SUCCESSION OF Arthel SCHEUERMANN.
MAY IT PLEASE THE COURT:
Mark Gonzalez, as executor of the Succession of Arthel Scheuermann, and Mark Gonzalez, individually, appeals the Trial Court's Partial Summary Judgment ruling on the constitutionality of La.R.S.12:1330 and 12:1333 because the case can be disposed of on non-constitutional grounds. There are questions of material fact as to whether there is an operating agreement that addresses the heritability of Ms. Scheuermann's financial interest in the LLC.
Standard of Appellate Review of Summary Judgments
A summary judgment is reviewed on appeal de novo, with the appellate court using the same criteria that govern the trial court's determination of whether summary judgment is appropriate; i.e. whether there is any genuine issue of material fact, and whether the movant is entitled to judgment as a matter of law. Wright v. Louisiana Power & Light, 2006–1181 p. 17 (La.3/9/07), 951 So.2d 1058, 1070.
In the present case, there are genuine issues of material fact which preclude summary judgment. The court need not review de novo the constitutionality of statutes that would not even be applicable to this case if there is an operating agreement concerning heritability of a member's financial interest in the firm.
ISSUE 1: Trial Court Should Have Deferred Ruling on Constitutionality of LLC Statutes Because Discovery Could Moot Necessity of a Ruling
As a matter of law, the Trial Court should have denied the Motion for Summary Judgment because a thicket of factual issues need to be resolved before a ruling on the constitutionality of the LLC statutes is necessary.
There is a genuine issue of material fact as to whether the partnership between Ms. Scheuermann and Mr. Jones was terminated, and, if so, when and under what terms. If the partnership was terminated in 2009, what happened to the partnership assets that are heritable by Ms. Scheuermann's legatees? There are also genuine issues of material fact as to whether Ms. Scheuermann and Mr. Jones had an operating agreement that included heritability of a member's financial interest in the firm. It is hard to imagine that these two people, law partners for more than 30 years, had no agreement regarding each member's financial interest at death.
Because there are genuine issues of material fact, as a matter of law the courts should defer ruling on constitutionality of statutes. The entire issue before the court should be made moot through discovery.
In Ring v. State, Dep't of Transp. & Dev., 2002–1367 (La.1/14/03), 835 So.2d 423, 427 the Louisiana Supreme Court re-affirmed long-held jurisprudence that the courts should not rule on constitutional issues if not imperative to the suit. The Court held:
We have repeatedly and consistently held that courts should refrain from reaching or determining the constitutionality of legislation unless, in the context of a particular case, the resolution of the constitutional issue is essential to the decision of the case or controversy․ Courts should avoid constitutional rulings when the case can be disposed of on non-constitutional grounds. Blanchard v. State Through Parks and Recreation Commission, 96–0053 (La.5/21/96), 673 So.2d 1000, 1002.
In Ring, the Supeme Court went on to set the standard for when constitutionality is ripe for judicial review. The ripeness doctrine is a tool designed to determine when judicial review is appropriate.
The ripeness doctrine is viewed as being both constitutionally required and judicially prudent. The prudential restrictions result from the fact that most courts would rather avoid speculative cases, defer to finders of fact with greater subject matter expertise, decide cases with fully-developed records, and avoid overly broad opinions, even if these courts might constitutionally hear a dispute.
Id. at 427.
In conclusion, the Court, in Ring, noted that “Moreover, there is a possibility that if the court waits for an actual controversy, the whole constitutional problem may be eliminated by later developments.” Id. at 428.
The record is this case is far from developed. There are material issues of fact which, when answered, will pretermit the need for a constitutional ruling. The Partial Summary Judgment should be reversed.
ISSUE 2: Facts of the Case in Material Dispute: Partnership Never Ended; Operation of Firm Did Not Change When LLC Formed
The Scheuermann & Jones law firm was formed in the 1970s as a partnership.22 To all indications, the partnership agreement was verbal. Over the years, Mr. Jones's interest in the partnership increased until he became a 50/50 partner with Ms. Scheuermann.
The partners formed Scheuermann and Jones LLC in 2009 in order to obtain a lease at One Shell Square. The firm's 2009 tax returns and LLC financial records show that Ms. Scheuermann and Mr. Jones did not transfer any of the partnership assets into the LLC. They did not transfer the partnership's operating bank account, firm IOLTA bank account, physical assets, or existing cases into the new limited liability company. They did not file for a new federal tax identification number with the IRS for the new company. They continued to use the partnership tax ID number for the firm. There was no new capitalization of the LLC. None of the law firm's tax returns after 2009 indicate that the partnership was terminated and the partnership assets liquidated.23
A business can be converted from one type of domestic entity to another type if it files the appropriate transfer forms and records the conversion with the Louisiana Secretary of State. La. R.S. 12:1601 et seq. The Secretary of State has no evidence of conversion of the partnership into an LLC.24
When a partnership terminates, the business of the partnership ends except for the purposes of liquidation. C.C. Art. 2835. A dissolved partnership maintains a fictional existence with respect to its liquidation, even after the partnership terminates and the partners subsequently form an LLC. See: Grosjean v. Grosjean, 45,529 (La.App. 2 Cir. 10/13/10), 50 So.3d 233, 245 writ denied, 2010–2623 (La.2/4/11), 57 So.3d 311 and writ denied, 2010–2619 (La.2/4/11), 56 So.3d 980.
There are questions of material fact as to whether the partnership terminated, and if so, when, and under what terms. The evidence shows that the partnership assets were commingled with the assets of Scheuermann and Jones LLC. Louisiana's LLC laws do not apply to partnerships or to partnership assets. Until discovery can be completed, there are genuine issues of material fact concerning the partnership, its assets, and its relationship to the LLC that preclude summary judgment.
Question of Fact Exists Whether Members Had An Operating Agreement
Genuine issues of material fact also exist as to whether Ms. Scheuermann and Mr. Jones had an agreement concerning the heritability of their membership interests in the LLC that was identical to the heritablity of partnership interests. If Ms. Scheuermann and Mr. Jones had an agreement concerning heritability, then the LLC laws do not apply to this case and a judicial decision on the constitutionality of the LLC statutes is unnecessary.
In 2009, Scheuermann & Jones LLC was created when Mr. Jones filled out three forms provided on the Louisiana Secretary of State's website.25 The law partners (personal injury attorneys) did not seek legal help in establishing the LLC.
There is no evidence that the law firm's operation changed after the formation of the LLC. The only change in the law firm was the name of the firm. However, between the founding of the firm and Ms.Scheuermann's death, there were multiple agreements between the members as to how the law firm would operate. La.R.S. 12:1301(16) defines an LLC “operating agreement” to mean “any agreement, written or oral ․”
Before the trial court, Mr. Jones did not dispute that there is an operating agreement. The agreements concerning the operation of the partnership and LLC are shown in the tax returns and in admissions by Mr. Jones in the Amended Reconventional Demand wherein he sues Ms. Scheuermann's estate for $1 million for income she allegedly should not have received.26 Paragraph VIII of the Reconventional Demand states:
Per agreement, Lawrence Blake Jones and Arthel Scheuermann agreed to draw a salary in connection with their employment as attorneys at Scheuermann & Jones LLC, and then to split the profits from Scheuermann & Jones LLC pursuant to their pro-rata share (50–50) after certain adjustments/reconciliations were made.
The Reconventional Demand states in Paragraph IX:
One of the adjustments/reconciliations was an agreement that the member who brought in the client would receive a rain-maker fee of 25 percent of the fees generated in connection with that client.
The LLC income tax returns substantiate Mr. Jones's claim that the ownership of the partnership and the LLC was 50/50.27 The returns also show that the law partners agreed that Ms. Scheuermann had a guaranteed income of $20,000 per month.
While there were no specific written agreements between Mr. Jones and Ms. Scheuermann, there were agreements and decades of custom and practice that defined how the Scheuermann & Jones law firm would operate. As a matter of law, “[c]ustom may modify, restrict or enlarge a contract into which it enters ․” Wray–Dickinson Co. v. Commercial Credit Co., 192 So. 769, 772 (La.Ct.App.1939).
Ms. Scheuermann and Mr. Jones formed a partnership, and over the years, custom modified and enlarged the partnership agreement. The operation of the law firm did not change after the formation of the LLC. Because the partnership did not convert into an LLC, and the operation of the law firm did not change once the firm became an LLC, there are questions of material fact as to what operating agreements existed between Ms. Scheuermann and Mr. Jones, including agreements on the heritability of financial interests.
Ms. Scheuermann's bequest to Mr. Gonzalez demonstrates her belief that her interest in the firm was heritable. This belief is understandable because the operation of the firm as a partnership never changed after formation of the LLC. A partnership interest is heritable. C.C. Art. 2823.
Heritability of Membership Interest Unquestioned for a Year
After Ms. Scheuermann died in February 2013, Mr. Gonzalez continued to work for a year as an employee for Scheuermann & Jones. Mr. Gonzalez gave Mr. Jones a copy of Ms. Scheuermann's will. At no time did Mr. Jones state that Ms. Scheuermann could not leave her financial interest to Mr. Gonzalez.28 At no time did Mr. Gonzalez assert to Mr. Jones that he was a partner in the firm by right of inheritance, nor does he want to be a member. Mr. Gonzalez's sole interest is to recover Ms. Scheuermann's financial interest in the firm.
In February 2014, a year after Ms. Scheuermann died, Mr. Jones met with Mr. Gonzalez and the attorney for the estate, Miles Trapolin, to discuss valuing the firm so that the Descriptive List of Assets could be completed. During that meeting, Mr. Jones said the reason the LLC was formed was so the firm could get a lease at One Shell Square. Far from asserting that Ms. Scheuermann's interest in the firm was not heritable, Mr. Jones asked Mr. Trapolin to produce a list of the financial records needed to value the law firm.29
On several occasions during that first year, Mr. Gonzalez discussed with Mr. Jones the difficulties of valuing the law firm due to its many open contingency fee cases: some new, some old, some cases brought in by Mr. Jones, some cases brought in by Ms. Scheuermann, some with great value, and some with little value.
