October 31, 2014
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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.