Potter v. Potter
| Decision Date | 26 May 2021 |
| Docket Number | No. 671, Sept. Term, 2018,671, Sept. Term, 2018 |
| Citation | 250 Md.App. 569,252 A.3d 17 |
| Parties | Denise POTTER, et al. v. Ruby POTTER |
| Court | Court of Special Appeals of Maryland |
Argued by: D. Gregory Howard (Carl A. Howard, Howard & Howard, Reisterstown, MD), on the brief, for Appellant.
Argued by: David E. Sessions (Frederick R. Franke, Jr., Jack K. Beckett, Deborah F. Howe, Franke, Sessions & Beckett, LLC, Annapolis, MD), on the brief, for Appellee.
Panel: Wright,* Graeff, Kehoe, JJ.**
In Maryland, and as a general rule, a document that transfers title to property upon the death of its owner must be executed in accordance with our version of the statute of wills, which is codified as Md. Code, Est. & Trusts § 4-102. There are exceptions; some are based on common law principles, and others established by statute. The issues in the present appeal revolve around whether § 4-102 applies to a document purporting to transfer a member's interest in a Maryland limited liability company at the time of the member's death.
James Potter owned an interest in a Maryland limited liability company. The members of the company agreed among themselves as to who should receive each individual member's interest upon the death of that member. Mr. Potter passed away. There was a dispute as to whether his interest passed to the individual designated in the company's documents or to his estate. The controversy eventually came before the Circuit Court for Anne Arundel County and that court concluded that the membership interest passed to the designee.
The personal representative of Mr. Potter's estate has appealed and presents one issue that we have reworded:
Is a provision in a limited liability company operating agreement that purports to transfer a member's economic interest at death enforceable even though the agreement was not executed with the formalities required in
Maryland for the execution of a will?[1 ]
Because our answer is no, we will reverse the circuit court's judgment and remand this case for further proceedings.
All of the individuals who played a role in this case have or had the surname of "Potter." To avoid confusion, we will refer to them by their first names. We mean no disrespect.
The facts are not in dispute. James married Ruby Potter in 1984. Sometime thereafter, he acquired a membership interest in TR Steak Pasadena, LLC, a Maryland limited liability company. James's rights and obligations as a member of the company were defined by various documents that were amended over time. The relevant ones are TR Steak's Third Amended Operating Agreement (the "operating agreement") and the company's Third Amended Members’ Agreement (the "members’ agreement"), both of which were executed on August 7, 2012.
Pertinent to the issues before us, the operating agreement distinguishes between a member's "interest," which is defined as "a person's share of the profits and losses of, and the right to receive distributions" from the company, and a member's "rights," which are the rights of a member to participate in the management and control of the company.2 The operating agreement provides that, if a member dies, his or her "living trust, estate, legatee or other successor in interest" will "automatically and immediately" become a "Successor Member" as long as the successor is a member of the "Permitted Group," as defined in the members’ agreement.
The members’ agreement stated that James was one of eleven members of the company, and owned eight of the 100 outstanding "membership interest units." The agreement recited that it was in the best interest of the company and the members to make provisions for a variety of aspects of the company's ownership and management, including the disposition of a membership interest upon the death of a member.
Although the operating agreement states that the members’ agreement contains a definition of "Permitted Group," the latter document does not. Nonetheless, the members’ intentions are clear. The members’ agreement states in pertinent part:
Upon the death of a Member, all of the Membership Interests of the Company owned by him shall be transferred as shown below for each Member with the voting rights attached to their Membership Interests being assigned to the Member shown.
Immediately after this paragraph, Ruby was designated as the "successor" to James's membership interest, that is, his right to share in the profits, losses and distributions from the company. James's membership voting rights were assigned to two of the other members of the company.
Copies of the operating agreement and the members’ agreement are in the record. James's signature on the operating agreement was not witnessed. His signature on the members’ agreement appears to have been witnessed by one individual, but the signature is indecipherable and the witness is otherwise unidentified.
