"Relative" Risks: Untangling Family Ties in Conflict of Interest Transactions

Last month, the Tennessee Court of Appeals addressed the issue of conflict of interest in In Re Estate of Joyce Ann Hendrickson, which involved a transfer of assets. The case centered on an LLC owned by a mother, father, and daughter, which held seven properties. The mother, holding the majority voting interest and serving as the LLC’s manager, transferred most of the LLC’s assets to another LLC, owned by her daughter and son-in-law. The transfer was made without the father’s knowledge. After the mother’s death, her estate sought to recover the transferred assets, arguing that the transactions violated conflict-of-interest provisions under Tennessee law.

In 2021, the administrator of the estate filed a complaint against the deceased mother’s children, asserting that the transactions were invalid due to a conflict of interest. Both parties agreed that a conflict of interest existed, but the defendants argued that the transfers should not be voided under exceptions outlined in Tenn. Code Ann. § 48-249-404(b).

"For purposes of this section, a member, manager, director or officer of the LLC has an indirect interest in a transaction, if, but not only if:

(1) Another entity in which the member, manager, director or officer has a material financial interest, or in which the member, manager, director or officer, as applicable, is a general partner, is a party to the transaction; or 

(2) Another entity for which the member, manager, director, or officer is a member, governor, director, manager, officer or trustee is a party to the transaction, and the transaction is, or should be, considered by the members, managers or directors, as applicable, of the LLC."

The defendants contended that since the deceased mother did not personally receive a "material benefit" from the transfer, the transaction should stand. However, the court disagreed, claiming that this argument ignored the critical statutory language "if, but not only if." The Appeals Court further clarified its position by referencing Holmes Financial Associates, Inc. v. Jones, where the court did not interpret the "if, but not only if" language narrowly, but rather adopted a broader interpretation. This approach was consistent with the court’s view that indirect interests arise in transactions involving family members, given the inherent conflicts of interest that such relationships create.

Additionally, this transfer violated specific regulations regarding the required disclosure of interests to all members of an LLC before transferal. The third and final member was “kept in the dark” about these transactions.

Ultimately, the court found that these transfers violated various Tennessee Codes, including conflict-of-interest rules, and declared them void. This decision underscores the importance of closely scrutinizing transactions involving LLCs, especially when family members are involved, as these relationships can create inherent conflicts.