In a recent choice from the United States District Court for
the Southern District of Indiana, it verified a determination of
the Bankruptcy Court that when a member of an LLC with ballot
control thereof filed individual bankruptcy, that right to manage
the LLC ended up being vested, as part of the bankruptcy estate, in the
trustee. As such, going forward, the bankruptcy trustee has control
of that LLC. In re Lester L. Lee, No. 4-15-cv-00009-RLY-WGH, Adv.
Proc. No. 14-59011 (SD Ind. August 10, 2015).
contract of Lee Group Holding Business, LLC (Lee Group).
determined a variety of members, designating to them particular financial.
and ballot rights within the business. While Lester Lee did not.
enjoy any right to either interim or liquidating distributions from.
the LLC, he was afforded 51 votes therein; the balance of the.
members held, collectively, 50 votes. As such, Lester separately.
controlled a majority of the ballot rights in the company.
Lester Lee then filed individual bankruptcy. After that filing,.
with the consequent entry of an automatic stay, the trustee # 39; s.
counsel evaluated the Lee group running agreement and wrote a.
letter offering in part that this non-economic interest [in.
Lee Group] ended up being home of the estate subject to control of the.
Trustee on the filing of the [bankruptcy] petition pursuant to 11.
USC. 541. Thereafter, the other members of the Lee.
Group executed files claiming to accept Lee # 39; s resignation.
from the Lee Group and the termination of his ballot rights.
thereunder. These actions were taken in the face of a provision of.
the operating arrangement which provides, inter alia, that decisions.
need the approval of 51 % of the ballot rights assigned amongst.
the various members. They likewise sought to adopt amendments to the.
operating arrangement, again acting without consideration of the 51.
voting systems held by Lester Lee. After these actions were.
challenged by the trustee, the bankruptcy court concluded.
that the Debtor # 39; s voting rights were property of the estate as.
of the filing of the Petition and that the [actions of the other.
members of Lee Group] professing to terminate his ballot rights.
breached the automatic stay enforced by 11 USC. 362 and,.
therefore, had no legal result. In re Lester L. Lee, 524 BR.
798 (Bankr. SD Ind. 2014). It was from that ruling that.
this interest the District Court was taken. On appeal, the.
Court # 39; s main focus was upon whether the right to vote in an.
LLC makes up property of the estate, specified by.
area 541(a)(1) of the Bankruptcy Code as all legal or.
fair interest of the Debtor in home as of the commencement.
of the case. After discovering that Lee might be a member.
of the LLC notwithstanding the absence of any share in the.
business # 39; s earnings and losses or the distributions it should.
make, the Court was able to identify that Lee was a member. In a.
belt and suspenders analysis, the Court figured out likewise that the.
voting rights themselves could constitute economic rights in.
the company managing him the opportunity to, for example,.
guarantee his continued employment as supervisor thereof.
On that basis, the determination of the trial court to the.
effect that any effort to strip Lee of his right to control the LLC.
through the workout of the 51 voting rights was invalid as a.
offense of the automatic stay. HERE IS A LINK to this choice.
Curiously not attended to by this viewpoint (it was not resolved.
by the trial court below) is Area 23-18-6-5(a)(3)(B) of the.
Indiana LLC Act, which offers that a person stops to be a.
member of a [LLC] upon the occurrence of any of the following.
occasions: … (3) the person is removed as a member: … (B)… By the.
affirmative vote, approval or consent of a majority in interest of.
the members after the member has actually designated the member # 39; s whole.
interest in the [LLC] By this omission, the Court may be.
stating that, in effect, the presumption by the bankruptcy trustee of.
the voting rights within the estate is not an.
assignment as contemplated by this arrangement. Whether.
that is the Court # 39; s thinking is, however, still unidentified.
There have been a long series of cases that have addressed.
the question of whether the bankruptcy estate prospers to a.
member # 39; s right to take part in the management and affairs of.
an LLC. Notoriously, in In re Ashley Albright, it was determined that.
the bankruptcy court did succeed to the management rights. See.
alsoThomas E. Rutledge and Thomas Earl Geu, The Albright.
Choice – Why a SMLLC is Not an Appropriate Property Defense.
Car, 5 Company Entities 16 (Sept./ Oct., 2003)..
That, nevertheless, remained in the context of a single member LLC; Lee Group.
was a multiple-member LLC in which various issues were present.
This decision is yet another where it was held, inter alia, that.
multiple-member versus single-member is not of itself a.
differentiating element (although certainly those reality modifications may.
effect upon the administrator agreement analysis). See, eg,.
Matter of HW Food Mart, LLC, 461 BR 904 (Bankr. NDGa.,.
2011); Norberg v. Hawks Prairie Casino, LLC (In re McSwain), 2011.
WL 4706982 (Bankr. WDWa., 2011); In re Alameda Investments, LLC,.
2013 WL 3216129 (BankrCD.Cal., 2013).
members of the Lee Group vested control in Lester Lee. Now, for all.
results and purposes, control of the LLC has actually been vested in Lester.
Lee # 39; s bankruptcy trustee, and it appears there is little the.
members may do about that. While they may be trapped because.
circumstance, counsel preparing LLC operating contracts (comparable.
problems can emerge under restricted partnership agreements) needhave to.
carefully consider how ballot control is designated and address.
mechanisms by which, based on the restrictions of the automatic.
stay, functional control of the businessbusiness endeavor may be properly.
removed from a bankruptcy trustee need to that scenario.
Originally released on.
Kentucky Business Entity Law
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