Update on LLC Operating Agreement Case Condo v. Conners
on January 2, 2012 at 9:06 pmOn July 7, 2010, I wrote a post entitled LLC Operating Agreement Controls Assignment of Membership Interest. In the post I discussed the Condo v. Conners, No. 09CA1130 opinion in which the Colorado Court of Appeals agreed with the trial court that an assignment by a member to his ex-spouse of member distribution rights contrary to the Operating Agreement was void.
As I described before, in the case, one of the members of an LLC assigned his membership interest (in the form of the right to receive distributions from the LLC) to his ex-spouse as a part of his divorce. The Operating Agreement for the LLC required that any assignment be approved in writing by the other members. The other members of the LLC refused to approve the assignment and instead purchased the assigning member’s interest from him. The former member’s ex-spouse then brought an action against the remaining members for tortious interference with contract and civil conspiracy on the basis that their actions had resulted in the divestment of her contractual right to the monetary distributions from the LLC. The Appeals Court affirmed the summary judgment of the ex-spouse’s claims.
After the decision, the ex-spouse appealed to the Colorado Supreme Court, and on December 19, 2011, the Colorado Supreme Court affirmed the decision of the Appeals Court. The opinion can be found on the Colorado Bar Association website, Condo v. Conners, 10SC703, December 19, 2011.
The appeal made additional arguments rejected by the Court. First, the appeal argued the Operating Agreement only prohibited the assignment of membership duties, not rights. Accordingly, because the assignment to the ex-spouse was the right to distributions, the appellant argued the Operating Agreement did not prevent the assignment. However, the Colorado Supreme Court rejected this argument on the basis that the assignment itself purported to assign both membership rights and duties, and because the Court’s plain reading of the assignment clause was that it prevented all unapproved transfers of membership interests.
Second, the appeal argued that the anti-assignment clause only meant the member assigning the interest did so in breach of the contract, not that he was without the ability to make the assignment. However, the Court held that the intent of the Operating Agreement in the context of a closely held LLC was to prevent the assignment altogether, such that the member had no legal ability to make the assignment without the approval of the other members as required in the contract.
The opinion reinforces the validity and enforceability of Operating Agreements under Colorado law for LLCs.
