Operating Agreement Saves the Day in Romagnoli

An operating agreement is the governing document of the LLC.  It establishes the rules and regulations for LLC operation and provides a roadmap for the members and managers regarding internal affairs.  It is based on contract law and is held to apply even if its provisions conflict with Florida’s Revised Limited Liability Company Act, save certain enumerated provisions in the Act that cannot be contracted out of.  But a company operating agreement does much more than govern—it also serves as proof of ownership of the LLC.  In fact, the operating agreement saved the day for Roberto Romagnoli (the “Debtor”).

The Operating Agreement in In Re Romagnoli

In In Re Romagnoli, the Debtor filed for a Chapter 7 Bankruptcy and claimed as exempt Marova, LLC, a limited liability company owned by him and his wife, or the marriage, as tenants by the entireties (“TbE”).  The trustee objected to the exemption and argued that a lack of joint control over Marova severed the TbE interests, which meant that the Debtor could no longer claim as exempt his ownership interest in the company.

As an aside, this is because well-settled jurisprudence in Florida requires that a married couple holding property as TbE act as a single unit—one of six characteristics called the unity of possession (joint ownership and control).  In the context of owning a company, a married couple must act jointly with respect to any action and be considered as only one member for voting purposes, among other things, in order to properly preserve the unity of possession.

In this case, the trustee argued exactly that:

In support of this argument, the Trustee relies on the deposition testimony of the Debtor in which the Debtor testified that Laviosa made decisions regarding Marova, LLC; on Marova, LLC’s articles of organization which were signed only by the Debtor; and on Marova, LLC’s annual corporate reports filed with the Florida Division of Corporations, in which only the Debtor or Laviosa, but not both at the same time, were named as manager of Marova, LLC and executed the reports in various years.

Florida’s Revised Limited Liability Company Act

The court quickly dispensed with all of these arguments by simply citing Fla. Stat. §§ 605.0212(1)(e) and 605.0203(1)(b) for the proposition that only one person is required to sign annual reports and only one person—an authorized person, actually—is required to sign the articles of organization. In other words, the trustee’s reliance on the company’s business filings only was not determinative of ownership, which was the central issue in this case.  On this point, the court stated as follows:

Marova, LLC’s filings with the State of Florida are not dispositive of the Trustee’s allegation that only the Debtor or his Wife at different times had sole and exclusive control of Marova, LLC.

Operating Agreement Controlling as to Intent to Hold Ownership as Tenants by the Entireties

Instead, the court focused on the intent of the parties, and this is where the operating agreement saved the day.  Pursuant to the Marova, LLC operating agreement, which was executed back in March 2011 when the company was formed, the owner of the company was identified as husband and wife, “Tenants by Entireties 100%.”  And the court found this controlling and persuasive:

Finally, the Marova, LLC operating agreement reflects the clear intent of the Debtor and Laviosa to own Marova, LLC as “Tenants by Entireties 100%,” and the Trustee has presented no evidence to refute this clear intention. Membership interests in a limited liability company, like stock in a corporation or other forms of personal property, may be held by a husband and wife as tenants by the entireties. See Cacciatore v. Fisherman’s Wharf Realty Ltd. Partnership, 821 So. 2d 1251 (Fla. 4th DCA 2002).

Based on the intention of the parties as manifested in the company operating agreement, the court overruled the trustee’s objection to the Debtor’s claimed TbE exemption in Marova, LLC.

But would this result have been different if the company had no operating agreement?  It most certainly could have been as it seems the only other evidence the Debtor presented in support of the TbE exemption was his testimony; the trustee also failed to present any other evidence to the contrary.  On the one hand, you do not want the lynchpin of your defense to rest on whether the court believes you or not, which is the case when testifying on a matter when there is no corroborating evidence in support.  On the other hand, the Debtor in this case got really lucky because the trustee wrongly conflated management and control of an LLC with ownership of an LLC.  Each is addressed briefly in turn.

If no Operating Agreement

Regarding the testimony, had there been no operating agreement (and assuming the trustee raised genuine issues of material fact), the burden of proving ownership would have proved much more burdensome.  First, LLCs traditionally do not issue certificates representing a member’s ownership interest in the company.  See generally Fla. Stat. § 6050502(4). Second, “family” LLCs such as this one do not usually pass resolutions when members need to act, which could serve as evidence of ownership depending upon the management structure of the LLC.  For example, a resolution signed by husband and wife as TbE in a member-managed LLC would tend to show that they operated as one unit and jointly consented to the action.  Third, a CPA may have not fully understand how to classify a TbE interest on the company’s informational returns or Schedule C, and may inadvertently list both husband and wife as separate members.  Fourth, signature cards at the bank or account opening documents, which are usually presented to the customer pre-filled and signature ready, may list members separately.

The list goes on, but if you did not already get my drift, allow me to summarize it this way: your intent becomes less relevant when documentary evidence, even if it is mistaken, tends to contradict your testimony.  You may state unequivocally and credibly that you hold your ownership as TbE, but without an operating agreement, your testimony is more likely to be “fact-checked” against other documents.  As in the case mentioned above, drafting a company operating agreement that certifies ownership as TbE will be a strong rebuttal and defense to those who claim that ownership is not what you intended it to be, even if documents are presented to the contrary.

Management Structure of LLC

Regarding the trustee’s argument that the TbE severed because of a lack of joint control, i.e. no unity in possession, the fact that the Debtor’s wife signed all business filings instead of both of them together as a single unit is a rather odd argument to make in light of the patent statutory requirements that business filings do not require the signature of all owners.  Regardless, it appears from public record that this LLC was a manager-managed LLC, as opposed to a member-managed LLC, so arguing that the marriage didn’t operate the company as one unit falls flat.

The issue was ownership, not management, and it is perfectly fine to have your marriage own the company but have one spouse manage the company, which seems to be the case here.  However, the trustee conflated ownership with management, or perhaps assumed that Marova was a member-managed LLC, and went all in on the argument that the owners of the company must be those who manage it.  Not so, unless you operate as a member-managed LLC.  Whether by design, tactics, or otherwise, that the trustee failed to argue that the LLC was in fact a member-managed LLC, or present tax returns, bank records, or company resolutions to support its position, all but doomed her argument.

The operating agreement in this case resoundingly convinced the court to grant summary judgment in favor of the debtor.  However, the ownership issue would have been much less clear had the Debtor not drafted an operating agreement or if the trustee presented evidence creating a genuine issue of material fact.  When faced with evidence to the contrary, as will probably be the case, your operating will act as both a sword and shield.

It might even save your day as well.