There are material issues of fact as to whether Mr. Jones and Ms. Scheuermann agreed that their LLC interests were heritable, as they would have been with a partnership interest. Ms. Scheuermann was 72 and widowed when she died.30 Mr. Jones is married, has children and has a history of health problems, including heart trouble.31 Both members of the LLC had reason to consider their mortality and the succession of their financial interest in the firm they had built together.
In light of these facts, it is hard to imagine that Mr. Jones ever agreed that, in the event he predeceased Ms. Scheuermann, his family and heirs would be mere assignees of his interest in the firm and could be cut off from all the financial assets he had in the firm.
At this juncture, the full substance of the firm's operating agreement—whose existence has not been disputed by Mr. Jones—can be determined only through discovery. Judicial determination of the constitutionality of the LLC statutes is only necessary if there is no operating agreement related to inheritance of a member's financial interest in the firm.
ISSUE 3: LLC Statutes Violate Constitutional Due Process and Are Vague
When there is no operating agreement, La.R.S. 12:1333(A) provides that, upon the death of a member, the member's membership ceases and the member's executor shall be treated as an “assignee” of such member's interest in the limited liability company.
La.R.S. 12:1333(A) provides:
If a member who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the member's membership ceases and the member's executor, administrator, guardian, conservator, or other legal representative shall be treated as an assignee of such member's interest in the limited liability company.
The choice of words used by the Legislature in R.S. 12:1333(A) is constitutionally problematic. “Assignment” is defined by the Civil Code to be a form of sale. The statute does not state who the assignor is, nor does it prohibit the inheritance of a member's financial interest. Under Louisiana's succession law, the executor is never the owner of the decedent's property; in fact, possession by an executor for purposes other than administration is barred. The executor is only the administrator, while the principle of seizen establishes that the heirs and legatees of the decedent become the owners of the decedent's property as of the moment of death.
The LLC statutes allow members to bequeath their financial interests in the companies to their heirs or legatees. When a membership interest in an LLC is inherited, the inheritance is governed by succession procedure which is the due process for the distribution of a decedent's property.
While La.R.S. 12:1333(A) provides for the assignment of the decedent's interest in the LLC to the decedent's executor, La.R.S. 12:1330(A) provides that the decedent's LLC management and voting right—the membership interest itself—are unenforceable. This bifurcates the ownership of the decedent's financial and membership interest in the LLC.
Under La.R.S.12:1333(A), the assignee is entitled to receive the profits or losses “to which the assignor was entitled to the extent assigned.” After the death of Ms. Scheuermann, the LLC issued a K–1 to the estate showing 2012 income of $597,000, but did not pay any money to the estate or to Mr. Gonzalez. Once the LLC reports the income, the LLC is obligated to pay these profits to Mr. Gonzalez, in his capacity as executor and assignee; or, if there is an operating agreement, to him as the legatee.
While La.R.S. 12:1333(A) makes the executor the assignee of the decedent's interest in the firm, La.R.S. 12:1330(A) takes all membership interest in the firm from the executor. La.R.S. 12.1330(A) states:
Unless otherwise provided in the articles of organization or an operating agreement, a membership interest shall be assignable in whole or in part. An assignment of a membership interest shall not entitle the assignee to become or to exercise any rights or powers of a member until such time as he is admitted in accordance with the provisions of this Chapter. An assignment shall entitle the assignee only to receive such distribution or distributions, to share in such profits and losses, and to receive such allocation of income, gain, loss, deduction, credit, or similar item to which the assignor was entitled to the extent assigned.
By prohibiting the assignee from exercising any of the rights or powers of a member, La. R.S. 12:1330 bars the executor from performing his fiduciary duty to value the decedent's financial interest in the LLC as of the date of death. Further, in this case, if there is no operating agreement, the assignee, Mr. Gonzalez, is at the mercy of the sole remaining member of the LLC to receive any money held in the firm owned by Ms. Scheuermann or her estate. Distribution of income is determined solely by the members. This results in a taking of the deceased member's financial interest in the firm.
If Ms. Scheuermann was entitled to receive an undivided one-half of the LLC's income, as shown on a 2012 K–1, Mr. Gonzalez, as the legatee of her estate, should “receive such allocation of income to which the assignor was entitled to the extent assigned,” namely, an undivided 50 percent of the LLC income. To read 12:1330(A) otherwise creates an unconstitutional taking of property.
Taking of Mr. Gonzalez's Property Without Due Process Defies Constitution
La. Const. Art. 1, Section 2 requires that “No person shall be deprived of life, liberty, or property, except by due process of law .” Assuming there is no operating agreement, Mr. Gonzalez would be unconstitutionally deprived of his property that he inherited from Ms. Scheuermann by La.R.S. 12:1333(A), which makes the executor of the decedent's estate the owner of the decedent's LLC membership interest.
