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Ask a Lawyer -- LLCs
LLC Question 150
Question:
My brother and I owned an LLC in NY. I am a 75% owner with my brother owning the remainder. My brother filed chapter 7 and the trustee sold his 25%. What rights does the buyer have? Will the bankruptcy code in NY allow him to become a member or will he still have to be voted in? As a non-member with equity, does he have the right to inspect the books, would he be required to make capital contributions when called for? Can he be voted out?
Response: I count 4 questions above. Given the limited amount of time I have promised to devote to each question, just a few comments on the issue are in order. The facts given do not mention an operating agreement for this LLC. If one existed, it's terms would control this situation (assumed the operating agreement addressed the issue). In responding, I'll assume there is no operating agreement.
Can the buyer of your brother's interest in bankruptcy become an LLC member? I think the answer to this question is 'no' unless a majority in interest of the LLC members vote to admit said buyer. You control a majority in interest of the LLC, therefore, you can block the buyer's admission as a member. In making the foregoing statement, the following sections from the New York LLC Act were relied upon.Section 604. Rights of assignee to become a member. (a) Except as provided in the operating agreement, an assignee of a membership interest may not become a member without the vote or written consent of at least a majority in interest of the members, other than the member who assigned or proposes to assign such membership interest. ...
Section 607. Rights of creditors of members. (a) On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the membership interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to his or her membership interest.
(b) No creditor of a member shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company. The buyer becomes "an assignee of a membership interest." See discussion of LLC member interests in bankruptcy (bottom of page).
What rights does an assignee of an LLC member interest possess? The right to all LLC distributions that the former LLC member (i.e., your brother) would have had.
Submitted: 11/23/2007; MNY, NY
Response: 11/25/2007; JJR
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