One of the members of McCoy Farm, LLC, filed for bankruptcy. The bankruptcy trustee asked the court to liquidate the LLC in accordance with Section 10(a)(ii) of the operating agreement which provided that it “shall be dissolved upon the occurrence of any of the following events:…(ii) upon the death, retirement, withdrawal, expulsion, bankruptcy or dissolution of a Member….”
The other members tried to keep the LLC in operation by (i) voting to continue the business and (ii) removing the debtor from participation in the business. The bankruptcy court rejected the other members’ actions. First, their vote to continue the LLC was 10 days after the deadline set in the agreement. Second, their attempt to “disassociate” the debtor violated the automatic stay provisions of bankruptcy.
However, the court also rejected the bankruptcy trustee’s petition. Bankruptcy Code Section 541(c) provides that an interest of the debtor in property becomes property of the bankruptcy estate despite any provision in an agreement that is conditioned on the insolvency of the debtor or on the commencement of a bankruptcy case. Therefore, the court held that Section 10(a)(ii) of the operating agreement was unenforceable. In re Warner.
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