Crider v. Crider - 15 N.E.3d 1042 (Ind. Ct. App. 2014)

Rule:

The statutory definition of an "interest" in a limited liability company (LLC) means the member's economic rights in the limited liability company, including the member's share of the profits and losses of the limited liability company and the right to receive distributions from the limited liability company. Ind. Code § 23-18-1-10. Additionally, Ind. Code § 23-18-6-3 provides that if an interest in an LLC is assigned, the assignee is entitled to receive only the distributions to which the assignor would be entitled, and that assignment of an interest does not of itself dissolve the limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member. Considering this statutory language, essentially a charging order is the only remedy for a judgment creditor against a member's interest in an LLC. Ind. Code § 23-18-6-7. A judgment creditor awarded a charging order under § 23-18-6-7(b) has only the rights of an assignee of the member's interest in the limited liability company. 

Facts:

Jeff and Christina were married in 1992. They had two children during their marriage, one of whom is now emancipated. Christina first filed for divorce in 2006 and filed for legal separation in 2007, but both actions were dismissed. In May 2009, Christina filed another divorce petition. It must be noted that Jeff was involved in a large number of business entities with his father, Robert, and his brother, Steve. The primary family business was Crider & Crider, Inc. ("CCI"), which was engaged in road and other construction work primarily in the Bloomington area. Jeff, Robert, and Steve are the only shareholders of this closely-held S corporation. Two of the other family businesses are Logan Land Development, LLC, ("Logan") and North Park, LLC. Both entities own property in a planned unit development ("PUD") site in Bloomington called North Park. In 1993, Robert, Jeff, and Steve signed a stock transfer restriction agreement with respect to their holdings in CCI. The agreement prohibited any shareholder from encumbering any of their shares without prior written consent from the other shareholders, unless certain narrow exceptions were met. Additionally, the agreement purported to prohibit any transfer of shares to any other person unless first CCI, and then the other shareholders, were given the option to purchase the shares. It also required that any outside purchaser of CCI stock agree in writing to be bound by the agreement. It further stated, "No Shareholder shall sell, give away or otherwise dispose of any of his Shares (whether voluntarily or involuntarily, by operation of law or otherwise)" to any person in violation of the agreement, and that any such transfer of stock would be "void ab initio and of no force or  effect whatsoever." The LLCs also had restrictions on the transfer of membership interests written into their operating agreements, one provision being: “If any Membership Interest becomes subject to any Involuntary Transfer, the remaining Members shall have the option for a period of thirty (30) days to purchase such Membership Interest. []”

During the first ten years of the marriage, Christina primarily was a "stay-at-home" parent taking care of the children, at Jeff's request. In 2002, she started an interior design business, but it was not profitable and she closed the business in 2012, when it had a remaining inventory of $52,000. Christina also had some part-time employment during the marriage. Jeff’s finances, on the other hand, were much more complicated. He categorized his earnings from CCI as his only income, but he irregularly provided his personal financial statements, and his income tax returns were not helpful in determining his actual income since the entries would be incomplete or irregular. The trial court conducted a dissolution hearing over the course of eleven days and received extensive evidence and testimony from both parties. In part, there was widely divergent testimony from various experts regarding the proper valuation of CCI and Jeff's interest in it. On June 26, 2013, the trial court entered a final dissolution decree, accompanied by extensive findings of fact and conclusions thereon as to the value of CCI, its assets, and other financial concerns. Ultimately, the trial court found that the total value of Jeff's business and real estate interests in 2009 was over $11 million, which was offset by little marital debt. The trial court evenly split the marital estate, which resulted in Christina and Jeff each being entitled to $5,510,930 in assets. However, because Christina received few liquid assets, the trial court required Jeff to make an equalization payment to Christina of $4,752,066. It also reduced that required payment to a judgment and ordered that it bear statutory interest, unless Jeff paid it in full within ninety days. In order to secure payment of the judgment, the trial court ordered as follows: “Christy shall be given a security lien on all of Jeff's shares and ownership interests in Crider & Crider and the Crider Entities (and of any successor to or affiliate thereof). […] If within 180 days of this Court's Final Decree Jeff has not paid the Judgment in full, Christy shall take ownership and control of one half of Jeff's shares in Crider & Crider and the Crider Entities. Christy shall retain ownership and control of these shares in these entities until such time as the Judgment has been paid in full with all accrued interest.” Regarding child support, the trial court modified Jeff's weekly support obligation to $308, but delayed the effectiveness of this change for ninety days.

Jeff did not pay the equalization judgment to Christina within either ninety or 180 days. Instead, he filed a notice of appeal on July 25, 2013. On August 30, 2013, Christina also sought to modify the dissolution decree to the extent it reduced Jeff's child support obligation ninety days after it was entered. Specifically, she argued that because Jeff had refused to pay the equalization judgment, he was not entitled to the reduction in child support. On January 2, 2014, Christina filed a Verified Petition to Enforce Judgment. The trial court granted this and entered both a garnishment order and a writ of attachment on the earnings of Jeffrey from the Crider entities.

Issue:

Did the trial court err in automatically granting ownership and control of Jeff’s shares to Christina?

Answer:

Yes.

Conclusion:

The trial court exceeded statutory authority by purporting to grant Christina "control" of one-half of Jeff's LLC membership interests. Instead, she is required to seek and obtain a charging order against those interests; again, the LLCs are entitled to notice and opportunity to participate in any proceedings in that regard. As with the CCI stock, the members of the LLCs have the option to purchase the membership interests outright themselves rather than allowing their involuntary assignment to Christina. The scope of any such charging order can only permit Christina to receive distributions from the LLCs; she is not allowed to participate in the management of those businesses or otherwise exercise the full rights of a member. In sum, the trial court was fully empowered to grant Christina a security interest in Jeff's business holdings in their various forms. But it went too far in automatically transferring "ownership and control" of those holdings to Christina in the event Jeff failed to pay the equalization judgment within 180 days.