Imagine that you and your business partner decided to take on a long-term project to acquire and revitalize an abandoned amusement park. Your partner primarily provides the cash, while you provide the development expertise. You form a limited liability company (LLC) to own the amusement park. However, before the project is complete, your partner dies. What happens now?
These are essentially the facts in the case of McLure v. Ghost Town in the Sky, LLC, a case proceeding in the North Carolina Business Court. The short answer is that ownership of the LLC, and the possibility of continuing the project, depend on the LLC’s operating agreement. Operating agreements are vital to any LLC, and it is critical to pay close attention when drafting your LLC’s operating agreement.
Background
In Maggie Valley, North Carolina, there is an abandoned ghost town-themed amusement park located on top of a mountain. The park has a long and interesting history involving disappearing sheep, sinking ground, celebrity visits, great success, and eventual failure. You can read more about the unlikely history here: https://en.wikipedia.org/wiki/Ghost_Town_Village
The current story starts in 2020. That year, an LLC called Ghost Town in the Sky, LLC was formed. Ghost Town owns about 250 acres where the abandoned theme park is located. Ghost Town had two owners when it was formed: an individual named Alaska Presley and another LLC called Coastal Development Carolina, LLC.
The general organization of Ghost Town was that Ms. Presley provided the money, while Coastal Development was tasked with obtaining financing to rehabilitate and eventually reopen the theme park. Ms. Presley and Coastal were both parties to Ghost Town’s operating agreement. The operating agreement included provisions concerning how members could be admitted to the LLC and how they could leave. The operating agreement also had specific provisions governing what would happen when Ms. Presley, who was in her nineties at the time, died.
LLCs and Operating Agreements
LLCs are often the preferred corporate form for small businesses and startups. LLCs are flexible and relatively easy to form. In North Carolina, all you have to do is file a few documents and pay a modest fee to set up your new entity. Often business owners ask their accountants to form their new LLCs. But accountants do not usually provide operating agreements.
A properly formed LLC can sign contracts, open bank accounts, receive and pay money, own property, and pay taxes. The structure of an LLC is designed to be flexible. There are certain default laws that apply to the operation of LLCs, but most of those laws can be modified by contract between the members of an LLC. That contract is called the Operating Agreement.
Operating agreements are crucially important for an LLC. Operating agreements govern all aspects of the company. The operating agreement controls how the LLC is managed, who owns it, who can own it, and how an owner can cease to be an owner. The operating agreement establishes the relationship among the owners.
One of the most important things an operating agreement must do is dictate how members enter and exit the LLC. Typical operating agreements set forth how many initial members there are, how new members may be admitted, and how a member can cease to be a member. These provisions are often the heart of the LLC. For the members, these provisions decide who they are going to be in business with and for how long. If not drafted carefully, members can find themselves stuck in a business with members they have no desire to be in business with. Or members can find themselves left with an inoperable business if critical member decides to leave and take his or her skills and assets with them.
Problems at the Ghost Town
Perhaps unsurprisingly given the timing (in the middle of a pandemic) and the complicated history of the park itself, Ghost Town’s plans progressed slowly, if at all. Then, in 2022, Ms. Presley died. Under the operating agreement, Ms. Presley’s niece “succeed[ed] to all of Alaska Presley’s Membership Interest . . . with all the interests, rights and duties previously held by the decedent.”
Ms. Presley’s niece, Ms. McClure, was dissatisfied with Costal Development’s progress and immediately started asking for books and records to verify what had been done. Coastal Development refused, claiming that Ms. McClure was not actually a full member of Ghost Town and was therefore not entitled to that information. Ms. McClure filed a lawsuit to dissolve Ghost Town, and Coastal Development moved to dismiss.
Arguments in the Business Court
Coastal Development argued that, under the Operating Agreement, to become a full new member of Ghost Town with voting rights, a person must be approved by the existing members. Coastal Development argued that it had not approved Ms. McClure as a member, and therefore she had no rights to participate in the management of the company. Coastal Development’s argument is supported in the statutes governing LLC’s, as new members usually do not become full members without some assent or input by existing members.
The North Carolina Business Court disagreed. According to the court, the case was an easy matter of contract interpretation. The operating agreement was clear and unambiguous about what would happen when Ms. Presley died. Specifically, Ms. McClure became the owner of all of Ms. Pressley’s interest in the LLC. All meant all, and therefore Ms. McClure became a full member of Ghost Town upon Ms. Pressley’s death, regardless of whether Coastal Development approved her becoming a member.
Lessons Learned
Coastal Development, at least according to it, had been putting significant time and effort into finding financing to reopen the amusement park. However, with Ms. McClure’s arrival as a member, Coastal Development stands to lose control of Ghost Town and any potential profit from the development.
Ms. Presley made sure that her heirs were protected in the case of her death by including specific provisions in the operating agreement. This was wise planning on her part.
Revolution Law Group is located in Greensboro, NC, and serves individuals and small businesses throughout the Triad and surrounding areas. To contact us please visit Revolution.law or call 336-333-7907.
The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.