In the Matter of the Estate of Charles E. Cook, Jared Brooks and Charlotte Smith v. Amy Willhite and the Estate of Charles E. Cook

2020 Ark. App. 292, 601 S.W.3d 453

• Court: Court of Appeals of Arkansas
• Decided: May 6, 2020
• Status: Published

Opinion

Cite as 2020 Ark. App. 292 Reason: I attest to the accuracy and integrity of this document ARKANSAS COURT OF APPEALS Date: 2021-06-17 10:22:47 Foxit PhantomPDF Version: 9.7.5 DIVISION IV No. CV-18-1033

IN THE MATTER OF THE ESTATE Opinion Delivered: May 6, 2020 OF CHARLES E. COOK, DECEASED

JARED BROOKS AND CHARLOTTE APPEAL FROM THE LAWRENCE SMITH COUNTY CIRCUIT COURT APPELLANTS [NO. 38PR-17-49]

V. HONORABLE KEVIN KING, JUDGE

AMY WILLHITE AND THE ESTATE REVERSED AND REMANDED OF CHARLES E. COOK APPELLEES

MIKE MURPHY, Judge

Appellants Jared Brooks and Charlotte Smith appeal from the Lawrence County

Circuit Court’s order finding that an LLC operating agreement between Brooks and Charles

Cook, deceased, lacked sufficient consideration to transfer Cook’s LLC interest to Brooks

without paying a buyout to Cook’s estate. Brooks and Smith also appeal from the circuit

court’s order confirming jurisdiction. Finding no error in the circuit court’s determination

of its jurisdiction, we reverse and remand the order determining Cook’s LLC interest to be

an asset of his estate.

Charles Cook died on April 23, 2017. At the time of his death, he had three surviving

children: Charlotte Smith (Brooks’s mother), Crista Bowker, and Amy Willhite. Also at the

time of his death, Cook had a 50 percent interest in Cook’s Towing and Recovery, LLC. In December 2014, Cook and his grandson Brooks created the LLC pursuant to a seven-

page operating agreement that was filed with the Arkansas Secretary of State on December

23, 2014. Brooks and Cook, as the only members, each owned a 50 percent interest in the

LLC. A provision in the operating agreement provided that upon the death, incompetency,

or bankruptcy of either member, that member’s ownership, interest, and income from the

LLC would immediately transfer to the surviving member, without any buy-out required.

It also stated that a member could sell or transfer his interest with the consent of the other

member but granted a right of first refusal.

On May 3, 2017, Brooks filed a petition to open the estate and for the appointment

of a personal representative. The petition listed Brooks and Cook’s three daughters as

surviving heirs and devisees pursuant to a purported holographic will, which Brooks alleged

to be Cook’s last will and testament. On August 21, the circuit court entered an order

appointing Brooks personal representative and finding that the holographic will was not

valid. Based on this finding, the court ordered that the assets of Cook’s estate pass by intestate

succession to his three daughters.

On January 29, 2018, Brooks petitioned the court to admit two documents

purported to be holographic wills found in Cook’s safe. He also petitioned to be released as

personal representative because he was listed as a beneficiary in the purported wills. The

court released him as personal representative and appointed D. Clay Sloan for the position.

The court also appointed Sloan to serve as the estate’s legal counsel. On April 9, after a

hearing, the court entered an order disallowing the admission of the holographic wills

because the documents lacked clarity and the necessary testamentary intent.

2 Meanwhile, in November 2017, Willhite had filed a motion to determine that

Cook’s interest in Cook’s Towing and Recovery be considered an asset of the estate and

did not pass automatically to Brooks. At the April 9 hearing, the court directed the parties

to submit briefs on this issue. Brooks’s brief first asserted that the probate court lacked

jurisdiction to address the matter because the dispute concerned property rights and did not

involve a beneficiary or personal representative of the decedent’s estate. He also asserted,

among other things, that the operating agreement is an independent, valid, and binding

contract that clearly stated the intent of the decedent to have his interest in the LLC transfer

upon his death to the surviving member. Charlotte Smith filed a statement that she had no

objection to the LLC being vested completely in Brooks.

