Facts: Husband and Wife divorced after 18 years of marriage.

During the marriage, Husband started a business (“the LLC”) that contracted with the U.S. military to provide transportation and logistics services. The LLC was very successful, and the parties amassed around $56 million in assets until the military terminated the contract a year before it was set to expire. The LLC sued the government for $32 million for breach of contract, and that lawsuit is pending.

Husband owns 100% of the LLC.

The trial court divided the marital estate 55% to Wife and 45% to Husband.

The trial court concluded that the LLC’s pending lawsuit was a marital asset subject to division. The trial court divided the hypothetical net proceeds $6.6 million to Husband and split the rest 55% to Wife and 45% to Husband.

Wife was awarded alimony in solido of $7.3 million paid over 10 years. To secure the payment of alimony, the trial court placed a lien on real estate owned by Husband and the LLC.

Husband appealed.

On Appeal: The Court of Appeals reversed the trial court.

Husband challenged the trial court’s treatment of the LLC.

First, the trial court found the LLC to be a marital asset instead of finding that Husband’s 100% ownership of the LLC is a marital asset. Tennessee law is clear that a membership interest in an LLC is a type of personal property. While the trial court may have been imprecise, the Court restated that Husband’s ownership in the LLC is a marital asset and affirmed that classification.

Second, Husband challenged the trial court’s finding that Wife has a vested interest in the LLC’s pending lawsuit against the government because the LLC is a separate entity and a nonparty. While the Court technically agreed with Husband, the net effect on the parties remains to be seen:

Husband argued that the contractual claim is the property of a nonparty, asserting that the claimant belongs solely to the LLC. Though the trial court recited that “Plaintiff, [Husband], individually and as president and CEO of [the LLC] has a contingent contractual claim,” the evidence does not support such a finding. There was no evidence admitted at trial showing that Husband had pursued this [contractual claim] in his individual capacity.

Because the assets of an LLC are separate from those of its members, we conclude that the contractual claim was not marital property and was therefore not subject to distribution to Wife. We, therefore, vacate the trial court’s award to Wife of any interest in the contractual claim of [the LLC].

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The trial court effectively treated that contractual claim as a personal asset of Husband’s that was subject to division. As we have concluded, it was an asset of the LLC, not subject to division. Its relevance relates to the value of [the LLC]. On remand, when the trial court reconsiders the valuation of the parties’ marital business interests, the court should only specifically revalue [the LLC] in light of its previous failure to properly account for the contractual claim.

Third, Husband complained that the trial court placed liens on the assets of a nonparty—the LLC—to secure Husband’s alimony in solido obligation. The Court agreed that was improper:

Here, the trial court’s judgment attempts to reach the real estate assets of both Husband and of the three LLCs owned by Husband to secure his alimony in solido obligation. While [Tennessee law] grants courts the authority to impose a lien to effectuate an equitable distribution, and the court’s judgment, once recorded, operates as a lien on the real property owned by Husband, . . . there is no statutory authority here for the court to act upon parcels of real estate owned by the LLCs. Despite Husband’s 100% ownership interest in the LLCs that owned these parcels of real estate, Tennessee Code Annotated § 48-249-502(a) provides that “[a] member has no interest in specific LLC property. All property transferred to or acquired by an LLC is property of the LLC.”

[T]he court did not have jurisdiction over these entities and their assets, only the parties’ ownership interest in the LLCs themselves. We, therefore, conclude that the real property owned by the LLCs could not be subjected to a lien to guarantee payment of Husband’s alimony obligation, and we vacate those portions of the trial court’s judgment granting Wife a lien on those parcels of real property owned by the LLCs.

The Court vacated the trial court’s judgment on these issues and remanded the case for reconsideration of the pending lawsuit’s impact on the valuation of Husband’s interest in the LLC. Once that issue is resolved, the trial court must reconsider the overall division of marital property.

Barton v. Barton (Tennessee Court of Appeals, Eastern Section, November 10, 2020).

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