In this case, the Second District Appellate Court reversed a decision of the trial court to award ownership of membership units in an Limited Liability Company held by Wife (“LLC”) to the non-member Husband.
The LLC operating agreement included provisions for valuing the business and repurchasing ownership interests in the event of divorce. The agreement contained a typical restriction against transfer provision. The provision required that the LLC members unanimously agree to a buyout of the divorcing member’s interest, among other restrictions.
The valuation provision required the LLC’s accountant to set the value to be used for the buyout, and also stated that in the event a Court set a higher value, the divorcing member would be required to repay the LLC the difference between the court-determined value and the value set by the accountant.
Despite the existence of the operating agreement, the Court ordered the Husband to purchase the Wife’s interest in the LLC at the value she believed it was worth, rather than following the LLC accountant’s value, and contrary to the provision requiring the LLC to buy out the divorcing member’s interest. The Appellate Court held this was an abuse of discretion and reversed the decision.
The Court stated: : “While no Illinois case requires a court to distribute marital property in accordance with an operating agreement binding one or both parties in their business activities, existing case law, both within and outside Illinois, comes together to establish that the failure to do so, where compliance is easily possible, constitutes an abuse of discretion.”
The Court reversed the transfer to Husband, allowed the Wife to retain the LLC interest, and required her to pay Husband for his equitable share of the LLC interest.
What does this mean for the business owner? Essentially trial courts are required to follow operating agreements and shareholders’ agreements at least in terms of transfer and divorce buyout restrictions. This did not change existing law in terms of valuation determination, however. The divorce court may still set a value for the business independent of that set forth in an operating agreement.
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