To claim the protections of due process, a claimant must show the existence of some property or liberty interest which has been adversely affected by state action. Delta Bank & Trust Co. v. Lassiter, 383 So.2d 330, 334 (La.1980). Property interests are not created by the constitution; rather, they are created, and their dimensions are defined, by existing rules or understandings stemming from an independent source, such as state law. These in turn are rules or understandings that secure certain benefits and that support claims of entitlement to those benefits. Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972). An ongoing business is a property right entitled to constitutional protection. Callais Cablevision, Inc. v. Houma Cablevision, Inc., 451 So.2d 6, 12 (La.App. 1st Cir.), writ denied, 452 So.2d 1175 (La.1984).
As the legatee of Arthel Scheuermann's interest in Scheuermann & Jones LLC, Mr. Gonzalez has a vested property interest in the firm. At the moment Ms. Scheuermann's death, Mr. Gonzalez became vested in the decedent's financial ownership interest in the LLC. “․ the universal legatee is vested with the ownership of the succession property immediately upon the death of the decedent regardless of whether or not there is an administration of the estate.” Fortson v. Lake, Inc., 176 So.2d 703, 706 (La. 4th Cir.App.1965).
In Paillot v. Wooton, 559 So.2d 758, 760 (La.1990), the Supreme Court established the basis for determining whether a person's due process property rights had been violated as follows:
(1) Whether the interest is or is not protected by due process;
(2) If it is, whether due process requires some kind of hearing, and
(3) If it does, what kind of hearing is required.
It is a well-settled rule that “[w]hen protected interests are implicated, the right to some kind of prior hearing is paramount.” Haughton Elevator Division v. State of Louisiana, 367 So.2d 1161, 1165 (La.1979). Any significant taking of property by the state is within the purview of the Due Process Clause. Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972). Even a temporary, non-final deprivation of property is nonetheless a “deprivation” within the contemplation of the Fourteenth Amendment. Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969).
In this case, assuming there is no operating agreement, Mr. Gonzalez's inherited financial interest in the LLC would be taken from him without due process of law. The statutory transfer of ownership of the LLC interest to the executor completely bypasses the succession and completely ignores succession procedure. This would be an unconstitutional taking of property without due process of law.
‘State Actor’ Deprived Mr. Gonzalez Of His Inheritance
To claim the protections of due process, Mr. Gonzalez must show the existence of some property or liberty interest which has been adversely affected by state action. In the present case, assuming there is no operating agreement, the transfer of ownership of the decedent's interest to the executor would be a state action chargeable to the state.
In Allain v. Martco P'ship, 2002–1796 (La.5/23/03), 851 So.2d 974, the plaintiffs challenged the constitutionality of LSA–R.S. 3:4278.2 which authorized the sale of an undivided interest of timber with the consent of eighty percent (80%) of ownership interest in the land. In analyzing whether there is a state actor in a due process action, the Louisiana Supreme Court cited the U.S. Supreme Court's decision in Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978), for the proposition “that when a party alleges a deprivation of due process by a state actor,” he must demonstrate that the actor “acted under color of the challenged statute” and that the private action is “properly attributable” to the state. The U.S. Supreme Court noted in Flagg that “our cases state that ‘a State is responsible for the ․ act of a private party when the State, by its law, has compelled the act.” ’ Allain at 982.
Assuming there is no operating agreement, when Ms. Scheuermann died her ownership interest in the LLC was assigned to her executor. This transfer of ownership did not require any action by the LLC or any of its members. There was no private action, as in Allain, by any party which resulted in the assignment of the decedent's property. Instead, the assignment of the plaintiff's interest in the LLC occurred as a matter of law. “A State is responsible for the ․ act of a private party when the State, by its law, has compelled the act.” Id. at 982. See also: Bank of New York Mellon v. Smith, 2011–60 (La.App. 3 Cir. 6/29/11), 71 So.3d 1034, 1043, writ denied, 2011–2080 (La.11/18/11), 75 So.3d 462, private parties may be held liable under Section 1983 if their actions are “fairly attributable to the state.”
In the present case, without an operating agreement, the transfer of ownership of the decedent's LLC interest to the executor would occur without any action or consent by the LLC or its members. In that instance, the conduct would be chargeable to the state.
Constitutional Due Process Applies to Successions
La. Const. Art. 12, § 5(A) entitled, Successions, Forced Heirship and Trusts, provides that: “The legislature shall provide by law for uniform procedures of successions and for the rights of heirs or legatees and for testate and intestate succession .”
As part of his duties as executor, Mr. Gonzalez is required by law to inventory the assets of the estate or, in lieu of an inventory, file a sworn Detailed Descriptive List of Assets which “show[s] the location of all items of succession property, and set[s] forth the fair market value of each item thereof at the date of the death of the deceased.” C.C.P. Art. 3136.
