Inspection Rights of Former LLC Members Currently Before the Texas Supreme Court

Inspection Rights of Former

The Amarillo Court of Appeals held in Davis v. Highland Coryell Ranch, LLC, 578 SW3d 242 (Tex. App.—Amarillo 2019, pet. filed), that a former member of an LLC has the right to inspect books and records if the member has a proper purpose. Highland filed a Petition for Review in September 2019.

Mark Davis was one of Highland Coryell Ranch’s original members. Id. at 245. He relinquished his interest in the Ranch in 2005. Davis requested documents from the LLC after he was no longer a member. Some information was provided; other information was not. Davis sued the Ranch to obtain the remaining information. The Ranch moved for summary judgment based on the argument that Davis had no right to the information, as he was no longer a member of the LLC. Id.

The court first examined the LLC inspection statute, Texas Business & Organizations Code § 101.502(a), which allows a “member of a limited liability company or an assignee of a membership interest on written request and for a proper purpose” to examine certain business records. Id.

The court also examined the definition of member in section 1.002(53)(A) of the Code: “a person who is a member or has been admitted as a member in the limited liability company under its governing documents.” Davis was no longer a member and therefore did not fit into the first category of this definition. Id. at 246.

Here is where the interests of fellow grammarians and law review nerds will be peaked. The court “harken[ed] back to high school English” and examined the tense of “has been” as used in the statute. Id. “Has been” was categorized as the “present perfect tense of the verb ‘to be.’” Id. Several examples of how present perfect tense is used are given, but the key example is that is may “describe a past action that simply occurred at some time or another without continuing effect.” Id. “’[H]as been admitted as a member’ of a limited liability company could mean that the person was admitted at some time or another in the past without requiring that his status as a member continues.” Id.

Highland argued for another use of present perfect, a past action that continues. However, under this interpretation, “member” and “has been a member” would have the same meaning. In other words, “member” of course would be a present member. One who “has been a member” would be one who was made a member in the past and is still a present member—in other words, the same as a member. The court noted that this interpretation violates the rule of statutory construction requiring that each word of the statute be given meaning and that no duplicate meanings be given. Id.

The court chose to interpret “has been a member” to mean “one who once was admitted as a member at some time or another but who no longer is such.” Id. at 247. This interpretation did not allow for a redundancy between member and “has been a member,” which resulted from Highland’s interpretation.

In support of this interpretation the court looked to section 101.054 of the Code. This section prohibits the Company Agreement from “unreasonably restrict[ing] a person’s right of access to records and information . . . .” (emphasis added). The court noted the use of person rather than member, with “person” being more broadly defined in the Code than member. Id. at 248. The court also emphasized that while interpreting the statute to include former members, they were still restricted to requesting documents for a proper purpose in the same way as members. Id.

The dissenting opinion disagreed with the majority’s interpretation, referring to it as a “once a member, always a member concept.” Id. at 249. The dissent points out that under this interpretation of member, former members would approve admission of new members into the LLC. In addition, in member-managed LLCs, former members would be included in the company’s governing authority. Id. at 249–50.

Highland Coryell Ranch filed its Petition for Review on September 5, 2019 and Davis has filed his response. Both sides make important arguments for the Court’s consideration. The Court has not yet granted or denied review.

Highland argues that TBOC § 101.502(a), the LLC inspection statute, allows members and assignees the right to inspect company records. Only the definition of member raises the question about what “has been a member” means. Highland also raises relevant issues about the inclusion of former members in that definition when reviewing the entire LLC statute. As the dissent also pointed out, former members would vote on issuing new membership interests. Former members would also retain governing authority in the LLC. Former members would still have a share in profits and losses as well.

Highland concludes that this interpretation yields an absurd result, and rightly so. This turns the LLC into a type of Hotel California, where “you can enter any time you like, but you can never leave.” Former members could still be liable for company debts, would still have to take part in corporate governance. Parting ways from any business generally happens for a good reason and often it is because of personality issues. Former members and members would still be forced to interact in matters of company business. Ultimately this could result in deadlock and failed businesses. This result does not seem to comport with legislative intent.

How do we resolve the language in the definition of member in 1.002(53)(A) and still give effect to all the language in the definition? Highland does not resolve this matter conclusively. Highland sticks to the definition that “has been admitted as a member” means that one is a member in the past and this continues to present time, but does not address the redundancy issue created by that definition. Highland also points to the legislative history, which provides no support for former member’s rights. Petr.’s Br. 16. Highland further looks to the other inspection statutes in the Code for guidance, noting differing requirements among business entities and pointing out that only general partnerships allow former general partners inspection rights and this right is explicitly granted, not tucked away in a definition. Id. at 19.

Davis argues for strict statutory construction, and that all words should be given effect and no part should be rendered superfluous. Res. Br. 5. Davis argues for the present perfect tense definition that covers a time in the indefinite past. This resolves the redundancy problem in interpreting the statute, but fails to address the problem that this interpretation creates. In fact, Davis argues that the Court should not make its decision based on circumstances other than the inspection issue and that Highland argues for a decision based on “imagined hypotheticals.” Res. Br. 13. As for the outcomes Highland presents, these “odd results” do not meet the bar for the “absurdity argument.” Id. at 14. Davis does point out that courts should not substitute their own view of what should be for what actually is. Id. If the legislature made a mistake, it is up to the Legislature to fix, not the courts. Id.

Davis attempts to address some of these “odd results” argued by Highland. Davis posits that because LLC members cannot withdraw from membership and that former members can have continuing obligations after withdrawal, that these former members should have a limited role in the company’s governance and finances. Id. at 15. However, this “limited role” wouldn’t be the result in Davis’ interpretation. Former members would have the same role as if they were members.

What is the correct interpretation of 1.002(53)(A)? The first part is easy—a member is a member. But what about a person who has been admitted as a member in the limited liability company under its governing documents? How should this be resolved without both definitions equating to a member or does it matter? What would the effect of including non-members in the definition have on LLCs in general?

Certainly LLCs across the state could amend their Company Agreements to limit or omit the rights of former members. Remember, however, the Company Agreement may be amended only if each member of the Company consents unless your Company Agreement states otherwise.

Currently, at least in Amarillo, under Davis v. Highland Coryell Ranch, former LLC members have the right to inspect LLC documents if they have a proper purpose. The court specifically limited its opinion to the facts of Davis, so only inspections are currently affected. A petition for review has been filed, so the next step is to see if the Texas Supreme Court grants the petition for review. So far this has been an interesting case to watch. It could have interesting results for LLCs across the state depending on the outcome.

View the Texas Supreme Court briefing here: