Preferential Distribution Upon Sale of LLC Assets Not Applicable Upon Sale of LLC Membership Interests

Preferential Distribution Upon Sale of LLC Assets Not Applicable Upon Sale of LLC Membership Interests

       In a recent decision from the Superior Court of Pennsylvania, it was held that the sale of the interest in LLC is not equivalent to the sale of the LLC’s assets for purposes of the application of a liquidating distribution preference. Meeco, Inc. v. Clean Growth Fund III, LP, No. 438 EDA 2019, 2019 WL 4887249 (Penn. Sup. Ct. Oct. 3, 2019).

      This dispute arose out of an operating agreement that specifically addressed the liquidating cascade that would apply upon a sale of assets, but which was silent as to other transactions. In this instance, the claim was made that the transaction that was undertaken should be treated as a sale of assets. This the court refused to do as a sale of membership interest is not equivalent to a sale by the LLC of its assets. As to that point, the court wrote:  

We have held that a “membership interest is an ownership interest in a [LLC] and is akin to an interest in stock of a corporation.” The sale of stock is not a sale of a corporation’s assets because “a corporation is an entity irrespective of … the persons who own its stock.” Similarly then, the sale of membership interests in a [LLC], like the sale of stock, is not the sale of assets. Therefore, the trial court properly found that the sale of Membership units was not a “Capital Transaction” within the meaning of Section 9.2 of the Operating Agreement based on its unambiguous language.” 2019 WL 4887249,*4 (citations omitted).