[CLBS] Breach of LLC Operating agreement - before BK or by filing BK - any difference?

[Matthew Christensen]

Couple questions:



1.  What's the reason for the other member demanding the withdrawal prior to the BK filing?

2.  Is the withdrawing member receiving anything from the other member in return for his/her withdrawal?  If so, is that something the Trustee could otherwise reach?  If not, why not?  Could the Trustee pursue an avoidance claim (assuming the LLC has some value)?



Generally, I think there is a difference between default because of withdrawal, and default because of a BK filing.  Generally, a contractual provision that works as a waiver of the right to file bankruptcy (such as an LLC OA term that states a member defaults by filing BK) is unenforceable.  Here's<http://www.jonesday.com/Blocking-Member-Provision-in-LLC-Agreement-Designed-to-Prevent-Bankruptcy-Filing-Unenforceable-06-01-2016/> a recent article discussing that topic, with several good case citations.  However, I think a default caused by a pre-petition withdrawal from the company would not be something prevented by the BK code or caselaw.  Thus, one is an enforceable default, and the other is an unenforceable default.



MTC




Matthew T. Christensen

(208) 384-8588

mtc at angstman.com



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-----Original Message-----
From: CLBS [mailto:clbs-bounces at admws.idaho.gov] On Behalf Of Holly Roark
Sent: Wednesday, March 21, 2018 10:31 AM
To: clbs at admws.idaho.gov
Subject: [CLBS] Breach of LLC Operating agreement - before BK or by filing BK - any difference?



According to an LLC operating agreement, a member resigning is a breach, but so is filing BK. Is there any difference in liability if one breaches by resigning prepetition as opposed to breaching by filing BK? I understand there may be nondischargeable claims of breach of fiduciary duty, however in this particular case that is unlikely. I am wondering if there are any non-obvious traps regarding timing here since the other member would like client to go ahead and sign a resignation prior to filing the BK.





A breach does trigger a requirement to return all "units" of interest for mandatory redemption (valued at zero). I don't think a chapter 7 trustee would find any value in the debtor member's interest.







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