Spurlock v. Begley - 308 S.W.3d 657 (Ky. 2010)

Rule:

Pursuant to Ky. Rev. Stat. Ann. § 275.195(1) and Ky. Rev. Stat. Ann. § 275.255(1)(a), a member may assign, in whole or in part, the economic rights (the limited liability company interest) associated with a membership interest. It, thus, appears that the membership interest in a limited liability company includes both economic rights and also rights to participate in the management of the business. If the non-transferring members do not approve of the transfer of a membership interest pursuant to Ky. Rev. Stat. Ann. § 275.265(1), the interest is divided into its economic rights (which are transferred) and its governance rights (which are not transferred). Under Ky. Rev. Stat. Ann. § 275.255(1)(d), until the assignee of a limited liability company interest becomes a member pursuant to Ky. Rev. Stat. Ann. § 275.265(1), the assignor shall continue to be a member. The implication is that if a majority of the members do approve, a transfer of a membership interest will convey both the economic and the governance rights. This, then, leads to the conclusion that simply acquiring economic rights does not, in and of itself, equate to "ownership" or "membership" in the limited liability company.

Facts:

Appellant purchaser and appellee seller entered into an agreement relating to the purchase of an ownership interest in a limited liability company. The purchaser later refused to pay after being informed that the seller did not have such an interest in the company. The trial court entered judgment for the seller, and the court of appeals affirmed. The purchaser appealed.  

Issue:

Did the seller own an interest in the company, which he can sell and transfer to the purchaser? 

Answer:

No.

Conclusion:

In reversing the court of appeals, the supreme court determined that the seller was not a member of the company under Ky. Rev. Stat. Ann. § 275.275. The seller did not introduce evidence that all members of the company had consented in writing to his membership, and no operating agreement of the company was introduced into evidence. At most, the seller had an interest that he received in exchange for his tendering of $ 75,000 to the company. Simply acquiring economic rights in the company did not, in and of itself, equate to ownership or membership in the company. Because there was no ownership interest to convey, there was a failure of consideration.