In In re Estate of Mandelstein, 2018 IL App (2d) 171009-U, the Appellate Court of Illinois, Second District, held that the last surviving member of an LLC did not owe a fiduciary duty to the estate of his deceased co-member, except to purchase the deceased’s distributional interest in the LLC as required by Illinois’ Limited Liability Company Act (“LLC Act”) at the time. The court also held that awarding attorney’s fees was not required under the LLC Act. The case was decided under the pre-2017 version of the LLC Act, and shows how different the same scenario would be under the present version of the Act.
Lester Mandelstein and his son Leslie Mandelstein were each 50% members of Custom Planning Group, LLC (“CPG”), an investment consulting organization. In addition to CPG’s clients, both men had separate, personal clients. When Leslie passed away, Lester asked his son’s clients to sign asset management agreements with him. Leslie’s widow, Barbara, as independent executor of his estate, filed a complaint asserting several claims, including that Lester breached his fiduciary duty and that she was entitled to fees. While the matter was pending in the circuit court, Lester died as well. His daughter, Linda, was appointed executor of his estate.
Among other things, the circuit court held that Lester, as a member of CPG, owed Leslie a duty to purchase Leslie’s distributional interest for $19,707, but that Lester did not owe Leslie or his estate any further duty. It also held that Leslie’s estate was not entitled to fees under the LLC Act. Barbara appealed both holdings.
The Second District affirmed that Lester, as a member of CPG, did not owe Leslie’s estate any fiduciary duty except to buy out Leslie’s interest. It cited a now-repealed section of the LLC Act, which required an LLC to “purchase a distributional interest of a member for its fair value determined as of the date of the member’s disassociation,” by any means, including by death. Id. at ¶ 28 (emphasis added); 805 ILCS 180/35-60(a). Since CPG had no operating agreement to require otherwise, “the only applicable duties are those prescribed by the Act itself.” Mandelstein, 2018 IL App (2d) 171009-U ¶ 28.
Regarding fees and expenses, the Second District cited another part of the LLC Act that no longer exists, which provided that the circuit court “may award one or more other parties their reasonable expenses” if it finds that a party to a proceeding to determine the fair value of a dissociated member’s distributional interest “acted arbitrarily, vexatiously, or not in good faith.” Id. at ¶ 35; 805 ILCS 180/35-65(d). The Second District found no abuse of the circuit court’s discretion in determining that the parties had not so acted. It held, therefore, that fees and expenses were not required under the LLC Act.
Had the events of this case taken place today, the LLC Act would have dictated a completely different scenario. Instead of CPG being obligated to purchase Leslie’s distributional interest under the now-repealed 805 ILCS 180/35-60, Leslie’s legal representative would have automatically assumed his ownership interest in the LLC as a non-member transferee, and could request information for the purpose of settling his estate. 805 ILCS 180/30-10(e); 805 ILCS 180/30-25; 805 ILCS 180/10-15. She would then receive distributions to which Leslie would otherwise be entitled, including the net amount due to Leslie on dissolution and a statement of account. 805 ILCS 180/30-10(e). As for Barbara’s demand for fees, the removal of the buyout requirement also removed the ability to seek fees in connection therewith under 805 ILCS 180/35-65(d).
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact Matt Pagano at 312.419.6900 or email@example.com.