Tom Petty, who tragically passed away in 2017, was one of the greatest American songwriters and the property rights to his music are likely his most valuable asset. His trust divides these artistic property rights between his wife, Dana, and his two daughters (from a previous marriage), Adria and Kim. Perhaps not surprisingly, both Dana and his daughters want control of these assets, and they are now battling each other in court. The litigation raises some interesting legal questions about how Tom intended to dispose of his artistic property and how it should be managed.
Dana is responsible for gathering Tom’s artistic property and applying it as directed by section 5.2 of the trust, which states:
5.2 Creation of the Artistic Property Entity and Allocation of Interests Therein. The Trustee shall first set aside all of the Artistic Property held by the Trust Estate. The Trustee is hereby directed to create a California limited liability company (or such other entity as the Trustee deems appropriate) (“Artistic Property Entity”) to hold the Artistic Property. The membership interests in the Artistic Property Entity shall be held as follows:
(a) If [Dana] survives [Tom], then the Trustee shall allocate an undivided one-third (1/3) membership interest (or other beneficial interest) in the Artistic Property Entity to the Marital Trust to be created pursuant to Paragraph 5.3. …
(b) The Trustee shall allocate an undivided two-thirds (2/3) membership interest (or other beneficial interest) in the Artistic Property Entity to the Issue’s Trust to be created pursuant to Paragraph 5.3. With respect to the creation of the Artistic Property Entity, the Trustee is directed to create the governing documents of the Artistic Property Entity such that those of the Spouse, ADRIA and KIM who are living at the time of creation of the Artistic Property Entity shall be entitled to participate equally in the management of the Artistic Property Entity, even though their respective economic interests in the Artistic Property Entity are not equal.
In sum, this part of his trust says the following:
- Dana is the trustee and controls all of his property right now.
- Dana must create a company to hold Tom’s artistic property.
- Dana (through her Marital Trust) will own one-third of this company.
- Tom’s daughters, Adria and Kim, (through the Issue’s Trust) will own two-thirds of this company.
- Dana is directed to create the governing documents of this company.
- Dana, Adria, and Kim “shall be entitled to participate equally in the management.”
As trustee, Dana formed a company called Petty Unlimited, LLC to hold Tom’s artistic property, and she named herself, Adria, and Kim as the three managers. Before Dana would transfer the artistic property to Petty Unlimited, she requested that Adria and Kim first sign an operating agreement specifying how the company would be managed. This is where the dispute emerges.
What did Tom intend by the phrase “shall be entitled to participate equally in the management?”
Dana’s proposed operating agreement interprets the direction to “participate equally in the management” as merely giving Adria and Kim something akin to an advisory role, but leaving nearly all decisions to the ultimate discretion of a “professional” manager who may only be removed upon unanimous consent of all three owners. As Dana explained in her May 29, 2019 objection to Adria and Kim’s petition:
The Trust says Dana, Adria and [Kim] will have an equal right to participate in management. Equal participation in management can be accomplished by authorizing a professional manager who can make day-to-day business decisions with the requirement that he obtain unanimous approval on major decisions. For example, Adria wanted to authorize Tom’s name and likeness to be used to promote products akin to Paul Newman, whose face adorns bottles of salad dressing and so on. But Tom would never have permitted such a thing; he never “sold out” while he was alive and refused to do any such thing despite numerous opportunities. Dana is certain Tom’s fans would also find it a sad perversion of Tom’s legacy. But each of these women would have the opportunity to participate by seeking-in a respectful manner, one would hope-to persuade the manager one way or the other. That is “participation” in management.
While Dana sees a professional manager protecting Tom’s brand from ill-advised management decisions, Adria and Kim suspect a secret alliance between Dana and the professional manager, and see the proposed operating agreement as a means of shutting them out of management. They refused to accept Dana’s proposal for a professional manager, and instead interpret the phrase “participate equally in management” as providing each of the three women with a vote on management decisions. And in the face of a disagreement, Adria and Kim believe the majority should prevail. Of course, this would give Aria and Kim the power to overrule Dana on all issues, and Dana wants to avoid being the oppressed minority owner.
Whose interpretation wins? That will be for the judge to decide, but in my view, neither Dana’s nor Adria and Kim’s interpretation is correct.
Significantly, the trust provides that Dana, Adria, and Kim “shall be entitled to participate equally in the management of the Artistic Property Entity, even though their respective economic interests in the Artistic Property Entity are not equal.” (Emphasis added) Why would Tom say their respective economic interests were not equal when each of the three owns a one-third membership interest? What inequality is Tom referring to here? It seems clear that once you identify the inequality, it could impact the interpretation of the preceding clause.
The only inequality evident in this part of the trust is Dana owning one-third, and Adria and Kim owning two-thirds of the Artistic Property Entity. If this is the inequality Tom is referring to, it suggests that even though Dana owns one-third and the daughters own two-thirds of the economic interests, Tom wanted Dana, on one hand, and Adria and Kim, on the other hand, to “participate equally in management.” That is, Dana would have a 50 percent vote on all management decisions and Adria and Kim together would have a 50 percent vote on all management decisions, even though their economic interests would be divided one-third to Dana and two-thirds to the daughters. Neither Dana nor the daughters would have a majority and both factions would have to compromise in all managerial decisions.
What happens if there is a deadlock? If managerial decisions require unanimous approval, the failure to obtain unanimity could paralyze operations and threaten the business. Unless the operating agreement requires a higher threshold, 50 percent or greater of the voting interests may dissolve the LLC. (Corp. Code § 17707.01, subd. (b).) Members holding less than 50 percent of the voting interests may also petition the court to dissolve the LLC when “management of the limited liability company is deadlocked or subject to internal dissension.” (Corp. Code § 17707.03, subd. (b)(4).) However, in the latter case the majority may then exercise the right to buy-out the petitioning membership interests at their fair market value.