Descriptive Lists of Assets are essential to establish whether federal estate taxes must be paid and to establish the tax basis for inherited assets. Upon death, there is a “step-up” in basis of the value of the property with assets being valued for tax purposes as of the date of death. See: 26 U.S.Code § 1014—Basis of property acquired from a decedent.
Ms. Scheuermann's assets outside of the law firm were valued at about $2.6 million. However, in the two months prior to her death, the law firm had $2 million in its trust account, of which amount she would own one-half, or $1 million. The value of the succession is also based on Ms. Scheuermann's interest in the firm's pending cases. It is possible that Ms. Scheuermann's estate is subject to federal estate taxes.
Mr. Gonzalez sued the defendants to allow him to perform his fiduciary duty as executor to value the assets of the decedent (one-half interest in the partnership and the LLC) in order to complete the Descriptive List of Assets; and to recover the “allocation of income to which the assignor was entitled to the extent assigned,” namely, an undivided 50 percent of the LLC income. Mr. Jones acknowledged this interest when he had the LLC issue a K–1 to the estate.
Louisiana courts have held that, under Louisiana's Constitution, due process in successions requires prior notice and a chance to be heard. In Succession of Haydel, 96–0528 (La.App. 4 Cir. 12/27/96), 685 So.2d 701, 704–05, writ denied, 97–0395 (La.3/27/97), 692 So.2d 395, the trial court violated constitutional due process by issuing an ex parte judgment distributing a missing man's estate when it did not follow the procedure for declaring a missing person dead. The Court held that the minimum due process requirements for an action that will deprive a person of his or her interest in property were set out in Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 795, 103 S.Ct. 2706, 2709, 77 L.Ed.2d 180 (1983), in which the United States Supreme Court held:
[P]rior to an action which will affect an interest in life, liberty, or property protected by the Due Process Clause of the Fourteenth Amendment, a State must provide “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.
In State, Dep't of Transp. & Dev. v. Estate of Jacquot, 622 So.2d 727, 729 (La. 5th Cir.1993), to fulfill constitutional due process requirements, the Court required the appointment of an attorney to represent a vacant succession before the decedent's property could be constitutionally expropriated by the state.
In the present case, if there is no operating agreement, the legatee's property would be taken without due process and without compensation and given to the estate's executor as a consequence of La.R.S. 12:1330 and 1333. Not only would the Louisiana LLC law deprive the legatee of his property, it would also vacate the value of that property by converting an ownership interest into an “assignment”.
LLC Statute Violates Due Process Requirements of Successions
La.R.S. 12:1333(A) makes the executor the assignee, but 1330(A) prohibits the executor, as assignee, from performing the duties required of the executor. La.R.S. 12:1319(B) 2.a. provides that only a member can obtain a “true and complete information regarding the state of the business and financial condition of the limited liability company.”
In order for Mr. Gonzalez to be appointed executor of Ms. Scheuermann's succession, he signed an oath with the court that he would “discharge faithfully the duties of his office.” C.C.P. Art. 3158. As part of his duties, Mr. Gonzalez must inventory the assets of the estate or, in lieu of an inventory, file a sworn Detailed Descriptive List of Assets which “show[s] the location of all items of succession property, and set[s] forth the fair market value of each item thereof at the date of the death of the deceased.” C.C.P. Art. 3136.
As the court held in Succession of Willis v. Martin, 228 So.2d 732, 734 (La.Ct.App.1969) writ refused, 255 La. 244, 230 So.2d 93 (1970): “The purpose of the detailed descriptive list is to provide a complete, concise evaluation of the property of the deceased thereby enabling the succession representative to properly administer the succession and informing heirs, creditors, and other interested parties to the nature and value of the succession of property.”
In Interstate Collection Bureau, Inc. v. Olivier, 457 So.2d 688, 689 (La.App. 4 Cir.1984), the court held that completing a descriptive list is not discretionary and, if necessary, the court shall order the filing of a descriptive list. The LLC laws prevent Mr. Gonzalez from getting an appraisal of Ms. Scheuermann's undivided interest in the LLC in violation of the mandatory requirements of due process succession procedure. La.R.S. 12:1330(A) unconstitutionally prohibits the executor from performing the duties required of him by the Code of Civil Procedure.
In Kinkle v. R.D.C., L.L.C, 2004–1092 (La.App. 3 Cir. 12/8/04), 889 So.2d 405, 41, a member of an LLC died and his widow sued the LLC to view the LLC's books after the member's date of death and to recover income distributions that should have been made to the member. The court denied the widow's demand to view the LLC's post-death financial records, but it did order the LLC to distribute the member's income to the widow.
Kinkle can be distinguished from the present case because there was no challenge to the constitutional due process violation of La.R.S. 12:1330, which prohibits a succession representative from valuing succession assets as of the date of death. Kinkle, however, points out the unconstitutionality of the law.
