LLC Member’s Managerial and Voting Rights Cannot Be Stripped Upon Bankruptcy Filing Notwithstanding State Law Provisions to the Contrary Today’s

LLC Member’s Managerial and Voting Rights Cannot Be Stripped Upon Bankruptcy Filing Notwithstanding State Law Provisions to the Contrary Today’s

Rochelle’s Daily Wire discusses a recent bankruptcy case with

important implications for corporate and transactional practitioners. The U.S. Bankruptcy Court for the S.D. of Texas held that the U.S. Bankruptcy Code prevents a member of a Delaware LLC from losing its managerial and voting rights in the LLC upon filing for bankruptcy.

This was held to be the case despite Section 18-304 of the Delaware LLC Act, which provides that “[a] person ceases to be a member of a limited liability company” when, among other events, the person “files a voluntary petition in bankruptcy.” The court concluded that Section 18-304 of the Delaware LLC Act directly conflicted with Section 541(a) of the Bankruptcy Code which provides the bankruptcy estate includes “all legal or equitable interests . . . in property as of the commencement of the case.” It also found the Delaware LLC Act in conflict with Section 541(c)(1)(B) because it ceases, modifies, and amends an LLC member’s rights only because it filed for bankruptcy.

In so holding, Judge López expressly disagreed with decisions from the Delaware Court of Chancery, which had concluded that the Bankruptcy Code does not preempt Section 18-304 of the Delaware LLC Act because a debtor is only divested of its managerial and voting rights, but not of its economic rights in the LLC.

What happens if the case is dismissed?