Ohio Court Addresses Consequences of Resignation From An LLC

Ohio Court Addresses Consequences of Resignation From An LLC

In a recent decision from Ohio, the court addressed the efficacy of a member’s resignation from an LLC, the impact of that resignation upon that now former member’s personal bankruptcy filing, and as well title ownership to certain domain names that the member had secured on the LLC’s behalf. Cutting to the chase, the resignation was effective, the efforts to undo the resignation were ineffective, the resignation and the impact thereof as defined in the operating agreement were not limited by the ipso facto clauses of the Bankruptcy Code, and the domain names belong to the LLC. In re: LaGroux (AllCare Medical Services, LLC v. Buzulencia), Case No. 17-40198, Adversary Proceeding No. 17-4045, 2019 WL 3933797 (Bankr. N.D. Ohio Aug. 19, 2019).

LaGroux had been a 25% member in AllCare Medical Services, LLC (“AllCare”). In this Adversary Proceeding, it sought rulings with respect to the efficacy of his resignation from the LLC and the impact thereof. It also sought a determination that certain Internet domain names that LaGroux had procured were the property of the LLC.

On November 3, 2016, LaGroux emailed two of the three other members of AllCare announcing that effective 6 p.m. that evening he was resigning from the company. The next day, subsequent to the effective time and date of the prior email resignation, he sent an email seeking to undo his prior resignation; the subject line of that email was “Un-resignation.” In response, he received an email from one of the other members, who was as well the chief operating officer of the company, stating that the un-resignation was rejected and that the resignation would stand. In December, 2016, LaGroux began working as a consultant for Greenleaf, a competitor of AllCare. AllCare’s operating agreement provided a member could not consult with a competitor.

On February 9, 2017, LaGroux filed a voluntary petition under Chapter 7 of the Bankruptcy Code. His Schedule A/B indicated that he held a 25% membership interest in AllCare. He did not on his initial Schedule A/B list any of the Internet domain names, and he did not bring them up at his Section 341 meeting of creditors. He subsequently amended his Schedule A/B to include the domain names. Also, he changed the passwords to the domains notwithstanding that he had previously given those passwords to Gobbi, another member of the company and its chief operating officer.

The first issue addressed by the court was the resignation/un-resignation. It was found that the resignation was effective in that AllCare’s operating agreement allowed a member to voluntarily resign. The email was found sufficient to satisfy the “written notice” of the Ohio LLC Act and specifically Ohio Rev. Code § 1705.16. That being the case, the un-resignation email was insufficient to change his status in that, at that point in time, he was no longer a member of the company and AllCare’s operating agreement provides that the addition of a new member required the unanimous consent of the then current members. In that the members other than LaGroux, now a former member, had not consented to his admission as a member, “the ‘un-resignation’ email did not reinstate LaGroux’s membership in AllCare.” 2019 WL 3933797, *5.

In what may be dicta, the court noted as well that had LaGroux actually been re-instated as a member of the company, his work on behalf of a competitor, commenced in December, 2016, would have violated the terms of AllCare’s operating agreement.

LaGroux admitted at trial that Greenleaf is in the same business as AllCare. As AllCare’s duty of loyalty provision does not allow LaGroux to invest or engage in any business with a competitor, LaGroux would have known that he would have been in violation of AllCare’s operating agreement by working as a consultant for Greenleaf. Because he likely would not have acted in violation of the operating agreement if he believe he still had a noneconomic interest in AllCare it is more likely that LaGroux believed he had only an economic interest in AllCare at that time.

As such, the time of his bankruptcy filing, LaGroux was not a member in the LLC, but rather the holder of a bare economic interest. The fact that he continued to be reflected as a member for tax purposes did not impact upon the state law effects of his resignation and the consequent loss of member status. Id.*6.

The trustee argued that the provisions of the Ohio LLC Act and AllCare’s operating agreement should be subordinated to federal bankruptcy law. Specifically, it was argued that “any provision of the operating agreement that was triggered by LaGroux  filing bankruptcy and led to his disassociation is an ipso facto provision and should not be permitted to prevent the transfer of LaGroux’s interest to LaGroux’s estate.” Id. The trustee as well argued that he was not obligated to sell LaGroux’s interests pursuant to the redemption provisions of the operating agreement. Id. With respect to the ipso facto argument, it was found that the argument is inapplicable. “The court has determined that LaGroux withdrew from AllCare prior to filing bankruptcy. That means that LaGroux gave up his noneconomic interest in AllCare upon his withdrawal and only held an economic interest at the time of filing. Because LaGroux only possessed an economic interest when he filed for bankruptcy, LaGroux’s estate similarly can only hold an economic interest.” Id. There was rejected the trustee’s argument that the trustee is not bound by the right of redemption set forth in the operating agreement and the attendant of valuation provision, it was held that the trustee is bound by those provisions. As the provision was applicable to any former member, and not merely upon a member’s bankruptcy:

[T]he right of first purchase provision is in effect any time a member withdraws from AllCare and is not an ipso facto provision. At the time LaGroux withdrew from AllCare prior to his bankruptcy filing, LaGroux was required to comply with this provision of the operating agreement. Thus, the trustee in this case is not excused from complying with this provision of the operating agreement. Id.*7

Subsequent to LaGroux’s bankruptcy filing, another member in AllCare, Simmons, sold all of his interests to the remaining members. The trustee’s assertion that the estate should have been allowed to participate in that acquisition was rejected on the basis that LaGroux was not a member in the LLC on that date, and therefore could not exercise a member’s right to participate in the purchase.

With respect to the domain names, and undertaking a factual analysis, it was found that LaGroux held mere legal title. It was suggested by the court that AllCare could file a motion for an order of abandonment in LaGroux’s bankruptcy case with respect to those domain names.