A Sole Member May Not “Mutually Agree” with Himself to Avoid Required Action

Where the Operating Agreement required certain actions to be taken in a particular situation (i.e., dissolution upon death of a member) but permitted avoidance of that act where all “members” had “mutually agreed,” the sole member of the LLC could not “mutually agree” with himself to avoid the required act.  Agarwal v. Estate of Agarwal, 2022 NCBC 7 (J. Earp).  As a result, the sole member’s resolutions avoiding the dissolution of the LLCs were of no effect.

Decedent formed a number of LLCs to own and operate several Dunkin Donuts franchises and to manage the land that they sat upon. Decedent was the sole member of each LLC at the time of formation, and each Operating Agreement required mandatory dissolution of the LLC upon a member’s death.  However, each agreement also allowed dissolution to be avoided if the “members” of each LLC “mutually agree” to continue to operate after the death of a member.  Thereafter, Decedent invited Plaintiff to become a 50/50 member of each LLC, in exchange for operating the stores.  Plaintiff agreed.  When Decedent died several years later, Plaintiff (as sole member of each LLC) passed corporate resolutions directing that the LLCs should each continue in operation.  Decedent’s estate objected, contending Plaintiff did not have the power to unilaterally avoid the automatic dissolution.  Plaintiff filed suit, seeking a declaratory judgment as to his rights under the Operating Agreements.  The Estate file a motion for judgment on the pleadings, seeking a declaration that the resolutions were of no effect.

The Business Court agreed with the Estate. Looking at the plain language of each Operating Agreement, the Business Court held the language mandated dissolution of each LLC upon a member’s death. (Opinion, ¶31).  Although the Court recognized each agreement allowed the dissolution to be avoided if all “members” would “mutually agree” to avoid dissolution (Id., ¶31), the Business Court held the agreements’ plain language (i.e., the fact that “members” was in the plural, and “mutually agree” required agreement among more than one member) required such at least two members to reach such consensus. (Id.). As a result, Plaintiff was foreclosed from unilaterally avoiding the dissolution requirement by essentially “agreeing with himself.” (Id, ¶30, 32).

Based upon this decision, any business whose Operating Agreement allows otherwise required actions to be avoided if multiple members agree would be well-served to review its Operating Agreement to ensure the proper requirements for avoidance exist.

Additional Legal Points:

  • The default rule under the Limited Liability Company Act is that the estate of a member merely has an economic interest in the company, but does not become a member of the company. (Opinion, ¶36).  While an Operating Agreement can alter that default rule, the language must be clear. (Id., ¶37).  Otherwise, it must be decided by a jury. (Id., ¶39).

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