A Few of the Consequences of a Member Bankruptcy

A Few of the Consequences of a Member Bankruptcy

Recently the Washington Court of Appeals addressed some of the consequences of a LLC’s member entering bankruptcy.  While different state laws may dictate different outcomes, in this case it was determined:

• Upon filing bankruptcy the member became an assignee and lost the ability to as a member initiate a derivate action on the LLC’s behalf;

 

• Neither 11 U.S.C. 541(c)(1) nor 11 U.S.C. 365, both ipso facto clauses of the bankruptcy code, serve to preempt the provision of the Oregon LLC Act to the effect that a member is dissociated from the LLC upon bankruptcy; and

 

• The bankruptcy estate will hold only the rights of the former members in the LLC’s economics and does not succeed to any right to participate in its management.

Northwest Wholesale, Inc. v. PAC Organic Fruit, LLC, 334 P.3d 63 (Wash. Ct. App. Div. 3 2012).