Case Alert: Skeels vs. Friedman, Suder & Cooke, P.C. (Fort Worth, 2025)

How Skeels v. Friedman, Suder & Cooke, P.C. Could Impact LLC Shares in a Texas Divorce

Introduction

Divorce in Texas, a community property state, involves equitably dividing marital assets, including ownership interests in closely held businesses like limited liability companies (LLCs). LLC shares, often significant marital assets, pose unique challenges due to their restricted transferability, lack of a public market, and complex valuation processes. The 2025 Texas Court of Appeals case Skeels v. Friedman, Suder & Cooke, P.C. addresses share redemption and transfer in a professional corporation, offering legal principles that could influence how LLC shares are handled in divorce proceedings. This article explores the implications of Skeels for LLC share valuation and division in Texas divorces, focusing on redemption, transfer restrictions, and valuation methodologies.

Overview of Skeels v. Friedman, Suder & Cooke, P.C.

The Skeels case involved a dispute between David A. Skeels and the professional corporation Friedman, Suder & Cooke, P.C., over the 2023 redemption of Skeels’s shares. The Fort Worth Court of Appeals ruled on whether the redemption complied with the Texas Business Organizations Code (BOC) and whether statutory reasonableness requirements applied to the redemption price. The court held that redemptions, unlike transfers, are not subject to the reasonableness requirements of BOC Sections 21.211 and 21.213, as they are classified as distributions under Section 21.002(6). Skeels conceded the redemption’s effectiveness, relinquishing his ownership claims, and the court affirmed the trial court’s summary judgment in favor of the firm.

Key points from the case include:

• Redemption vs. Transfer: Redemptions (the entity repurchasing shares) are distinct from transfers (shares sold or assigned to another party), with different statutory frameworks.
• Governing Documents: Redemption terms, including price, are governed by the entity’s governing documents (e.g., operating agreements for LLCs) under BOC Section 303.004 for professional corporations and analogous provisions for LLCs.
• Reasonableness: The reasonableness requirements for transfer restrictions do not apply to redemptions, giving entities significant flexibility in setting redemption terms.

These findings, while specific to professional corporations, are relevant to LLCs due to overlapping BOC provisions, particularly in the context of divorce proceedings where share valuation and division are critical.

Texas Divorce and Community Property

In Texas, assets acquired during marriage are presumed to be community property and subject to a “just and right” division under Texas Family Code Section 7.001. LLC shares acquired during marriage are typically community property unless proven to be separate property (e.g., acquired before marriage or via gift/inheritance). Dividing LLC shares requires determining their value, which can be challenging due to:

• Lack of Market: Closely held LLCs lack a public market, complicating fair market value assessments.
• Restrictions: Operating agreements often restrict share transfers or mandate redemptions, affecting liquidity and value.
• Valuation Complexity: Courts rely on expert appraisals using market, income, or asset approaches, each with unique considerations.

Skeels provides a framework for understanding how statutory and contractual provisions govern redemptions and transfers, which directly impacts LLC share valuation in divorce.

Implications of Skeels for LLC Shares in Divorce

1. Redemption vs. Transfer in Divorce

The Skeels court’s distinction between redemptions and transfers is pivotal for LLC shares in divorce. Under BOC Section 101.106, an LLC’s company agreement can specify redemption terms, such as price and conditions, similar to Section 303.004 for professional corporations. In a divorce, if an LLC redeems a spouse’s membership interest (e.g., upon termination of employment or by agreement), the redemption price could influence the court’s valuation of the community property interest.

For example, if an LLC’s operating agreement mandates redemption at a fixed price (e.g., $1,000 per share), Skeels suggests that courts may uphold this price as valid under the BOC, as it is not subject to the reasonableness requirements of transfer restrictions. However, divorce courts prioritize equitable division, and a spouse could argue that the redemption price does not reflect the true value of the shares, seeking a higher valuation based on fair market value or income potential.

This creates a potential conflict:

• Business Law Perspective: Skeels supports the enforceability of redemption terms in the company agreement, giving LLCs control over redemption pricing.
• Family Law Perspective: Can Divorce courts override contractual redemption prices if they are deemed inequitable, where a buy-sell agreement’s valuation does not reflect fair market value.

While Skeels strengthens the legal weight of redemption terms, divorce courts may require independent valuations to ensure a “just and right” division, particularly if the redemption price significantly undervalues the community interest.

2. Valuation of LLC Shares

Valuing LLC shares in divorce involves balancing contractual terms, statutory requirements, and equitable considerations. Skeels underscores the role of governing documents in setting redemption prices, which may serve as a baseline for valuation. Common valuation methods include:

• Market Approach: Compares the LLC to similar businesses, but this is often impractical for closely held LLCs due to the absence of comparable sales.
• Income Approach: Discounts projected cash flows to present value, suitable for revenue-generating LLCs.
• Asset Approach: Values the LLC based on its net assets minus liabilities, often used for asset-heavy LLCs.

In Skeels, the court noted that no BOC provision mandates a “fair value” standard for professional corporation redemptions unless specified in the governing documents. Similarly, BOC Section 101.106 allows LLC operating agreements to define redemption terms without requiring a specific valuation standard. However, in divorce, courts may diverge from these terms if they do not align with equitable principles.

