Wednesday, December 18, 2019

Divorce Decree Not Enforceable Against Assets of Spouse’s LLC

Divorce Decree Not Enforceable Against Assets of Spouse’s LLC

      A recent decision from Alabama offers yet another example of the rule that the members of the LLC do not have an ownership interest in the LLC’s assets. In Re: Raymond & Associates, Case No. 15-1883-JCO, 2019 WL 6208660 (Bankr. S.D. Ala. Nov. 20, 2019).

      Raymond and Candace were married; Raymond was the sole member in Raymond & Associates LLC. Raymond and Candace began divorce proceedings in 2011. In 2015, Raymond, individually, filed for a Chapter 11 bankruptcy, which bankruptcy was ultimately converted to a Chapter 7 proceeding. After Raymond filed for personal bankruptcy, she was granted relief from the automatic stay in order that the divorce case could proceed. Ultimately, in 2016, a divorce decree was granted that, in part, afforded Candace certain rights in BP/Deepwater Horizon settlement proceeds that were to be paid to Raymond & Associates. Ultimately, the Chapter 7 trustee would object to the proof of claim she filed in the LLC’s bankruptcy, asserting that all of the LLC’s assets, including the to be collected funds from BP, would need to be applied to paying the creditors of Raymond & Associates, leaving nothing for her. 

      This decision would focus upon the question of whether Candace, the former spouse, is entitled to a priority claim in connection with the LLC’s bankruptcy.

      The court would find that the clear wording of the divorce decree, specifically its reference to “after bankruptcy claims have been adjudicated by the bankruptcy court” and a claim on the “net” of the claim against BP indicates that all creditors of the LLC are first to be paid. But even if it did not include this language, the court held that a domestic support obligation (“DSO”) is enforceable against only the former spouse and not the LLC: 

Ms. LaForce’s … fails to meet the statutory requirements for treatment as a DSO in the Corporate Case. Ms. LaForce is the former spouse of Raymond LaForce, an individual, although Ms. LaForce may be a DSO Creditor of Raymond LaForce, she is not a DSO creditor of the Debtor, an Alabama limited liability company. Ms. LaForce’s claim does not fall within the plain language of the definition of a domestic support obligation in this case as described in 11 U.S.C. § 101(14A)(A)(i). Ms. LaForce is not a spouse, former spouse or child of the Corporate Debtor. Hence, the Divorce Decree does not entitle Ms. LaForce to a priority claim in this bankruptcy.
Further, the court would cite the decision of the Alabama Supreme Court rendered in Whaley v. Whaley, 261 So.3d 386 (Ala. 2017) for the principle that: 

[The] divorce court’s award to wife of limited liability company’s real property, equipment, contractual rights, intellectual property … went beyond awarding wife the husband’s transferable interest in the LLC, i.e. his right to receive distributions, which under the LLC statute was the only interest of member that was transferable.

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