ARTICLE ON HOW TO DRAFT LLC OPERATING AGREEMENTS FOR MEMBER BANKRUPTCY

By , December 15, 2017 3:07 pm

Below are the title of an excellent article on how to draft LLC operating agreements to address a key bankruptcy issue and its first paragraph:

72 Bus. Law. 981
Business Lawyer
Fall, 2017
Article
David L. Bury, Jr.a1 Thomas T. McClendon
Copyright © 2017 by the American Bar Association; David L. Bury, Jr., Thomas T. McClendon
PLANNING FOR THE UNEXPECTED: DRAFTING OPERATING AGREEMENTS TO PROTECT LLC MEMBERS FROM ANOTHER MEMBER’S BANKRUPTCY

Typically, the possibility that a member might end up in bankruptcy is an afterthought when parties form an LLC. However, a member’s bankruptcy can wreak surprising results for the LLC, including a Chapter 7 trustee taking over management of the LLC, selling the bankrupt member’s LLC interest to a third party, and seeking judicial dissolution of the LLC. Unwittingly, the LLC and its members can find themselves embroiled in disruptive and costly litigation. This article seeks to equip attorneys, especially those drafting operating agreements, to advise on and guard against these dangers. First, the article discusses two critical bankruptcy concepts in the LLC context: “property of the estate” and “executory contracts.” Second, it surveys the different ways bankruptcy courts treat LLC interests and operating agreements. Finally, this article provides several practical suggestions for improving operating agreements on the front end so that LLCs and their members are better prepared for and, hopefully, more protected from member bankruptcies.

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