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Can Members of an LLC Bring a Claim to Partition LLC Property?

Are members of a limited liability company (“LLC”) able to bring a claim to partition LLC property?  We’re often asked to determine what rights members of LLCs actually have with regard to the property of an LLC.  Understandably, many people think that because “their LLC” is a “pass-through” entity, the LLC’s assets are really just their personal assets.  But, that just is not true.  An LLC is a separate legal entity and “person” – separate from its members.  With that basic understanding, answering the question of whether an LLC member can bring an action to partition the LLC’s assets is far easier to answer, and understand.

Under Colorado law, “partition applies only to concurrent interests that are held simultaneously in time.” Beach v Beach, 74 P.3d 1 (Colo. 2013). “A concurrent interest is a prerequisite for a partition because the purpose of partition is to sever unity of possession.” Id. “There is no unity of possession to sever when the property interests at stake are not concurrent in time.” Id. “[A] court’s function in a partition action is to sever unity of possession of a parcel of property.” Id.  “When deciding a partition action, a trial court must not create new interests in property, but sever the unity of possession of the tenants in common.” Young Properties v. Wolflick, 87 P.3d 235 (Colo.App. 2003).

Let’s take for an example: three friends (Able, Burt and Molly) purchase a piece of land and shortly thereafter, put the land into an LLC, of which all three became equal members.  Under Colorado law (and generally LLC law), the LLC that is the sole owner of a piece of real property.  In this scenario, there is no concurrent interest in the assets of the LLC as the LLC is the sole owner of the real property.  All that a member of an LLC has is his/her personal property interest (i.e., his/her Member Interest) in the LLC. C.R.S. § 7-80-702.

Lets now say that one of the three members, Molly, decides she wants out of the LLC and wants to keep some portion of the land – the other members refuse to vote to divide the property.   Does Molly have standing to bring an action for partition from the court?  No.

As set forth above, an LLC member lacks standing to maintain a cause of action for partition.  While this question has not been subject to appellate scrutiny in Colorado, we believe the statutes are clear.  Other jurisdictions have addressed the issue, and have held that LLC members have no interest in specific LLC property, and do not have standing to bring an action to partition the assets of the LLC.  See, Sealy v. Clifton, LLC, 68 A.D.3d 846, 847, 890 N.Y.S.2d 598, 600 (2009); See also, In re Hewitt, 576 B.R. 790 (Bankr. D. Vt. 2017) (member does not own LLC property and cannot claim personal homestead exemption; Carey v. Howard, 950 So. 2d 1131 (Ala. 2006) (members have no interest in specific LLC property, and do not have standing to seek declaratory relief concerning LLC option); PacLink Communications International, Inc. v. Superior Court, 90 Cal. App. 4th 958, 109 Cal. Rptr. 2d 436 (2001) (members lack direct ownership interest in LLC property).

It is important to recognize there are differences between general partnerships and limited liability companies.  Partners of a general partnership may be entitled to bring an action for partition to gain sole title to property which was in the possession of the partnership. Limited liability companies, on the other hand, are different from general partnerships and members of a limited liability company have different property rights than do the partners in a general partnership.  Now, you may notice that some LLC operating agreements contain provisions regarding waiver of partition rights or something similar.  Don’t let this lead you astray however – LLCs are a relatively new creation and many concepts from general partnership agreements are found as carry-overs in operating agreements.  These provisions, if they’re in an operating agreement, may apply to unique situations, or simply may not apply at all.

So, what options does Molly have if she cannot partition LLC property?  Well, first, she’ll need to look to the governing documents of the LLC.  Hopefully the LLC has an Operating Agreement with a Buy-Sell Agreement.  Also, she may be able to seek dissolution of the LLC.  It all depends on the circumstances and the governing documents.

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The Colorado Business Lawyers at LaszloLaw, a Boulder, Colorado based law firm, provide legal counsel to for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance.  Contact us today to discuss your business needs.

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