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In Lusk, however, the court did not set out to define the meaning of "beneficial interest," and in fact merely used the term "beneficial interest" synonymously with "financial interest" in its examination of whether the beneficial interest or the entire membership interest of a limited liability corporation had been transferred.
Summary of this case from MODERN COMMUNICATION SERVS. v. NEP IMAGE GROUPOpinion
Civil Action No. 16326.
Date Submitted: May 24, 1999.
Date Decided: August 13, 1999. Date Revised: August 16, 1999.
Kenneth J. Nachbar and Donna L. Culver, Esquires, of MORRIS, NICHOLS, ARSHT TUNNELL, and J. B. Gallegos and Michael J. Condon, Esquires, of GALLEGOS LAW FIRM, P.C., Attorneys for Plaintiff.
Allen M. Terrell, Jr., and Srinivas M. Raju, Esquires, of RICHARDS, LAYTON FINGER, and John M. Eaves and Karen S. Mendenhall, Esquires, of EAVES, BARDACKE, BAUGH, KIERST KJERNAN, P.A.; Attorneys for Defendants.
MEMORANDUM OPINION
The dispute on these cross motions for summary judgment concerns who constitutes the lawful members and manager of AMI Aviation II, L.L.C., a Delaware limited liability company ("AMI"or the "Company"). AMI was formed to own and operate a 1984 Cessna Citation III aircraft (the "airplane"), which is the Company's primary asset. Although the plaintiff owns only a 1% membership interest in AMI, it claims to be AMI's sole member because (plaintiff claims) the late Neal M. Elliot ("Mr. Elliot"), AMI's former 99% owner and manager, extinguished his membership fights when he assigned his 99% interest in AMI to a family trust (the "Trust") in February 1998.
The plaintiff, Ron Lusk ("Lusk"), filed this action as trustee for Citation Realty Trust ("CRT"), the 1% owner of AMI, under 6 Del. C. § 18-110 and 18-111 of the Delaware Limited Liability Company Act (the "DLLCA"). In this lawsuit Lusk seeks a declaratory judgment that (i) CRT is the sole lawful member and manager of AMI, (ii) the defendant Gail W. Elliot (who is Mr. Elliott's widow) ("Mrs. Elliot"), lacks any power or authority to act on behalf of AMI, and (iii) under the provisions of the Operating Agreement that governs AMI's affairs, CRT's written consent is required to sell, lease, or transfer the airplane that is AMI's principal asset.
The specific question presented on these cross motions is whether the assignment of Mr. Elliott's 99% interest in AMI had the effect of transferring only a beneficial interest in the Company to the Trust, or whether it transferred all of Mr. Elliott's membership rights (including the rights to vote and participate in the management) as well. The answer to that question is pivotal, because if the assignment did not convey Mr. Elliott's membership rights, then under the DLLCA and the Operating Agreement, CRT — which owns 1% of AMI — would be AMI's sole member.
For the reasons explained more fully below, the Court determines that the February 1998 assignment transferred Mr. Elliott's entire membership and 99% ownership interest to the Trust, and that as a consequence, the defendant Trust succeeded to Mr. Elliott's 99% membership interest in AMI. Accordingly, summary judgment will be entered in favor of the defendant and against the plaintiff.
I. BACKGROUND
The background facts are undisputed.
A. The Parties
Both the plaintiff and Mr. Elliot were the founding members and owners of AMI, a Delaware limited liability company that (to repeat) was formed for the purpose of acquiring, owning, leasing, and operating the airplane.
The plaintiff, Lusk, is the trustee for CRT, a Texas trust, that was (and is) the original owner of a 1% membership interest in AMI. To manage the airplane's daily operations and its finances, CRT was paid a management service fee from the income generated by the airplane.
The defendant, Mrs. Elliot, is the trustee for the Neal M. Elliot and Gail Williams Elliot Trust (the "Trust"), which now claims to own a 99% interest in AMI. Before he conveyed his 99% AMI interest to the Trust, Mr. Elliot was the AMI's sole managing member.
Lusk Aff. Ex. B, at 4-5 (Operating Agreement § 3.1 (a)).
B. The Operating Agreement
CRT and Mr. Elliot were the two signatory parties to the Operating Agreement, which sets forth the governance rules that are applicable to AMI. Section 6.1(a) of the original Operating Agreement, the provision relevant to this case, originally prohibited transfers and assignments of a membership interest to non-members:
At that time, CRT's trustee was Vanessa Adams.
No Member shall sell, assign, transfer, mortgage, charge, encumber, or suffer any third party to sell, assign, mortgage charge, encumber of contract to permit any of the foregoing, whether voluntarily or by operation of law (collectively, "Transfer"; together with all derivations thereof), all or part of its Interest in the Company to an Affiliate or to any third party, other than another Member. Any Transfer in violation of this prohibition shall be void ab initio.
Lusk Aff. Ex. B, at 15 (Operating Agreement § 6.1(a) (emphasis added)).