For instance, if an LLC’s operating agreement sets a redemption price of $10,000 for a 10% membership interest, but an appraiser determines the interest’s fair market value is $100,000 based on the LLC’s earnings, the divorce court may favor the higher value to ensure fairness. This is particularly relevant when the LLC generates significant income or holds valuable assets, as courts aim to equitably divide the marital estate.

The Skeels case suggests that LLCs have significant latitude in setting redemption prices, which could limit a spouse’s ability to challenge a low redemption price in a business context. However, in divorce, the court’s equitable discretion may override such terms, especially if the price was set to deter member exits rather than reflect economic value. Courts may order appraisals or consider factors like the LLC’s revenue, market position, and growth potential to determine a fair value.

3. Transfer Restrictions and Divorce

LLC operating agreements often impose restrictions on share transfers, limiting sales to third parties or requiring company approval, as permitted by BOC Section 101.107. Skeels clarified that transfer restrictions under BOC Sections 21.209–213 are subject to reasonableness requirements, but redemptions are not. In divorce, transfer restrictions can significantly affect share valuation and division.

For example, if an LLC’s operating agreement prohibits transferring shares to a non-member spouse during a divorce, the court may face challenges in awarding the shares to the non-member spouse. Instead, the court might:

• Award Cash Equivalent: Value the shares at the price set in the Operating Agreement and award the non-member spouse a cash equivalent.
• Divide Other Assets: Offset the value of the shares with other marital assets to avoid violating transfer restrictions.

Skeels indicates that redemption terms are less scrutinized than transfer restrictions, potentially allowing LLCs to enforce low redemption prices. However, divorce courts may view such restrictions as inequitable if they undervalue the community property interest, leading to higher valuations based on expert testimony.

4. Equitable Considerations in Divorce

Texas divorce courts have broad discretion to achieve a “just and right” division, which may conflict with the Skeels emphasis on contractual redemption terms. For instance, if an LLC’s operating agreement aligns with Skeels by setting a redemption price that is significantly below the appraised value, the court may:

• Reject the Redemption Price: Order a valuation that reflects the LLC’s true economic value, considering factors like goodwill, client relationships, or intellectual property.
• Consider Spousal Needs: Factor in the non-member spouse’s financial needs, potentially increasing the awarded value.
• Address Control Issues: Account for the member spouse’s control over the LLC, which could influence redemption or valuation decisions.

The Skeels case suggests that LLCs can rely on their operating agreements to define redemption terms, but divorce courts are not bound by these terms if they result in an unfair division. Courts may prioritize equitable outcomes, especially if the redemption price was designed to protect the LLC rather than reflect market value.

5. Practical Implications for Divorcing Couples

For couples with LLC interests, Skeels has several practical implications:

• Review Operating Agreements: Attorneys should examine the LLC’s operating agreement for redemption and transfer provisions, as these may influence valuation but are not conclusive in divorce.
• Hire Experts: Business appraisers are critical for determining fair market value, especially when contractual redemption prices are low.
• Negotiate Settlements: To avoid litigation, couples may negotiate settlements that account for redemption terms while addressing equitable concerns.
• Anticipate Court Discretion: Parties should be prepared for courts to override contractual terms if they do not align with a “just and right” division.

Case Study Example

Consider a hypothetical Texas couple, John and Jane, where John owns a 25% interest in an LLC acquired during marriage. The LLC’s operating agreement mandates redemption at $5,000 per percentage point ($125,000 total) upon a member’s departure. During their divorce, an appraiser values the 25% interest at $500,000 based on the LLC’s annual profits of $1 million.

Based on Skeels, the LLC could argue that the $125,000 redemption price is enforceable under BOC Section 101.106. However, Jane’s attorney argues that the price undervalues the community property interest, citing Mandell and requesting a fair market value of $500,000. The court, prioritizing equitable division, may order an independent valuation or award Jane a portion of the $500,000 value, potentially offsetting it with other marital assets to comply with transfer restrictions.

Challenges and Considerations

• Conflicting Legal Frameworks: The Skeels ruling aligns with business law’s deference to governing documents, but divorce law’s equitable focus may lead to different outcomes.
• Valuation Disputes: Disagreements over valuation methods can prolong divorce proceedings, requiring expert testimony and detailed financial analysis.
• Control and Influence: If the member spouse controls the LLC, they may influence redemption decisions, necessitating court oversight to prevent undervaluation.
• Tax Implications: Redemption or division of LLC shares may trigger tax consequences, such as capital gains, which courts may consider in the division.

Conclusion

The Skeels v. Friedman, Suder & Cooke, P.C. case clarifies the legal distinction between redemptions and transfers, emphasizing the enforceability of redemption terms in LLC operating agreements under the BOCa. In Texas divorce proceedings, this ruling suggests that courts may respect contractual redemption prices for LLC shares, but the equitable mandate of the Texas Family Code allows courts to override these prices if they do not reflect the fair value of the community property interest. Divorcing couples must navigate the tension between business law’s contractual framework and family law’s equitable principles, often requiring expert valuations and strategic legal arguments. By understanding the implications of Skeels, attorneys and spouses can better prepare for the valuation and division of LLC shares, ensuring a fair outcome in the complex landscape of Texas divorce law.