Willhite’s trial brief noted that the assets of the LLC include vehicles used in the

towing business as well as Cook’s personal residence. She attacked the validity of the creation

of the LLC, arguing there is no valid business reason for Cook to have transferred his

personal residence to the LLC. She further argued that there are no dates on the pages of

the agreement, no page numbers, no initials of the signatories on each page, and no

verification by a witness or notary. Thus, she claimed there is no proof that Cook agreed to

the language transferring his interest to Brooks. Lastly, she claimed the transfer-upon-death

provision in the operating agreement is an attempt to accomplish a testamentary disposition

in an unverified and unwitnessed contract.

On August 31, the circuit court entered two orders regarding its determination on

jurisdiction and the transfer of the LLC interest. First, the court found that it had jurisdiction

over the parties and issues presented. It noted that Brooks was a party to the case since it

3 had been opened and that he had been actively involved in actions taken on behalf of the

estate until Sloan replaced him as personal representative. It further noted that Brooks only

identified himself as a “stranger” to the case after the court issued a decision as to the

ownership of the LLC interest by the estate.

Concerning the ownership of the LLC interest, the court’s order directed that Cook’s

50 percent interest in the LLC be considered an asset of his estate. The order found that the

transfer of Cook’s interest by virtue of the operating agreement was contractual in nature

and not a testamentary transfer; however, the court found the contract failed due to lack of

consideration. Because the transfer provision lacked consideration, the court severed the

transfer provision from the remainder of the operating agreement per the severability clause

in the agreement. The order further found that Brooks had a contractual right under the

LLC agreement to purchase Cook’s interest from the estate as if Cook were selling his

interest to a third party under the right of first refusal clause. Brooks and Smith (collectively

referred to as “appellants”) now timely appeal.

We will address the appellants’ arguments out of order. Even though the appellants

first contend that the circuit court erred in finding that the operating agreement did not

transfer Cook’s interest in the LLC to Brooks upon Cook’s death, because they also allege

a jurisdictional issue, we will discuss the jurisdictional issue first.

The appellants contend that the circuit court did not have jurisdiction to determine

the ownership of the LLC because Brooks and the LLC are strangers to the estate. This

court has defined a “stranger” to the estate as one who is not an heir, distributee, or devisee

of the decedent, or a beneficiary of or claimant against the decedent’s estate. Smith v. Smith,

4 338 Ark. 526, 529, 998 S.W.2d 745, 747 (1999). Brooks acted on behalf of the LLC as a

claimant against the estate. Additionally, Arkansas Code Annotated section 28-1-104 (Repl.

2012) defines probate court jurisdiction and states that the circuit court shall have

jurisdiction over “[t]he administration, settlement, and distribution of estates of decedents.”

The question before the circuit court was whether the operating agreement signed by both

Cook and Brooks authorized transfer of Cook’s LLC interest outside of the estate to Brooks

or whether Cook’s interest should transfer to his estate. Because the question before the

court involved the administration, settlement, and distribution of Cook’s estate, namely how

his interest in the LLC will be distributed, we find no error in the circuit court’s

determination of its jurisdiction.

Next, we will discuss the appellants’ argument that the circuit court erred in finding

that the operating agreement did not transfer Cook’s interest in the LLC to Brooks upon

Cook’s death. When a contract is free of ambiguity, its construction and legal effect are

questions of law for the court to determine. Kraft v. Limestone Partners, LLC, 2017 Ark. App.

315, at 5, 522 S.W.3d 150, 153. When contracting parties express their intention in a

written instrument in clear and unambiguous language, it is the court’s duty to construe the

writing in accordance with the plain meaning of the language employed. Id. We must

consider the sense and meaning of the words used by the parties as they are taken and

understood in their plain and ordinary meaning. Id. It is a well-settled rule that the intention

of the parties to a contract is to be gathered, not from particular words and phrases, but from

the whole context of the agreement. Id. On appeal from a circuit court’s determination of

5 a purely legal issue, we must decide only if its interpretation of the law was correct, as we

give no deference to the circuit court’s conclusion on a question of law. Id.

Arkansas Limited Liability Companies are authorized by the Small Business Entity

Pass Through Act. See Ark. Code Ann. §§ 4-32-101 et. seq. (Repl. 2016 & Supp. 2019).

