In re MARRIAGE OF LARISA D. SCHLICHTING, a/k/a Larisa D. Fansler, Petitioner-Appellant, and BRUCE E. SCHLICHTING, Respondent-Appellee
Appeal from the Circuit Court of Boone County. No. 10-D-38. Honorable Brendan A. Maher, Judge, Presiding.
In an appeal centered on an order awarding respondent petitioner's membership interest in a family-owned limited liability company that operated a rock quarry and had been deemed to be marital property by the trial court, the appellate court held that the trial court abused its discretion to the extent that the order required petitioner to violate the terms of the company's operating agreement, which specified the valuation process to be used in the case of a member's divorce and allowed a nonmember spouse to contest the valuation during the divorce process, since respondent had no interest in the company but members of his family did and respondent had a history of litigating against his family members; therefore, the appellate court reversed the trial court's order and directed petitioner to pay respondent the value of petitioner's interest as arrived at by the company's accountant pursuant to the terms of the operating agreement; furthermore, based on this ruling, adjustments were directed to be made for the parties' payments for postdissolution payments of taxes and capital contributions and receipts of postdissolution profits.
Nancy Grimme Schilling, Erin E. Walsh, Schilling & Walsh, LLP, of Rockford, for Appellant.
Robert C. Pottinger, Barrick, Switzer, Long, Balsley & Van Evera, LLP, of Rockford, for Appellee.
JUSTICE JORGENSEN delivered the judgment of the court, with opinion. Justices Schostok and Birkett concurred in the judgment and opinion.
[¶1] The trial court entered a judgment of dissolution of the marriage between Larisa D. and Bruce E. Schlichting. The court deemed Larisa's membership interest in Rockton Rock, LLC (the LLC), to be marital property. It awarded Bruce, a nonmember, all of Larisa's membership interest, but it ordered him to pay Larisa $19,500 in exchange. Larisa appeals, arguing that the trial court abused its discretion because the award required her to
violate the LLC's operating agreement. This court stayed enforcement of the trial court's judgment pending appeal. For the reasons that follow, we reverse the trial court's judgment concerning the LLC. Accordingly, we also vacate the trial court's corresponding order that Bruce make capital contributions reflecting his membership interest and be awarded certain profits.
[¶2] I. BACKGROUND
[¶3] A. Judgment of Dissolution and Memorandum of Decision
[¶4] On April 1, 2011, the trial court entered the judgment of dissolution, ending the parties' 10-year marriage. The parties had no children, and the case mainly concerned property division. Of particular interest was the LLC, which owned and operated a quarry. Larisa held a 20% membership interest and several of Bruce's family members also held interests but Bruce did not. The record does specify why Bruce was not a member. However, there are several indications that Bruce had a history of litigating against his family. For example, Bruce's exhibit No. 31 is an agreed order stating that Bruce was to dismiss two pending lawsuits against two family members, who (personally or through other business relationships) happened to be members of the LLC.
[¶5] The LLC's operating agreement contained a transfer restriction that prohibited Larisa, or any member, from selling to Bruce, or any person, a membership interest absent the unanimous written consent of the other members:
" 16.1 A Member will not assign, sell, transfer, pledge, or otherwise encumber its Membership Interest, or any portion of its Membership Interest[,] without the unanimous prior written consent of the other Members."
[¶6] The trial court determined that Larisa's membership interest in the LLC was marital property. The LLC had been discussed at trial, but very little evidence was presented concerning its value. The LLC's manager, Robert Schlichting, stated incidentally that he " felt" the company was worth approximately $400,000. The scarcity of valuation evidence was due to the parties' interpretation of the two-part valuation formula and buyout procedure contained in sections 16.6 and 16.4 of the LLC's operating agreement, which, in their view, rendered pointless the introduction of valuation evidence prior to the court's judgment of dissolution.
[¶7] Section 16.6 stated in part:
" 16.6 In the event of a Member's divorce (if applicable), the same buyout procedure set forth in Section 16.4 shall apply, except that the value shall be the greater of said determination [by the LLC's accountant] or that amount determined by the final non-appealable decision in the divorce [by the court]. In the event the final non-appealable decision [by the court] concerning value is higher than the value calculated in Section 16.4 [by the LLC's accountant], the divorcing Member shall execute a promissory note payable to the [LLC] for the difference in valuation, which note shall be due and payable within ninety (90) days of said order." (Emphasis added.)
[¶8] Section 16.4 stated in part:
" 16.4 In the event that a Member dies, declares bankruptcy, or receives a court declaration of incompetence, he or she shall receive the fair value of his or her membership interest as of the effective date of his or her resignation as may be determined by the accounting firm regularly employed by [the LLC], utilizing the customary practices and principles associated with the operation and valuation of [the LLC's] assets and
liabilities to the date of resignation." (Emphasis added.)