Executor Cannot Become Owner of Decedent's Interest
Without an operating agreement, the Legislature's assignment of the decedent's membership interest to the executor is unconstitutional on its face. Succession law does not make the executor an owner of the deceased member's incorporeal rights in an LLC. The Legislature also cannot compel the executor to become an owner of a decedent's property and then further obligate the executor to transfer ownership to the heirs or legatees. The Legislature's misuse of the word “assignment” to the executor creates an unconstitutional taking of the legatee's property that conflicts directly with the law governing Louisiana successions and the fiduciary duty of executors.
More than 100 years ago, the Supreme Court distinguished seizin by an executor from seizin by an heir or legatee. In Tulane Univ. of Louisiana v. Bd. of Assessors, 115 La. 1025, 1030, 40 So. 445, 447 (1905), the Supreme Court wrote:
The seisin [sic] of the succession representative operates merely to protect his title as detainer of the property for the purpose of his administration; while the seisin [sic] of the heir, conflicting in no respect with the other, operates as the sign of his title as owner of the estate, subject to its liquidation under administration.
While the executor is a mere possessor of the decedent's property, he is a fiduciary to the estate. By making the executor the assignee of the decedent's property, the Legislature has created an irreconcilable conflict of interest. There is no way for the executor to be both a fiduciary to the estate and an adverse owner of estate property. “The proper party to enforce the succession right while the succession is under administration is the succession representative appointed by the court.” C.C.P. Art. 3191. In this case, the executor, in his fiduciary capacity, would have to file suit on behalf of the estate against himself, in his capacity, as assignee, to recover the succession asset. Mr. Gonzalez has not sued himself. Instead, he has challenged the constitutionality of the Legislature's taking of his property and giving it to the estate's executor.
Legislature Uses Common Law Definition of “Executor”
The Legislature gave the assignment of the decedent's interest in the LLC to the estate's executor, rather than to the decedent's heir or legatees, because it relied on common law concepts of inheritance. This is discussed in 8 La. Civ. L. Treatise on Business Organizations 44:20, n. 3. The authors write:
[T]he LLC statute does not say that the heirs or legatees of a deceased member become assignees, it says that executor, administrator, or legal representative of the decedent becomes an assignee. LSA—R.S. § 12:1333. The position of the heirs or legatees themselves is never mentioned.
This oversight occurred because the Louisiana drafters relied on a provision of the ABA Prototype Statute that was designed to deal with the administration of estates under common law principles. § 707 ABA Prototype Statute (1992). 32
Common law states generally do not recognize the kind of direct succession to a decedent's property that is contemplated by Louisiana law. See § 14.2, McGovern, Kurtz & Rein, Wills, Estates & Trusts (West 1988); LSA—Civil Code art. 940.
Despite the oversight in the statute, it seems clear that the heirs or legatees of a deceased LLC member should be treated as assignees of the decedent's interest, even if no formal administration of the succession is carried out.
The authors incorrectly make short thrift of this legislative “oversight” that resulted from using common law estate terms in the statute. “Questions of the transmission and tenure of property in this state are governed exclusively by the Civil Code. The common law has no application.” See: Tulane University of Louisiana, supra, at 448.
If the legislative intent was for the executor to transfer the assignment to the decedent's heir and legatees, the Legislature created a “prohibited substitution.” Such a substitution exists when a testator leaves property to one individual with directions for that person to give the property to another individual. See: C.C. Art. 1520. The effect of a prohibited substitution is to invalidate the entire disposition. Succession of Gwathmey, 364 So.2d 226, 230 (La.Ct.App.1978) writ granted sub nom. Baten v. Taylor., 366 So.2d 571 (La.1979) and rev'd sub nom. Baten v. Taylor, 386 So.2d 333 (La.1979).
For the assignment to have any legality, the assignment must directly benefit the heirs or legatees. And, there is no legal requirement that the executor assign his interests to the intended legatees.
That Mr. Gonzalez is both the executor and the legatee of the decedent's LLC interest does not resolve the ownership issue. The courts distinguish the executor in his official capacity from the legatee even when they are the same person. See: In re Succession of Under, 11–633 (La.App. 5 Cir. 5/22/12), 92 So.3d 1158, 1172, reh'g denied (July 19, 2012), writ denied, 2012–1893 (La.12/14/12), 104 So.3d 440.
Procedurally, to transfer ownership of the assignment, the executor would have to gratuitously donate, quitclaim or transfer his ownership interest by authentic act to the decedent's heirs or legatees.
In this case, the application of common law has created an unconstitutional taking of property.
Decedent's Will Controls; Legatee Is Owner Of Decedent's LLC Interest
Ms. Scheuermann left a valid notarial will that was probated by the trial court. She bequeathed her ownership interest in the Scheuermann & Jones law firm to Mark Gonzalez. R.S. 12:1333(A) does not prohibit a member from leaving his or her ownership interest in an LLC to his heirs or legatees.
In Sanders v. Sanders, 222 La. 233, 238, 62 So.2d 284, 286 (1952), the Court held: “Where there are no forced heirs, a sane person may dispose of all of his property in any way he may see fit in the absence of some special prohibition, for he may do as he pleases with that which he owns.”
