The Intersection of Business Divorce and Marital Divorce

stock-photo-quarryOn occasion, the worlds of business divorce and marital divorce intersect. One such case is In re Marriage of Schlichting, 2014 IL App (2d) 140158 (2014). There, the divorce court was dividing the marital property of Larisa and Bruce Schlichting, and questions arose about how to value and divide Larisa’s ownership interest in an LLC that owned and operated a quarry. Larisa owned a 20% interest, and several of Bruce’s family members also owned interests. The record did not specify why Bruce was not a member. However, Bruce had a history of litigating against his family.

The LLC’s operating agreement had a buyout procedure in the event a member was forced to sell his or her interest as part of a divorce. It provided that the value of the interest would be the greater of the member’s pro rata portion of the overall value of the LLC, as determined by (1) the LLC’s accountant; and (2) the divorce court. Larisa wanted to keep her interest in the LLC despite the divorce, whereas Bruce wanted to force the sale of her interest under the provision in the operating agreement. However, Bruce believed the value of the interest was significantly higher than the LLC’s accountant had provided.

Still, he did not introduce any evidence or otherwise attempt to convince the divorce court that the accountant’s value was too low. Although the LLC’s operating agreement restricted the sale of membership interests to outsiders, the divorce court ordered Larisa to sell her interest to Bruce at a price based on the accountant’s value, which in turn would allow Bruce, as a member of the LLC, to pursue a higher valuation at a later date in order to effectuate a higher cash distribution.

In doing so, the divorce court relied on the well established principle that where marital property such as a business is not susceptible to division, the court may award the property to one spouse, subject to payment to the nonacquiring spouse for the interest lost, either by offsetting other marital property or by cash.

The appellate court reversed, holding that the trial court abused its discretion in ordering Larisa to violate the LLC’s operating agreement and sell her interests to Bruce. If Bruce believed the interest was worth more than the accountant’s valuation, he had the right to have the divorce court set a higher valuation. Moreover, the divorce court abused its discretion by encouraging Bruce — who already had a history of litigation with his family — to pursue future litigation as a new member of the LLC.

(This is for informational purposes and is not legal advice.)

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