and that Jane’s higher degree of involvement, while “fulfill[ing]” for Jane, did not make her a “manager” under the LLC Act.

2. An Estate Does Not Become a Member by Default Upon the Death or Disability of a Member

In holding that Allan’s estate was not itself a member of SG Windsor — and limiting Steven’s ability to exercise membership rights — the court cited to the LLC Act’s rule that LLC membership interests are not directly transferrable. Under the Act, if a member attempts such a transfer, the transferee will “only hold[] the rights of an assignee, [consisting] of the economic rights associated with the interest [and] the power to sue derivatively.” For the transferee to upgrade their rights to those of a member, they have to either (1) follow the relevant procedure as provided in the LLC agreement (if such a procedure is so outlined), or (2) attain “the affirmative vote or written consent of all the members of the [LLC].” These rules are applicable even when the transfer results from the member’s death. While the LLC member interest is regarded in Delaware as personal property — which, like other personal property, becomes part of the deceased member’s estate — its movement into the estate constitutes a transfer for the purposes of the LLC Act.

3. But the Executor Does Hold Certain Governance Rights

With the above considered, the court maintained that Steven as executor did possess Allan’s membership rights for the purposes of administering and settling Allan’s estate. Steven possessed these rights under § 18-705 of the LLC Act: “[i]f a member who is an individual dies . . . the member’s personal representative may exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property.” Interpreting, for the first time, the interplay between this section of the LLC Act and those governing membership transfer, the court held that § 18-705 imbues the legal representatives of LLC member decedents with the authority to exercise the decedents’ membership rights for the purposes of estate administration. The court emphasized that the standard for representative conduct is “proper purpose” rather than necessity; thus, so long as the representative rationally “believe[s] that [their] exercise of governance rights serves a proper purpose,” courts will not “second guess” the representative’s actions. The court noted that the case did not present an opportunity to evaluate whether Steven had exercised any governance rights for that proper purpose.

Key Takeaways

• In Delaware, it is difficult to avoid the default rule that an LLC is member-managed, absent a written and explicit agreement. As this case demonstrates, mere “management” in the colloquial sense — even if practically and temporally extensive — will not turn a member-managed LLC into a manager-managed one. If parties want to make the LLC manager-managed, they need to say so explicitly.
• The LLC rule against per se membership transfers applies even if the transfer occurs as a result of death. Like any other transferee, the decedent’s estate is an assignee, and not an LLC member.
• Yet, the legal representative of a deceased LLC member will possess the member’s governance powers for the purpose of administering the member’s estate. This power could be quite broad. If parties to an LLC want to limit such power, they should take care in drafting the LLC agreement. The court made clear that, like most default rules regarding LLC governance, this one could be modified in many ways: “Drafters can take these issues into account, just as they take into account other issues presented by the contractual freedom that the LLC Act provides. Whatever rights the executor can exercise remain subject to the ceiling that Section 18-705 imposes: they have to be used for a proper purpose of either settling an estate or administering the former member’s property.”

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