The Connecticut Supreme Court just held that a spouse who receives by assignment the other spouse’s interests in an LLC, may not get much after all. You can read the case here. Once upon a time when I handled domestic relations cases, I knew that one of the assets that might be equitably divided was a spouse’s interests in a limited liability company. The value received is really the right to receive distributions of the LLC’s profits, because the spouse is not automatically a member of the LLC. But what if the other LLC member doesn’t make any distributions? What can the assignee-spouse do? Not much it seems.
In Styslinger v. Brewster Park, LLC, the Connecticut Supreme Court ruled that the assignee-spouse (the plaintiff in the case) has no standing to force a winding up of the LLC, because winding up only occurs in conjunction with a dissolution. Dissolution can occur when (1) an event of dissolution takes place under the formation documents, (2) the majority members vote to dissolve or (3) a court orders dissolution. If none of those have happened, and they didn’t in this case, the spouse has no standing or right to bring an action to wind up the LLC. Winding up is basically paying off the creditors and distributing the remaining assets to the members. That’s why the plaintiff sued – to force the winding up so he could get the remaining value as a distribution.
The plaintiff abandoned his claim for dissolution of the LLC, possibly because he had no basis to convince a court to dissolve the LLC. And that seems to have been the death knell for his claim of winding up the LLC. You can’t have one (winding up) without the other (dissolution). Also the Court deemed it important enough to mention that Brewster Park lacked an operating agreement. The operating agreement is the document that permits members to control certain things about the LLC, rather than revert to the default rules contained in the limited liability company act. If this LLC had an operating agreement, it could have barred assignment of a member’s interests, avoiding this problem altogether.
Divorce lawyers might want to consider how to protect their client’s interests in an LLC when the LLC refuses to make distributions. Maybe it could be a basis to seek a modification of the divorce decree because the client isn’t getting any monetary value for the asset. This case reinforces the fact that simply receiving an assignment of an LLC interest really means zilch unless you are receiving distributions.