The First District recently examined the nature of a limited liability company (LLC) member’s personal liability and the requirements for converting a general partnership to an LLC.
In Daniel v. Ripoli, 2015 IL App (1st) 122607, a case with a labyrinthine fact pattern, an LLC member’s estate sued an accounting company LLC to recover distributions the estate claimed was owed the deceased member under the LLC operating agreement.
The LLC defended by asserting that the deceased’s distribution amount was permanently reduced before he died by an amendment to the operating agreement. The trial court entered a money judgment of about $200,000 for the plaintiff and the LLC appealed.
Held: reversed. The operating agreement’s amendment lessened the deceased member’s distribution amounts from the amendment date forward.
Rules/Reasons:
1/ In Illinois a contract can be modified by express agreement or by conduct. A contractual modification that’s not expressly agreed to can be ratified by acquiescence in a course of conduct consistent with recognizing the modification;
2/ An LLC provides more insulation from liability for its members than does a corporation for its shareholders;
3/ Under Section 10-10(a) of Illinois’ LLC Act, 805 ILCS 180/10-10(a), LLC members aren’t liable for debts of the LLC unless (1) the articles of organization provide for personal liability; and (2) the member has consented in writing to the adoption of a personal liability provision;
3/ The failure of an LLC to observe usual corporate formalities in connection with the operation of its business is not a basis for imposing personal liability on LLC members or managers;
4/ When a general partnership converts to an LLC, all that’s required is each partner vote for the conversion. The partnership does not need to also transfer all of its assets to the newly formed LLC;
5/ Once the conversion from partnership to LLC is complete, all debts and assets of the partnership automatically become those of the LLC;
7/ An LLC member can sue the LLC or another member for legal or equitable relief with or without an accounting to enforce the member’s rights under the LLC Act, the operating agreement or any other rights of the member;
8/ The death of an LLC member results in the member’s disassociation from the LLC;
9/ The LLC Act does not allow for a deceased member’s estate to sue the LLC or other LLC members on the deceased member’s behalf;
805 ILCS 180/10-10(a), (c), 180/15-20.
The court held that here, once the accounting general partnership converted to an LLC, the LLC members (who were the erstwhile partners) had no liability to non-members like the plaintiff.
Additionally, the parties’ conduct indicated a mutual recognition that the deceased’s distributions were reduced by the deceased member accepting lesser distributions for several years before he died. The court then reversed the judgment against the LLC.
Afterwords:
A former LLC member’s estate has no standing to sue an LLC absent legislative decision to the contrary;
A partnership’s assets and liabilities become those of an LLC upon conversion to the LLC form;
Basic contract formation principles apply when determining LLC members’ rights and duties under an operating agreement.