“[I]n this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin, 1789 A solid succession strategy is a critical element of corporate planning, but one that is all too often sidelined until it is too late. Under the glow and excitement of starting and growing a business, who wants to talk about the death of an owner?

But, as business divorce litigators, we have all seen one too many cautionary tales of the impact that an unplanned death can have on a business and its surviving owners, particularly where there is no governing agreement in place.

In February 2023, my colleague, Peter J. Sluka, posted an insightful analysis of Andris v 1376 Forest Realty, LLC— a case so nice, we featured it twice (here and here)— which supported an executor’s right to seek judicial dissolution of an LLC following the death of a 50% member under the default provisions of New York’s LLC Law 608. In so doing, Andris appeared to buck the trend in New York of analogous precedent in which New York courts previously denied an estate’s standing to assert derivative claims (as belonging only to a member and not an assignee or economic interest holder).

Peter anticipated seeing a rise in estate counsel now pushing for the exercise of member rights, including dissolution, citing to Andris and LLC Law 608. That is, “until a more definitive case comes along.” That definitive case may have arrived, fresh out of the hallowed halls of the Delaware Chancery Court.

In a 68-page Post-Trial Opinion in a case involving the Goldman real estate empire, Vice Chancellor J. Travis Laster confronted the scope of Section 18-705 of the Delaware Limited Liability Company Act (the equivalent to New York’s LLC Law 608) which presented issues of first impression in Delaware: Gurney-Goldman v. Goldman, C.A. No. 2023-1124-JTL (Del. Ch. July 12, 2024)

Goldman Family Real Estate Enterprise

According to the Post-Trial Opinion, Sol Goldman was the late-patriarch of the family-owned New York-based Goldman real estate empire. When Sol died in 1987, his estate was reportedly valued at $1 billion (yes, with a ‘B’), the largest to enter New York probate at the time.

At the risk of oversimplifying the complex web of entities under the Goldman real estate umbrella, some time after Sol passed, his four children—Jane, Allan, Amy, and Diane—agreed that they would each share an equal 25% in the family business.

As is not uncommon of many closely-held family businesses big or small, corporate formalities were somewhat lax. The lines of who does what and in what capacity were often blurred. Some of the entities have operating agreements, others do not. The only entity with employees is the property manager entity, Solil Management LLC, a New York LLC. Solil appears to be the enterprise-level governing arm of the family business. Solil does not have a written operating agreement.

Solil, in turn, has 2 members: SG Windsor LLC (a Delaware LLC) and SG Empire (a New York LLC), a pair of holding companies. SG Windsor does not have an operating agreement. SG Empire might have one. The four Goldman siblings each held a 25% membership interest in both entities.

Jane and Allan were actively involved in the day-to-day operations of the family business. Amy and Diane were not, but were occasionally consulted on major decisions (for example, whether to take out PPP loans during COVID).

Allan Goldman Dies in 2022, Leaving Uncertainty in His Wake

In January 2022, Allan Goldman passed away.

When Allan died, his son Steven Gurney-Goldman, who had worked in the Solil main office from 2013 to 2020, became the executor of his estate and was tasked with administering Allan’s estate. Steven, as executor of his father’s estate, claimed that Jane was less than responsive to his requests for information to administer the estate. Steven also hoped to step into his father’s shoes and jointly manage the family business with Jane as his late-father once had, but Jane was uninterested in “integrating the next generation so quickly.”

Tensions between Steven and Jane continued to rise when, in late 2022, Steven and his aunt, Amy Goldman Fowler, sought to exercise certain put rights to one of the Goldman entities that holds about 150 real estate properties in its portfolio. Jane selected a third-party appraiser to set the redemption price, but Steven and Amy contested the appraisal as “facially inadequate,” inferring that Jane must have provided information to the appraiser that would support a lower valuation.

The Lawsuits Kick Off A Year Later

When negotiations with Jane broke down, Steven (as executor of Allan’s Estate) and Amy commenced a pair of lawsuits in New York and in Delaware in November 2023.

The New York action, Steven Gurney-Goldman, et al. v Solil Management LLC, et al., Index No. 655549/2023 (Sup Ct, New York Country), largely challenges the appraisal process and redemption price of the Goldman portfolio, together with allegations attacking Jane’s management of Solil and of SG Empire (a 50% member of Solil), both New York LLCs.

The Delaware action is substantially more limited, albeit dealing with equally complex issues. There, Steven and Amy sought, among other things, a declaration that: (1) SG Windsor (i.e. the other 50% member of Solil) is a member-managed entity; (2) the Estate is a member of SG Windsor; and (3) if it is determined that the Estate is only an assignee and not a member, that Steven (as executor of Allan’s Estate) can exercise governance rights equivalent to those of a member for the purpose of administering and settling the Estate.

Following a one-day trial, the Chancery Court issued its Post-Trial Opinion on July 12, 2024 in the DE action.

Chancery Court Opinion

Peter Mahler once described Vice Chancellor Laster as “known for his scholarship, his erudite and expertly-crafted legal opinions, his wit, his practical approach to dispute resolution, and, perhaps above all, for being a straight shooter.” Each of those attributes were on prominent display here.

Issue 1: Is SG Windsor Member-Managed?

V.C. Laster held that, yes, under the default provisions of the Delaware Limited Liability Company Act, SG Windsor is member-managed. SG Windsor does not have a written LLC agreement. The Chancery Court differentiated between the concept of a “manager” in the colloquial sense, and the term “manager” under the LLC Act as a term of art. While Jane appeared to demonstrate that she and Allan managed the Goldman family business in the sense that they ran the day-to-day operations of the enterprise, the evidence did not support that she was a manager in the way used by the LLC Act. The Court further found unpersuasive that there was an implied agreement under which SG Windsor was managed by Jane and Allan.