There is no statutory prohibition of an LLC member leaving his ownership of his LLC to his heirs or legatees. The LLC laws are completely silent as to the disposition of the member's interest to her heirs and legatees. C.C. Art.1984 provides: “Rights and obligations arising from a contract are heritable and assignable unless the law, the terms of the contract or its nature preclude such effects.”
Obviously, the executor, as assignee, and the legatee cannot become simultaneous owners of the member's LLC interest in the LLC. It is the long held law that heirs and legatees become owners of the decedent's property at the moment of death. C.C. Art. 934 and 935. However, R.S. 12:1333(A) provides that the executor becomes the assignee, or owner, upon the death of the member. When read together, C.C. Art. 934 and R.S. 12:1333(A) create a simultaneous and unconstitutional dual ownership of the decedent's membership interest. Obviously, both cannot become full owners of the same thing. This dual ownership of the LLC interest by the executor and legatee is unconstitutional.
In addition, R.S. 12:1330(A) directs that income shall be retained in the firm until distributed by its members, while, C.C. Art. 1598, provides that heirs are entitled to “the fruits and products attributable to the object of the legacy from the date of death.” The LLC statutes again conflict with succession statutes. The executor, as assignee, and the legatee cannot be simultaneous co-owners of the decedent's income.
The LLC statutes add insult to injury by making he LLC the perpetual possessor of assets it does not own, until and unless, the remaining sole member owner decrees a distribution.
Legislation Misuses Word “Assignment”; No Sale Involved
The Legislature in R.S. 12:1333(A) assigns the decedent's membership interest to her executor, but, in doing so, the Legislature misuses the word “assignment” as defined by the Civil Code. “Unequivocal provisions are not subject to judicial construction and should be applied by giving words their generally understood meaning.” C.C. Art. 11.
The word “assignment” as used in the R.S. 12:1333(A) is not defined in the LLC statute. See: R.S. 12:1301. Under Louisiana's Civil Code, an assignment is defined as a type of sale. C.C. Art. 2642.33
A literal reading of the statute makes the executor, as assignee, the purchaser of the decedent's interest in the LLC. “A statute is unconstitutional on its face if no circumstances exist under which the act would be valid. Only where a statute is clearly repugnant to the constitution will it be stricken.” AFSCME, Council # 17 v. State ex rel. Department of Health & Hospitals, 2001–0422 (La.6/29/01), 789 So.2d 1263, 1269.
Louisiana's jurisprudence defines assignment to be a form of sale. “An assignment of right is a species of sale and is treated as such in our Civil Code.” Sanson Four Rentals, L.L.C. v. Faulk, 35,417 (La.App. 2 Cir. 12/19/01), 803 So.2d 1048, 1052.34
While in Louisiana an assignment is the sale of an incorporeal right, under common law, an assignment is considered a mortgage. C.J.S. Assignments § 8, “An assignment of property as security for a debt is usually regarded as constituting a mortgage of the property.”35
There is no evidence in the record to show why the Legislature did not use the word “transfer” rather than “assignment.” It may be inadvertent use of the common law term of “assignment,” but it may also be an attempt in some way to limit heirs' or legatees' interests in an LLC.
Discovery should be conducted to determine if there is an operating agreement which would pretermit the court's need to delve into the constitutionality of the statutes.
Statute Is Unconstitutionally Vague: Assignor Is Not Defined
R.S. 12:1333(A) states that the executor is the assignee, but the law does not identify the assignor of the decedent's incorporeal ownership interest in the LLC. The law is unconstitutionally vague.36
The judiciary cannot legislate a definition of “assignor” when the law is silent on the matter. Before the trial court, the appellee argued that the assignor is the decedent. But it is impossible for the decedent to be the assignor when she is dead. As testatrix, she never assigned anything in her will, because she believed she could give, not assign, her interest to her legatees.37 The LLC cannot be the assignor because it too did not assign anything to anyone.
Logically, then, the only possible “assignor” is the Legislature. The Legislature, as a matter of law, assigned the member's interest upon her death to her executor. But the Legislature cannot be the assignor when it has no ownership interest in the LLC.
Because it is impossible for the assignor to be the decedent, the only other interested parties who could possibly be the assignor are: 1) the LLC, and 2) the surviving member of the LLC. Yet, neither the LLC nor Mr. Jones assigned anything to Mr. Gonzalez.
The law is silent on who the assignor is. It is purely speculative for the Court to interpret the LLC statute to define who the assignor is when the Legislature is wholly silent on the matter. Because it is speculative to state who is the assignor, the law is unconstitutionally vague.
LLC Statute Makes Perpetual Taking of Mr. Gonzalez's Property
If there is no operating agreement, the taking of Mr. Gonzalez's property does not end with the assignment of the LLC interest to the executor. R.S. 12:1330(A) provides that there is no required distribution of LLC income to the assignee. The LLC may have profits, but no income will be paid to the executor unless the LLC decides to make a distribution. This would result in a continued taking of Mr. Gonzalez's property until the termination of the LLC. When Scheuermann & Jones LLC was formed its term was defined as being perpetual.38 Theoretically, this perpetual existence of the LLC creates a perpetual administration of a perpetual succession without any distribution to the heirs or legatees.
