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July 30, 2014

Consequences of the Rejection of Limited Liability Company (LLC) Operating Agreements and Sale of LLC Membership Interests

Section 365 of the Bankruptcy Code empowers a trustee or debtor in possession (DIP) to reject executory contracts that are burdensome to the bankrupt estate. The Code does not define the term “executory contract,” but courts typically apply the “Countryman definition”: “[A] contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.”1 In other words, where material performance remains on both sides of a contract such as a limited liability company (LLC) operating agreement, the agreement will be executory and may be rejected in bankruptcy. The effect of the rejection of an LLC operating agreement, however, is where the ambiguity arises.

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This article was previously published in the American Bankruptcy Institute Journal.

©2014 Greenberg Traurig, LLP. All rights reserved.

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About this Author

Alan J. Brody, Bankruptcy Attorney, Greenberg Traurig Law Firm
Shareholder

Alan J. Brody is a member of the firm's Business Reorganization & Financial Restructuring Practice and has a wide-range of experience in bankruptcy and creditors' rights, corporate restructuring and bankruptcy litigation. He has represented clients in a variety of bankruptcy proceedings, as well as insolvency issues in business transactions and out-of-court restructurings.

Alan has broad experience in complex bankruptcy and creditors' rights litigation and has represented entities in the restructuring and transfer of assets in bankruptcy...

973-443-3543
 Ari Newman, Bankruptcy Attorney, Greenberg Traurig Law Firm
Associate

Ari Newman has significant experience handling complex legal issues that arise in business reorganizations, liquidations, distressed asset acquisition and sales, financial restructurings, and adversary proceeding litigation. His representations include Chapter 11 debtors, Chapter 7 trustees, secured creditors, unsecured creditors, distressed asset purchasers and sellers, and DIP lenders, as well as representing parties seeking to recover, or defend against, preferential and fraudulent transfers.

305-579-0868