In most cases, members of Tennessee limited liability companies will ensure, at the time of the formation of the LLC, that there is properly signed documentation which establishes which persons are members and their respective membership interest percentages. Most often, this is done in an operating agreement. It is not unusual, however, given the pace of many business deals, that the LLC members, or those purporting to be members, fail to clarify, in writing, who are members and/or the percentage interest of each of the members.
The Tennessee Revised Limited Liability Company Act (the “LLC Act”) provides the framework and procedures for the formation of a Tennessee LLC. It also provides key provisions that are applicable, by default, where the members have failed to agree on certain terms regarding the LLC’s governance or their rights as members. (For example, the LLC Act provides for the voting rights of members, sets forth the fiduciary duties of members, provides for members to have the right to review LLC records, and provides for the percentage of profits to which members are entitled). The LLC Act, however, gives no guidance whatsoever as to how to determine which persons are members of an LLC or how to determine their ownership percentages where those matters have not been agreed to in a writing, such as an operating agreement.
Given that the LLC Act is not helpful in sorting out who an LLC’s members are in situations where the identity of the members has not been agreed to in a writing, Tennessee case law provides the only authoritative guidance. (Case law from other states could well be persuasive). In Tennessee, as of this post, there are only two cases in which Tennessee courts have addressed this issue.
In the first of those cases, Parigin v. Mills (Tenn. Ct. App. 2017), the court determined that the party at issue was not a member. In the second case, Heatherly v. Off the Wagon Tours, LLC (Tenn. Ct. App. 2021), the court determined that the party at issue was a member. Here are the facts of the two cases.
Parigin v.Mills:
- Mills claimed to be a member of the LLC at issue
- It was undisputed that Mills had never contributed any money to the LLC
- Mills was very actively involved in the formation of the LLC and its operation after formation
- Mills conceived the idea for a business, and he talked with Landers about being involved with it
- Mills and Landers had a lawyer prepare articles of organization and an operating agreement for the LLC
- The articles provided that the LLC had two members
- The operating agreement provided the same, but was never signed by Mills or Landers
- Landers testified that Mills told him that Mills would be contributing $180,000 for his membership interest and that Landers had to contribute the same for his membership interest
- Landers concluded that he did not have the $180,000 for the investment so he walked away from the deal after Mills, according to Landers, told him that, if he didn’t have the $180,000, he could not be a member
- Mills then approached Parigin and Wheatley
- Parigin contributed $217,370
- Wheatley contributed $50,000
- Parigin, Wheatley and another potential investor who had been approached by Mills all testified that Mills had stated that he would contribute $180,000 for his interest
- There was also testimony that the same lawyer who prepared the articles and the first operating agreement (which was never signed), prepared a second operating agreement which provided that Mills and Parigin would each contribute $217,500 for their interest
- Like the first operating agreement, the second one was never signed
Based on the above facts in the Parigin case, it is, for me at least, easy to understand why Mills was determined to have no ownership.
Heatherly v. Off the Wagon Tours, LLC:
- Heatherly conceived of the idea for a business which would offer rides in downtown Nashville in a “party wagon” pulled by a customized tractor
- Carney thought Heatherly’s idea was good
- Carney agreed that the idea for the business was Heatherly’s
- Carney had Legal Zoom prepare and file articles of organization for the LLC
- The articles stated that there were four members of the LLC, but did not identify them
- Carney admitted that he had offered Weatherly a 5% membership interest
- Carney had Legal Zoom prepare an operating agreement for the LLC
- The operating agreement listed both Carney and Weatherly as members, but Weatherly never signed it
- Carney provided the start-up funds for the business
- Weatherly did not provide any funds, but contributed hours of his time
- When the parties’ relationship deteriorated, Carney’s lawyer sent correspondence to Weatherly offering to “purchase his shares” in the LLC
- Carney even admitted that Weatherly was his “partner”
A critical lesson from this case is that a member’s failure to sign an operating agreement wherein his or her membership interest is expressly stated is not fatal when other facts support that he or she was a member. Also, this case substantiates that a person does not necessarily have to contribute money to become an LLC member. A lesson from both cases is that, where there is no properly executed documentation setting forth the identity of the members, a Tennessee court will look to the surrounding facts to determine whether someone is a member or not. If you have a limited liability company dispute, you should consult with a qualified Tennessee lawyer to determine your rights and chances of success.