Issue 2: Is the Estate of Allan Goldman a Member of SG Windsor?

V.C. Laster held that, no, the Estate is not a member of SG Windsor. Under the default rules of the Section 18-702, the recipient of a member interest in an LLC does not automatically become a member, instead only holding the rights of an assignee, “which consist of the economic rights associated with the interest, plus the power to sue derivatively.” The only way for an assignee to obtain full-fledged membership in the LLC is either as provided for in the operating agreement, or upon the consent of all of the members in the LLC, per Section 18-704 (a).

Here, SG Windsor does not have an operating agreement, and the Court found unpersuasive Steven’s argument that there was an implied agreement that Allan’s Estate would be admitted as a member with the full panoply of rights.

Issue 3: Can Steven, as Executor, Nevertheless Exercise Member-Manager Powers Under Section 18-705?

Here is where things get thorny: “To put it mildly, this is not a well-developed area of Delaware law.”

“Section 18-705 is a challenging statute that could benefit from thoughtful legislative attention” (taking aim, in some lengthy footnotes, as to areas of the statute wherein such “legislative attention” might provide the courts with “welcome guidance”).

That said, the Court dove into statutory interpretation principles to ascertain the scope of Steven’s governance rights under Section 18-750. The key statutory phrase at issue in Section 18-750 provides that upon the death of a member:

“[T]he member’s personal representative may exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property.”

Jane advocated for a narrow reading of the statute, arguing that under the “distributive phrasing canon of interpretation,” Steven only has the power to exercise member rights for the purpose of settling the member’s estate but not for administering the member’s property.

But the Chancery Court disagreed, holding that the only reasonable interpretation is one that allows an estate to both administer and settle the estate:

Because handling an estate requires administering its assets before the ultimate settlement of the estate’s affairs, an executor must have the ability to do both.

Notably, V.C. Laster observed: “Other jurisdictions have interpreted provisions analogous to Section 18-705 to support this outcome. New York courts have consistently construed the comparable New York statute to permit the executor of a deceased member to exercise governance rights for the purpose of settling an estate.”

The Court then included in a footnote several notable New York cases on the issue, including Andris and Pacter v Winiarski (another case covered on this blog by a trio of articles authored by Peter Mahler and Frank McRoberts here, here, and here), interpreting those New York cases as empowering an executor to exercise the decedent-member’s membership rights for the purpose of administering and settling the estate.

Color me surprised. While New York courts often look to Delaware for guidance on issues related to corporate governance, I can only think of a small handful of occasions in which the Chancery Court looked to New York jurisprudence for support on an issue of first impression.

Next, the Court addressed Jane’s argument for a narrow reading of Section 18-705 under the pick-your-partner principle, by performing a deep-dive into the legislative history of Section 18-705 that could easily double as a scholarly article. With gusto, V.C. Laster went through the earliest concepts of partnership law found in its French roots in 1673, New York’s adoption of the first American limited partnership statute in 1822, followed by various revised versions of the uniform partnership act promulgated around the country, finally landing at the current version of the DE LLC Act in force today. Pages 48-60 of the Opinion is a must-read for any legal scholar or even those simply curious about the origins of these statutes we business lawyers so often rely on.

Ultimately, the Court concluded:

The statutory progression reinforces a plain language reading under which Section 18-705 authorizes a personal representative to exercise full governance rights for a proper purpose, at the expense of the pick-your-partner principle.

Finally, the Court addressed whether the governance rights sought to be exercised under Section 18-705 must be “necessary” for settling the estate or administering property. Here, the Court simply holds that requirement of necessity advanced by Jane is found nowhere in the statute. Rather, as the executor, Steven “must subjectively believe that his exercise of governance rights serves a proper purpose, and his belief must be rational. As long as that is the case, the court will not second-guess Steven’s exercise of governance rights.”

But, here’s the rub, as the Court itself points out:

More than that, this decision cannot say. The parties have joined issue over a series of declaratory judgments. No one has identified a particular action that Steven seeks to take or which gives rise to a concrete dispute necessitating analysis of whether Steven had a proper purpose for seeking to invoke a membership-level governance right. If a dispute arises and the parties cannot resolve it, then litigation may be warranted. At present, any opinion about whether or not Steven could take a specific act would be advisory.

What’s Next?

As the RealDeal byline covering the case succinctly put it, “In Delaware trial, Goldmans disagree on who won.”

What does the Chancery Court’s decision mean for the Goldmans ongoing dispute? What does it mean for New York jurisprudence, broadly? We may soon find out.

About a week after the Chancery Court issued its decision, counsel for the Estate (et al.) submitted a “Notice of Supplemental Authority” to New York Commercial Division Justice Melissa A. Crane in the New York action, enclosing a copy of the V.C. Laster’s July 12 Post-Trial Opinion, and its analysis of V.C. Laster’s decision to be considered in connection with Jane’s pending (and fully submitted) motion to dismiss 7 of the 23 causes of action in the 160-page Amended and Supplemental Complaint.

Jane’s counsel, unsurprisingly, took issue with the Estate’s interpretation of the decision, submitting a letter-response asking the Court to strike the Estate’s letter from the docket as an improper sur-reply in violation of New York’s Commercial Division Rule 18, and accusing the Estate of “rush[ing] to file their improper letter in an apparent attempt to pre-emptively spin the Chancery Court’s opinion, which rejected virtually all of their claims.”

Jane’s motion to dismiss is one of 6 motions scheduled to be heard by Justice Crane in a few short weeks, on August 9, 2024.

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Hat tip to Tom Kearns at Olshan Frome Wolosky LLP for alerting us to this case.

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