This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Tuesday, December 30, 2014
Stripping Member of Management Rights in LLC After Bankruptcy Violated Automatic Stay
Stripping Member of Management Rights in LLC
Violated Automatic Stay
recent decision, it was held that stripping an LLC’s member of the right to
vote in and control an LLC after bankruptcy violated the automatic stay.This is an important decision as it responds
to the question of whether or not the right to participate in management, as
contrasted with the right to participate in the economics of the LLC, shall be
deemed part of the bankruptcy estate.Walro v. The Lee Group Holding Co., LLC (In re Lee), Case No. 12-90007-JJG-7A,
Adv. Pro. No. 14-59011 (Bankr. S.D. Ind. Dec 18, 2014).
51 of the 100 voting units in and therefore controlled The Lee Group Holding
Company, LLC.He held, however, no
economic rights in the LLC.After he
filed for bankruptcty protection the trustee asserted that Lee’s “non-economic
interest [in the voting rights] became property of the estate subject to
control by the Trustee on the filing of the petition pursuant to 11 U.S.C. § 541.”Slip op. at ¶ 9. The other members then executed a Resolution wherein they purported
to accept Lee’s withdrawal as a member or the LLC – this removal was identified
as being pursuant to section 3.7 of the operating agreement, but its language
is not recited in the opinion.They also
purported to remove him as a manager and to elect a replacement manager.
trustee brought this action challenging Lee’s removal as a member and manager
of the LLC.
the members defended their action on the basis that Lee was not really a member
in that he did not share in the economics of the LLC, a notion that was quickly
rejected by the court, it noting that the operating agreement referred to lee
as a member.The court also found that
as Lee held a majority of the voting rights in the LLC it was not possible for
the other members to alter the terms of the operating agreement.
opinion did not reference the section of the LLC Act providing, inter alia,
that a member is disassociated (and loses their voting rights) upon
bankruptcy.Likely the other members did
not rely upon that provision in light of the many decisions that have found
such statutes to violate the Bankruptcy Code’s prohibitions on ipso facto
Lee was not removed as a member and he remains the manager of the LLC; the
actions of the other members purporting a different outcome violated the
automatic stay and were void.