Frequently in Tennessee, LLC members have to part ways. When that happens, it also may happen that one of the members will file a court action to have the limited liability company dissolved. Assuming that the LLC has assets, an issue that a Tennessee court is likely to have to decide in an LLC judicial dissolution action is how the assets should be divided between or among the LLC’s members. Of course, in dissolution proceedings, LLC members often disagree about the amount to which other members are entitled.
The first place a Tennessee court will (or should ) look to determine how the assets of an LLC which is being dissolved should be distributed is T.C.A. §48-249-620, which is part of the Tennessee Revised Limited Liability Company Act. To summarize, here is the pecking order for the distribution of an LLC’s assets upon dissolution:
First: Creditors of the LLC, which can include members who have made loans (as distinguished from contributions to the LLC).
Second:To members for certain distributions owed, but not made. What kind of distributions? A: Distributions provided for in the “LLC documents” or agreed to by a majority of the members, managers, or directors depending on the organization of the LLC. See, T.C.A. §48-249-305. (Under Tennessee law, no member is entitled to a distribution before dissolution unless the LLC documents permit it or upon the majority vote mentioned above.)
Third:To members for their contributions. (Sometimes referred to in case law and LLC documents as “capital contributions”).
Fourth:If any assets are left to distribute at this point, they are to be distributed to members according to the percentage of their ownership (financial rights).
Note that a member who has made a loan to the LLC is entitled to be repaid for the loan before another member is paid for his or her capital contribution. When one member claims a loan, another member may argue that it was not a loan, but a contribution. If the member has no promissory note, credible evidence of an oral agreement, or some proof of acknowledgment that the money was loaned, or some other document reflecting the loan, that member is likely to have an uphill battle proving the money was loaned.
Whether a member has made a contribution and the amount at which to value that contribution may well be a contested issue in an LLC dissolution. Under Tennessee law, a contribution may consist of money, services, tangible or intangible property, or “other benefit.” See, T.C.A. 48-249-301(a). Importantly, a contribution cannot be considered a contribution until it is “accepted” by the members and “the amount and value” are recorded in LLC documents. In practice, the acceptance and recordation requirements may be pretty loosely construed. (See, Owen v. Hutten (Ct. App. Tenn. 2013) where depositing funds into LLC bank account and tax documents of member showed contributions, requirements satisfied).
If a member intends for his or her services to amount to a contribution, he or she should have something written, whether in an operating agreement or otherwise, which states that his or her services are to be considered a contribution and which states the specific value assigned to the contribution. In the absence of a written agreement, a member could try to prove the other member or members orally accepted his or her services as a contribution. Where a member contributes significant services for a substantial period of time without any remuneration from the LLC, such a factor would be likely to influence the court that a contribution was made.
Regardless of the statute which sets forth how distributions should be made in an LLC dissolution, a Tennessee court always has the equitable power to order relief which might not fall in line with the pecking order of that statute. A provision in the Tennessee Revised Limited Liability Company Act, T.C.A. §48-249-616, grants a Tennessee court power to grant any equitable relief it considers “just and reasonable under the circumstances.” Lastly, and notably, a Tennessee trial court which employs the aforementioned statute will not be reversed on appeal unless it is found by the appellate court to have abused its discretion. For a litigant trying to have the decision of a trial court reversed, the abuse of discretion standard is a “tough row to hoe” so to speak.