[¶9] Therefore, in Larisa's view, there was no need to present valuation evidence, because, upon execution of the judgment of dissolution, that value would be " determined by the accounting firm regularly employed by [the LLC]." (Nor would it be in her interest to pursue a higher valuation, lest she be required to reimburse the LLC.)
[¶10] In Bruce's view, there was no need to present valuation evidence, because, even if he were able to convince the court that the LLC was worth more than the amount determied by the LLC's accountant, he and Larisa would need to pay the LLC the difference in valuation. As Bruce argued at the trial:
" It's all in the [operating agreement], though. There's going to be a fair value that's provided by *** whoever they designate as the accountant. *** So the point is that if we went through all the exercise of a valuation and all that cost ***, which would have been thousands of dollars, and we said it was something other than [the amount determined by the accountant] ***. The court would just find the value, and if it came in higher then that would have been an obligation of the parties  to now write a note back to the LLC and pay it ***, so it's really a poison." (Emphasis added.)
[¶11] On August 31, 2011, the trial court entered its memorandum of decision. In it, the court awarded 65% of the " potential cash distribution from equity interest in the LLC" to Larisa and 35% to Bruce. This division was in keeping with an approximate 65/35 split of the entire marital estate. The trial court stated that the current value of the LLC was unknown:
" The only evidence in the record with respect to the 'fair market value' of [the LLC] comes in the form of [LLC manager] Robert Schlichting's testimony that his 'feeling' is that the company is worth 'around $400,000.00.' According to the [LLC's operating agreement,] its fair market value will be determined by its accountant, Karl Barnes, upon completion of the parties' divorce."
[¶12] On September 21, 2011, the trial court entered an " order on remaining issues." As to the LLC, the court again stated: " [Larisa] is awarded 65% of the cash distribution from the equity interest in [the LLC]; [Bruce] is awarded 35% of the cash distribution from the equity interest in [the LLC]." Numerous motions and rulings followed the entry of the order and they can be divided into two groups: those aimed at effectuating the 65/35 split and those aimed at seeking reimbursement of expenses.
[¶13] B. Effectuating the 65/35 Split
[¶14] On October 11, 2011, Larisa moved to reconsider and for clarification. As to the LLC, she noted that there had not yet been a valuation, the implication being that she was unsure how to proceed. She stated that her membership interest had been valued (not necessarily before the court) as low as $15,000 and as high as $80,000.
[¶15] On October 21, 2011, Bruce moved to reconsider. As to the LLC, he asked that the court enter additional orders to effectuate the liquidation of Larisa's membership interest, which the parties referred to as a cash distribution:
" The undisputed evidence is that the LLC is required to purchase the interest
at fair market value. The issue becomes the enforcement of the Order and who should take the necessary steps to enforce the rights of the marital estate. Testimony was undisputed that Larisa wished to continue to hold her interest in [the LLC], whereas Bruce desired the interest be sold. *** Larisa does not have [any] interest in forcing the sale of the interest according to the terms of the Operating Agreement."
Although Bruce was not a member of the LLC, he requested that the court " enter an [o]rder requiring [him to] take all steps commercially necessary and reasonable to force the purchase of the shares [thereby allowing him to acquire a membership interest] according to the [o]perating [a]greement and the marital estate should reimburse [him] for any legal fees or other professional fees he incurs in [so doing]."
[¶16] On December 15, 2011, as to the motions to reconsider, the court ordered that " [Larisa] shall not liquidate, transfer, encumber[,] or otherwise dispose of any interest or contractual rights in [the LLC]." The court continued the matter as to the LLC.
[¶17] On January 25, 2012, Larisa moved to set the value of the LLC. Larisa noted that Barnes had determined the value to be $150,000, meaning that Larisa's cash distribution would be $19,500 ($150,000 x 0.20 x 0.65) and Bruce's cash distribution would be $10,500 ($150,000 x 0.20 x 0.35). Larisa stated that she and Bruce were entitled to be paid these amounts by the LLC.
[¶18] As part of the posttrial process, the parties deposed Barnes. Barnes explained the $150,000 valuation. Barnes performed the valuation based on the " capitalization of earnings" method. This method is based on cash flows. It is a standard method, because " earnings inherently incorporate the assets and liabilities of a corporation." However, the method can be thought of as limited, because it does not necessarily account for the value of the assets independent of the manner in which they are used by the business. For example, the LLC's quarry might be worth more than its present use by the business reflects. The hypothetical offered was that there could be an undiscovered platinum mine underneath the quarry. Despite this limitation, Barnes preferred the ...