Court Rules Farm LLC Dissolved After Father's Death Because Heirs Were Not Members

On June 5, 2019, the Iowa Court of Appeals ruled that a family farm LLC automatically dissolved 90 days after the death of its sole member. The court ruled that the manager of the LLC who inherited one-third of the LLC’s units had not become a member because he failed to execute a joinder agreement.

Background

A farmer in Dallas County farmed approximately 250 acres. He had three children, one son who farmed with him and a son and daughter who were off the farm. Before the farmer’s death, he created an LLC with the help of an attorney. The farmer transferred all of his real property into the LLC. The LLC’s operating agreement appointed the farmer and the on-farm son as its managers. The farmer was the only member of the LLC. The farmer also executed a will under which left everything in equal shares to his three children. He named the on-farm son as his power of attorney. The farmer passed away in November 2015.

After the father’s death, the on-farm son continued to operate the farm and manage the LLC. He obtained liability insurance and continued to equally divide LLC profits between himself and his siblings.

In October 2016, the two off-farm siblings proposed to make the LLC member-managed or to partition the land. The on-farm son did not agree to either of the proposed changes. The siblings then brought a lawsuit against the son alleging claims of tortious interference and elder abuse. They also sought a declaration that the LLC dissolved because it did not have any members within 90 days of the farmer’s death. Iowa Code §489.701(1)(c). After trial, the district court ruled that the son had become a member within 90 days of the father’s death. The district court then dismissed all claims against the son. The Iowa Court of Appeals reversed.

The Operating Agreement

The operating agreement established the LLC as a manager-managed LLC. The operating agreement required a joinder agreement to be executed before a new member or substitute member could be admitted. After an LLC is formed, Iowa law allows a person to become a member several different ways, including the following:

[I]f within ninety consecutive days after the company ceases to have any members, all of the following occur: (1) the last person to have been a member, or the legal representative of that person, designates a person to become a member. (2) The designated person consents to become a member.

Iowa Code § 489.401(4). However, having an interest in an LLC is not the same as being a member.

On-Farm Son Never Became a Member of the LLC

Here, the father was the only member of the LLC at its creation and for its duration. The court found that there was no evidence that the on-farm son was anything but a manager of the LLC. The district court found that the on-farm son, as manager, had appointed himself to be a member and had consented to becoming a member after his father’s death. The district court had found this “honored” the father’s intent in creating the LLC. The Court of Appeals, however, reversed, ruling that the operating agreement required a signed joinder agreement before a new member could be admitted. Because the on-farm son did not sign such an agreement within 90 days of the death of his father, the court found that the LLC dissolved by operation of law because it had no members.