The Operating Agreement also provided, in Section 4.1(c)(i), that if the managing member desired to sell the airplane, the written consent of all members would be required. Section 4. 1(c)(i) pertinently stated:
Limitation on Authority. The Managing Member shall have the authority to take the following action or to adopt the following proposals, only upon the unanimous written approval of the Members: (i) The sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the Company. . . .
Lusk Aff. Ex. B, at 9 (Operating Agreement § 4.1 (c)(i)).
Thus, the agreement of both Lusk and Mr. Elliot was required in order to sell the airplane, which represents "all or substantially all of the assets" of AMI.
That is still the case, even though the Court finds that the Trust is a member of AMI.
Finally, the Operating Agreement provides that it can be amended if the amendment is accomplished by a "supplemental written instrument executed by all members."
Elliot Aff. Ex. 1, at 23 (Operating Agreement § 10 (b)).
C. The Consent to Assignment and the Assignment
On February 5, 1998, in anticipation of Mr. Elliott's imminent death, Lusk and Mrs. Elliot consented in writing to an assignment of Mr. Elliott's "entire and undivided membership interest" in AMI to the Trust. The written consent states in pertinent part:
Consent to Assignment of Interest in AMI Aviation II, L.L.C. Lusk Aff. Ex. C at I (emphasis added).
We, the members of AMI AVIATION II, L.L.C. . . . hereby consent to the assignment by Neal M. Elliot . . . by and through Gail Williams Elliot, his attorney-in-fact, and Gail Williams Elliot . . . of their entire undivided membership interest to Neal M. Elliot and Gail Williams Elliot . . . Trustee of the Neal M. Elliot and Gail Williams Elliot Trust[.] We, the Members of AMI AVIATION II, L.L.C., agree that this assignment shall not constitute a prohibited assignment under Section 6.1 or any other section of AMI AVIATION II, L.L.C. Operating Agreement, it being the intent and effect of the assignment to preserve for Neal M. Elliot the beneficial ownership of his membership interest.
Lusk Aff. Ex. C (emphasis added).
Both parties agree that by executing the above-quoted Consent To Assignment of Interest in AMI Aviation L.L.C. (the "Consent"), Lusk and Mrs. Elliot (as Mr. Elliott's attorney-in-fact) amended Section 6.1(a) of the Operating Agreement to permit the assignment or transfer of Mr. Elliott's interest to an affiliate or third party other than a member. The parties disagree, however, over whether that Consent authorized the conveyance of Mr. Elliott's entire membership interest in AMI or only the beneficial financial interest underlying that membership interest. The defendant argues that the Consent operated as a transfer of Mr. Elliott's entire membership interest; the plaintiff contends it was merely an "assignment" of Mr. Elliott's financial interest in AMI. The distinction is critical, because the plaintiff contends that this issue is governed by the DLLCA, under which an "assignment" conveys only a member's financial interest — as distinguished from his entire membership interest — in a limited liability company.
See 6 Del. C. § 702(b)(1) ("assignment" of an interest in an LLC does not permit the assignee to become a member of the limited liability company); 6 Del. C. § 702(b)(3) (upon the assignment of all of a member's interest in an LLC, the member ceases to be a member).
On the same day that she executed the Consent, Mrs. Elliot also executed a written instrument, on her husband's behalf, conveying Mr. Elliott's interest in AMI to the Elliot Trust (the "Assignment"), of which she was the Trustee. The Assignment states in pertinent part:
Neal. M. Elliot . . . by and through Gail Williams Elliot, his attorney-in-fact, and Gail Williams Elliot, his wife . . ., hereby assign to Neal M. Elliot and Gail Williams Elliot . . ., Trustee of the Neal M. Elliot and Gail Williams Elliot Trust . . ., all of their membership interest in AMI AVIATION II, L.L.C.
Elliot Aff. Ex. C (emphasis added).
D. The Lusk Amendment
Mr. Elliot died shortly thereafter. Several weeks later, in late March 1998, Mrs. Elliot decided that AMI should sell the airplane, and she began negotiations with prospective purchasers. On April 7, 1998, Mrs. Elliott's counsel sent to Lusk a notice of a meeting at which the sale and dissolution of AMI would be discussed. Fearing that a sale of the airplane would effectively dissolve AMI because it was AMI's only asset, Lusk reacted by taking action unilaterally, on April 16, 1998, to amend the Operating Agreement to designate CRT as the sole remaining member of AMI (the "Lusk Amendment"). The Lusk Amendment purportedly was accomplished under Section 10(b) of the Operating Agreement, which provides that that Agreement "shall not be modified or amended except by supplemental written instrument executed by all Members."
Lusk Aff. Ex. B, at 23 (Operating Agreement § 10(b)).
If valid, the Lusk Amendment would have amended Section 4.1(a) of the Operating Agreement to provide that AMI now has only one member — CRT — which would also be AMI's sole managing member having the power and authority to manage the business and affairs of the company. The validity of the Lusk Amendment depends upon whether CRT was AMI's sole de jure managing member at the time that Amendment was adopted. Because I conclude that CRT was not, the Lusk Amendment had no legal force or effect.
