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Ask a Lawyer -- LLCs
LLC Question 129
Question:
What is the purpose of having a provision in an LLC Operating Agreement regarding "Disassociation of a Member" if the Member files for Bankruptcy? Is this a necessity?
Response: Is it necessary? No but it is standard in the LLC operating agreements I have seen. Why have it? The problem is that the LLC membership interest then becomes part of the bankruptcy estate. In a Chapter 7 bankruptcy, the LLC membership interest then will be sold by the bankruptcy trustee. In Chapter 13, sale of the interest may or may not occur. The provision in the operating agreement for disassociation of members upon the member's bankruptcy is for the benefit of the remaining members. It provids for an orderly sale of the membership interest back to the LLC (or to other members) after bankruptcy upon fixed terms as opposed to a bankrupt trustee selling the member interest in a public auction to whoever the highest bidder is.
Submitted: 09/05/2007; Orville, Connecticut
Response: 09/07/2007; JJR
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