The Act defines an “operating agreement” as the written agreement which shall be entered

into among all of the members as to the conduct of the business and affairs of a limited

liability company. Ark. Code Ann. § 4-32-102(11). Our statutes do not indicate any specific

requirements or contents of the written agreement, itself. The Act requires certain

information be kept in writing, but states that it shall merely be kept at the LLC’s “principal

place of business.” Ark. Code Ann. § 4-32-405.

A person ceases to be a member of a limited liability company upon the occurrence

of a member’s death unless otherwise provided in writing in an operating agreement. Ark.

Code Ann. § 4-32-802. The operating agreement entered into by Brooks and Cook

specifically addresses what should happen in the event of the death of a member. Section

8.4 provides,

On the death, adjudicated incompetence, or bankruptcy of a Member, the living member shall be the sole successor in interest to the deceased Member. Upon the death, incompetency, or bankruptcy of Jared Brooks, his ownership, interest, and income from the Company shall immediately transfer to Charles Cook. Upon the death, incompetency, or bankruptcy of Charles Cook, his ownership, interest, and income from the Company shall immediately transfer to Jared Brooks. In the event there is any legal contest to this automatic transfer of ownership, any other successors in interest to any deceased, incompetent, or insolvent Member (whether an estate, bankruptcy trustee, or otherwise) will receive only the economic right to receive distributions whenever made by the Company and the deceased, incompetent, or insolvent Member’s allocable share of taxable income, gain, loss, deduction, and credit (the “Economic Rights”). (Emphasis added)

Additionally, section 8.7 states,

6 [U]pon the transfer of the interest in the Company by any deceased, incompetent, or insolvent Member, there shall be no buy out required to accomplish the transfer upon death/incompetency/insolvency of either Charles Cook or Jared [Brooks]. All interest, shares, profits, and ownership shall automatically transfer to the remaining competent/solvent party. (Emphasis added)

The language clearly and unambiguously establishes that Cook and Brooks intended

for their ownership, interest, and income from the LLC to pass automatically and

immediately to the surviving member in the event of either of their deaths. The circuit

court properly acknowledged that this was a contractual transfer. However, the court

erroneously found that this contractual transfer lacked consideration and could not be

properly effectuated.

Consideration is any benefit conferred or agreed to be conferred upon a promisor to

which he is not lawfully entitled, or any prejudice suffered or agreed to be suffered by a

promisee, other than that which he is lawfully bound to suffer. Trakru v. Mathews, 2014 Ark.

App. 154, at 8, 434 S.W.3d 10, 16. Mutual promises constitute consideration, each for the

other. Essential Accounting Sys., Inc. v. Dewberry, 2013 Ark. App. 388, at 6, 428 S.W.3d 613,

617.

The operating agreement between Cook and Brooks delineated multiple mutual

promises and obligations including both contributing initial capital to the LLC and both

agreeing to operate and manage the company. Also, the provision directing that the interest

of a member upon his death shall immediately pass to the surviving member applied to both

Cook and Brooks. Both parties gave up the rights for their respective estates and heirs to

receive a buy-out from the other party to effectuate the transfer of interest in the event of

7 death, incompetency, or bankruptcy. As such, their mutual promises and obligations

supplied the necessary consideration to form a valid, enforceable contract.

Appellees maintain that the issue of whether there was adequate consideration should

be analyzed at the time of death. They assert that the consideration given for the creation

of the LLC in the operating agreement should not be the same consideration to support the

transfer that would only occur upon death of one of the parties. However, this ignores the

contract-construction principles set out above. Our principles of construction require that

the terms of the contract be read as a whole. When this is done, it is evident that Cook and

Brooks entered into the operating agreement with the intention that the LLC interest

transfer to the surviving member upon either of their deaths. Thus, because Cook and

Brooks created an LLC under the authorizing statutes and drafted an operating agreement

that included terms that clearly intended a member’s interest to pass to the surviving member

upon either of their deaths, we hold that Cook’s interest transferred upon his death to

Brooks rather than to Cook’s estate.

Reversed and remanded.

ABRAMSON and KLAPPENBACH, JJ., agree.

Taylor & Taylor Law Firm, P.A., by: Andrew M. Taylor, Tasha C. Taylor, and Jennifer

Williams Flinn, for appellants.

Snellgrove, Langley, Culpepper, Williams & Mullally, by: Todd Williams, for separate

appellee Amy Willhite.

Sloan Law Firm, by: D. Clay Sloan, for separate appellee Estate of Charles Cook.