Limited liability companies are popular, in part, because of the flexibility they allow owners in structuring business relationships. Courts are typically loath to interfere with these arms-length dealings between business people. But when LLC members structure their business relationships to thwart the rights of others, Georgia Courts may intervene to prevent injustice.
A recent example can be found in Seitz Joint Venture, LLC v. Seitz. Tom and Elizabeth Seitz were married in 1981. Seven years later, Tom and his brothers formed a general partnership called Seitz Joint Venture #1 (the “Partnership”).
Under Georgia law, any asset acquired during the course of a marriage is considered marital property and is subject to equitable division. Thus, Tom’s ownership interest in the Partnership would be subject to equitable division in a divorce proceeding. In 2007, Elizabeth sued Tom for divorce.
While that case was pending, Tom and his brothers formed a new entity, Seitz Joint Venture, LLC (the “LLC”), of which Tom owned a 1/6th interest. The LLC’s operating agreement conditioned the addition of new members upon the unanimous consent of the existing members. After setting up the LLC, the Seitz brothers caused the Partnership to transfer millions of dollars of assets to the LLC, perhaps in an effort to avoid Elizabeth’s claim to an equitable division of any Partnership assets.
On Elizabeth’s request, the trial court made the LLC a co-defendant in the divorce action. After trial, the trial court awarded 1/2 of Tom’s ownership, or 1/12th interest in the LLC, to Elizabeth.
The LLC appealed, arguing that its operating agreement expressly precluded Elizabeth from becoming a member absent the consent of the existing members.
The Georgia Supreme Court found no error in the trial court’s ruling because the LLC was not required to give Elizabeth voting rights in the LLC’s management and operations, but merely the right to receive 1/12th of the LLCs distributions.
In reaching this result, the Supreme Court juggled two competing doctrines.
On one hand, if LLCs are to continue as popular and flexible business entities, the contractual relationships that govern them must be enforced predictably and uniformly. On the other hand, if the marital property doctrine – that property acquired during a marriage is generally subject to equitable division between spouses in a divorce action – were ignored, it would become meaningless.
In Seitz Joint Venture, LLC v. Seitz, the Supreme Court attempted to follow both principles. Elizabeth received 1/12th of the economic benefit of the LLC, while Tom and his brothers were insulated from Elizabeth having a say in the LLC’s operations and management.
The intersection of business relationships and personal relationships is a complicated place for anyone to find themselves. Business owners facing similar challenges would do well to consult with experienced counsel so as to successfully navigate these obstacles to business growth and stability.
Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.
