Delaware Supreme Court Affirms Court of Chancery Ruling on Estate’s Assignee Status and Limits Executor’s LLC Governance Authority
The Delaware Supreme Court affirmed the Court of Chancery’s ruling in Gurney-Goldman v. Goldman based on the Court of Chancery’s post-trial opinion, which addressed the status of a decedent’s estate in an LLC following the decedent-member’s death and the scope of an executor’s authority to act with regard to the LLC during estate administration.
Allan Goldman (the “Decedent”) held a 25% interest as one of four equal members of a Delaware LLC tied to a New York real estate enterprise. After his death, the Decedent’s son, in his capacity as executor of the Decedent’s estate (the “Executor”), sought a declaration from the Court of Chancery that he could exercise the governance rights attached to the Decedent’s 25% stake in the LLC. One of the Decedent’s siblings supported that request, while the other two opposed it, giving rise to a dispute over both the LLC’s management structure and the Executor’s authority to act on behalf of the deceased member.
The Court of Chancery first determined whether the LLC was member-managed or manager-managed. With no written operating agreement in place, the Court applied the default rule under the Delaware Limited Liability Company Act (the “LLC Act”): an LLC is member-managed unless its governing documents state otherwise.
Applying 6 Del. C. § 18-702 and related provisions of the LLC Act, the Court of Chancery held that because the estate had not been admitted as a member of the LLC under the LLC Act or pursuant to an agreement among the relevant parties, it succeeded only to an assignee interest—carrying economic rights, but not the governance rights associated with membership. The Court noted that the question of whether an executor could exercise a decedent-member’s governance rights in an LLC is not well developed in Delaware law.
Turning to Section 18-705 of the LLC Act, the Court of Chancery held that a personal representative, such as an executor, can exercise a decedent-member’s governance rights, but only for purposes of administering and settling the estate. In reaching that determination, the Court observed that Section 18-705 requires the Executor to exercise any governance rights for a “proper purpose,” defined as the settlement of the estate or the administration of property. The Court acknowledged that estate administration commonly requires safeguarding and managing assets, which can in turn require participation in LLC governance when the decedent’s interest is part of the estate. Accordingly, so long as the Executor rationally believes his actions serve a proper purpose, a court will not second-guess the exercise of those governance rights.
Goldman confirms that, absent an agreement to the contrary, an estate does not automatically become a member of a Delaware LLC. The decision clarifies that executors may exercise governance rights in an LLC only to the extent necessary to carry out their fiduciary responsibilities to settle and administer the estate, subject to Delaware’s proper-purpose limitations. Beyond such purposes, a decedent-member’s estate holds only the rights of an assignee.
This blog entry was primarily authored by Sierra Turner.
Gurney-Goldman, et al. v. Goldman, C.A. No. 2023-1124-JTL (July 12, 2024)