James and Ruby separated in 2016 and soon thereafter signed a separation agreement. The agreement contained two relevant provisions.
The first was a mutual and general assignment and release of "any and all rights or interest which [the releasing party] now has or may hereafter acquire in the real, personal or other property of the other." The assignment and release were coupled with a promise to execute and deliver any "deeds, releases, quit claims or other instruments as from time to time may be necessary or convenient to enable the other party to deal with his property as if he were unmarried."
The second provision related specifically to James's interest in TR Steak. Ruby waived "any and all interest" in James's membership interest in the company and promised that James "shall maintain his shares/membership interest[ ] ... free and clear of any rights, title or interest" that could be asserted by her. However, whether by oversight or design, James never changed his designation of Ruby as the transferee of his interest.
Subsequently, James married Denise. In 2017, he died intestate. Denise opened a small estate in the Orphans’ Court for Anne Arundel County and was appointed as personal representative. In a document filed in the orphans’ court, Denise identified James's membership interest in TR Steak as an asset of the estate.3
About six months later, Ruby filed a complaint for a declaratory judgment in the Circuit Court for Anne Arundel County against Denise, both individually and in her capacity as the personal representative of James's estate.4 Ruby asserted that she was entitled to James's membership interest in TR Steak because she was listed as his successor in the members’ agreement. Denise responded that the membership interest was an asset of James's estate because the relevant limited liability company documents could not, as a matter of law, pass title because they did not comply with the requirements of Est. & Trusts § 4-102, the Maryland statute of wills.
The parties filed motions for summary judgment. The relevant arguments raised to the circuit court are the same as the ones presented to us and we will discuss them presently. After a hearing, the circuit court granted Ruby's motion and denied Denise's.
In an opinion delivered from the bench, the court concluded that there were no factual disputes between the parties. The court framed its legal analysis primarily in terms of the proper interpretation of the operating agreement when it was read in conjunction with the members’ agreement and the separation agreement.5 As to the separation agreement, the court decided that its legal effect was to give James the "absolute free will" to terminate Ruby's expectancy interest but that James "either chose not to do [so] or overlooked that fact that it would have been incumbent upon him to do it."6 Relying in large part on the Court of Appeals’ analysis in Painewebber v. East, 363 Md. 408, 419–21, 768 A.2d 1029 (2001), the court then reasoned that the terms of the separation agreement did not constitute a waiver of Ruby's rights under the members’ agreement. Finally, the court concluded that because the members’ agreement was "a contract where benefits can pass by way of death" the issue of whether it was "a testamentary instrument really is immaterial."
The court entered judgment accordingly and Denise filed this appeal.
A party is entitled to summary judgment when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Md. Rule 2-501(a). In the present case, neither Denise nor Ruby suggests that there are disputes as to material facts. Therefore, our role is to review the circuit court's legal analysis de novo to decide whether it was correct. See K. Hovnanian Homes of Maryland v. Mayor of Havre de Grace, 472 Md. 267, 285, 244 A.3d 1174 (2021) ; Koste v. Town of Oxford , 431 Md. 14, 25, 63 A.3d 582 (2013).
As we have explained, the circuit court construed the separation agreement to give James "absolute free will" to change the assignee of his membership interest in the event of his death. The court also decided, based on the undisputed facts and the language of the separation agreement, that Ruby had done nothing to waive or release her right to enforce the agreement. Denise does not challenge these aspects of the court's reasoning on appeal. Therefore, for purposes of our analysis, we will assume that the court's conclusions are correct.
This leaves us with the third aspect of the court's decision. Although its explanation of its reasoning was not expansive, we believe, as do the parties, that the circuit court read the relevant provisions of the Limited Liability Company Act to authorize members of limited liability companies to enter into agreements that pass title to a member's interest at death. Therefore—and again, we are reading between the lines of its decision—the court reasoned that the State's statutory requirements for the execution of wills and the administration of a decedent's property do not apply to James's membership interest in the limited liability company. Such...
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