Mr. Gonzalez, as the executor, has already had to pay more than $130,000 in income taxes for firm profits the estate never received. After Ms. Scheuermann's death in 2013, Mr. Jones, on behalf of the LLC, filed the LLC's 2012 federal and state income tax returns. Ms. Scheuermann's one-half of the profit was $597,892. On this undistributed income, her estate paid $116,600 in federal income tax and $20,697.30 in state income tax.39
In addition, without the knowledge or consent of the estate, Mr. Jones paid $331,026 of Ms. Scheuermann's income to the firm as a capital contribution. The LLC laws require a written approval of the member to make a capital contribution. R.S. 12:1322.
This is an unconstitutional taking of property without due process of law. However, if there is a verbal operating agreement concerning heritability that originated with the partnership and continued after the LLC was formed, this constitutional issue need not be considered today. The facts of the case may moot this issue.
This Honorable Court should reverse the Trial Court's partial summary judgment finding La. R.S. 12:1330 and 12:1333 to be constitutional and remand the case for further proceedings.
MILES G. TRAPOLIN (# 18474)
TRAPOLIN LAW FIRM
218 So. Jefferson Davis Pkwy
New Orleans, LA 70112
Telephone (504) 525–0447
CERTIFICATE OF SERVICE
I, Miles Trapolin, certify that the above captioned pleading has been served on all counsel of record pursuant to La.C.C.P. Art. 1313, specifically, by electronic means on the 9th day of February, 2015.
22. 2013–1620, Vol. II, p. 254: Exhibit 1: Unsigned partnership agreement
23. 2013–1620, Vol. II, p. 258–280: Exhibit 3, Scheuermann & Jones 2009–2012 tax returns: Note 2009 Tax Return was filed for Scheuermann & Jones and 2010 return was filed for Scheuermann & Jones LLC.
24. 2013–1620, Vol. II, p. 281–282, Exhibit 4: Louisiana Secretary of State, CORA Record of Non–Existence
25. 2013–1620, Vol. II, p. 283–286: Exhibit 5: Completed and filed LLC forms, as amended in June 2013.
26. 2014–1690, Vol. I, p. 31; 2013–1620, Vol. II, p. 217
27. 2013–1622013–1620, Vol. II, p. 258–280: Exhibit 3, Scheuermann & Jones 2009–2012 tax return
28. 2013–1620, Vol. II, p. 255–257; Exhibit 2, Affidavit of Mark Gonzalez
30. 2013–1620, Vol. II, p. 289, Exhibit 7: Death Certificate of Arthel Scheuermann
31. 2013–1620, Vol. II, p. 255–257; Exhibit 2, Affidavit of Mark Gonzalez
32. See also: Disassociation of a Member from a Louisiana Liability Company; A Need for Reform, Susan Kalinka, Louisiana Law Review, Vol. 66, No. 3, Winter 2006, p. 369–370, origins of Louisiana's LLC laws.
33. Assignment is located in the Civil Code, Book III, Modes of Acquiring Ownership of Things; Title VII, Sale; Chapter 15, Assignment of Rights' C.C. Art. 2642 et seq.
34. C.J.S., Assignments §§ 28 to 34 states: “As the sale of aright, that is, as a sale that has an incorporeal thing ․ the regulation of such transactions is part of the regulation of the special contract of sale, and therefore, in its practical aspects at least, escapes the purview of the general law of obligations.”
35. C.J.S., Assignments §§ 28 to 34 states: An assignment of property as security for a debt is usually regarded as constituting a mortgage of the property.
36. In the trial court, appellee argued that vagueness challenges are limited to criminal statutes. Vagueness challenges have been allowed in civil cases concerning partition of moveable property, child custody and discovery. See: Entrada Co. v. Moore, 41,414 (La.App. 2 Cir. 8/9/06), 938 So.2d 1055, 1062 writ denied, 2006–2232 (La.1/8/07), 948 So.2d 123; partition statute not vague; State in Interest of Alexander, 384 So.2d 1003, 1006 (La. 4th Cir.1980) writ refused, 386 So.2d 95 (La.1980), child custody law not vague; and, Palacios v. Louisiana & Delta R.R., 2000–00971 (La.App. 3 Cir. 12/29/00), 775 So.2d 698, 703 writ denied sub nom. Palacios v. Louisiana & Delta R.R. Inc., 2001–0565 (La.5/4/01), 791 So.2d 653, statute limiting discovery not vague.
37. “Uncertainty in Death and Taxes—The Need to Reform Louisiana's Limited Liability Laws,” William Neilson, Loyola Law Review, 2014, Vol. 60, Page 33, 37.
38. 2013–1620, Vol. II, p. 283–286: Exhibit 5: Completed and filed LLC forms, as amended in June 2013
39. See Exhibit 2: Affidavit of Mark Gonzalez