II. THE CONTENTIONS
The plaintiffs argument that CRT is AMI's only managing member runs as follows: CRT's executing the Consent to the Assignment represented only that: a consent to an "assignment" to the Trust of only Mr. Elliott's beneficial financial interest — but not his entire membership interest — in AMI. The plaintiff argues that because the Operating Agreement contains no provision governing assignments, the Court must look to the DLLCA default rules, which state that unless the Operating Agreement provides to the contrary, an "assignment" conveys only a member's financial interest (but not his entire membership rights). Such an assignment also has the effect of extinguishing all the assignor's membership rights. Therefore, (plaintiff concludes) the effect of the Assignment was to terminate all of Mr. Elliott's membership rights, and to leave CRT as AMI's sole managing member and the Trust as the owner of only a beneficial financial interest in AMI.
The defendants disagree. They contend that the Trust succeeded to Mr. Elliott's entire membership interest and became the new managing member of AMI. They argue that the Consent amended the Operating Agreement to allow the transfer of the entirety of Mr. Elliott's membership interest to the Trust, and that the Assignment carried out that intended transfer. For support, they point to language in the Assignment expressly describing the conveyance as an "assignment . . . of [the Elliots'] entire undivided membership interest" in AMI.
Elliot Aff. Ex. 3 (Consent to Assignment).
For the reasons discussed below, I find that (a) the Consent amended the Operating Agreement to permit the transfer of Mr. Elliott's 99% membership interest in AMI, and that (b) the Assignment effectively conveyed that entire membership interest to the Trust. As a result, the Trust became, and now is, the 99% owner and managing member of AMI.
III. ANALYSIS
Summary judgment is appropriate only where the moving party demonstrates that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Because here the pivotal, dispositive facts are undisputed, summary judgment is appropriate.
Mentor Graphics Corp. v. Quickturn Design Sys. Inc. Del. Ch., C.A. Nos. 16584, 16588, slip op. at 7, Jacobs, V.C. (Oct. 9, 1998).
A. Amendment of the Operating Agreement
To determine whether the Trust is a managing member of AMI, the Court must first determine whether the Consent amended the Operating Agreement to permit the transfer of Mr. Elliott's membership interest to the Trust. I conclude that it did. The Operating Agreement provided that "This Agreement shall not be modified or amended except by supplemental written instrument executed by all the members." The Consent here was in writing and was executed by (or on behalf of) all AMI's members.
Elliot Aff. Ex. 1, at 23 (Operating Agreement § 10 (b)).
The Consent amended the Operating Agreement to permit the transfer of a member's interest to a person other than another member. Where the provisions of a contract are plain and unambiguous, the Court will look only to the four corners of the document to determine what the parties intended. Evidence extrinsic to the document is generally inadmissible. In addition to identifying the Trust as the transferee, the Consent expressly stated that, "this assignment shall not constitute a prohibited assignment under . . ., the Operating Agreement." Without that language the Assignment would have been a "prohibited assignment," because the conveyance ran in favor of an non-member affiliate of Mr. Elliot. Only if the Assignment operated as an amendment that permitted a transfer of a membership interest to a non-member would it not be a "prohibited assignment under the Operating Agreement." It follows that the Consent amended the Operating Agreement in the manner described above.
Universal Studio Inc. v. Viacom. Inc. Del. Ch. 705 A.2d 579, 589 (1997).
Elliot Aff. Ex. 3 (Consent to Assignment).
B. The Effect of the Consent and Assignment
The remaining issue concerns the legal effect of the Consent and the Assignment; specifically, whether those instruments were limited to an "assignment" of only a financial interest, or constituted a broader authorization permitting a "transfer" of Mr. Elliott's entire membership interest. The plaintiff argues that before the Consent was executed the Operating Agreement prohibited assignments, but did not define that term, and that in cases such as this where the Operating Agreement is silent, the Court must look to the DLLCA default rule governing the definition of an "assignment." Under that default rule, an assignment" of an interest in a limited liability company operates to convey only a limited liability company interest, i e a "financial interest" in the member's dividend distributions and any future sale proceeds. The plaintiff concludes that because the Consent refers to the transfer as an "assignment" and the conveying instrument itself is labeled an "Assignment," the effect was only to convey a beneficial financial interest in Mr. Elliott's holdings in AMI. I cannot agree.
The Consent here amended the Operating Agreement to permit an assignment of an entire membership interest to a third party. To that extent the Consent does define what is meant by the term "assignment," and it does obviate the need to look solely to the DLLCA for guidance. In this case the effect of the Consent and the Assignment may be determined by reference to these two instruments themselves. The clear language of those instruments unambiguously shows that the interest being "assigned" to the Trust is Mr. Elliott's "entire undivided membership interest." It follows that the Assignment effectively conveyed the entirety of Mr. Elliott's membership interest to the Trust, and that as a consequence the Trust, by virtue of the amendatory effect of the Consent, succeeded to Mr. Elliott's membership and 99% ownership interest in AMI.
IV. CONCLUSION
For the reasons discussed above, the Court determines that the Trust is a member of AMI, which entitled it to all of the rights and privileges of membership. Accordingly, the plaintiffs motion for summary judgment is denied, and the defendant's cross motion for summary judgment is granted. Counsel shall confer and submit a form of implementing order.