Patrick Malloy, III v. Robert Kramer, et al.

Case Type:
Case Status:
BAP No. NO-21-005; BAP No. NO-21-006; Bankr. No. 19-12014 (10th Circuit, Nov 23,2022) Not Published
This decision is not recommended for publication and has no precedential value. Bankruptcy Code 11 U.S.C. §541 did not prevent members of an LLC from enforce the Transfer Restrictions in their Operating Agreements applicable under Oklahoma law.
Procedural context:
Chapter 7 Debtor filed bankruptcy before state court entered a $3.2 million judgment against him. Debtor's primary assets were his membership interests in certain LLC's. Trustee sought to sell the Debtor's interests in the LLCs. The other members of the LLCs objected to the sales, arguing that the LLCs' Operating Agreements all contained restrictions that restricted transfer of the membership interests under Oklahoma's Limited Liability Company Act.
Oklahoma's Limited Liability Company Act (the "Act") § 2012.2(A) allows a limited liability company's operating agreement to govern rights of the members so long as the operating agreement does not "vary the rights, privileges, duties and obligations imposed specifically under" the Act. The Act prohibits transfer of a membership interest but "may assign the capital interest associated with a membership interest in whole or in part." Based on Oklahoma case law, the bankruptcy court found that an operating agreement can alter the default rule that capital interest associated with a membership may be assigned. To the extent the operating agreements restricted assignment of the LLC's capital interest, such provision does not conflict with § 541(c)(1) of the bankruptcy code. Section 541(c)(1)(A) invalidates any restriction or condition that prevents a debtor's interest from becoming property of the estate and § 541(c)(1)(B) invalidates any clauses, including ipso facto clauses, to the extent they expressly or implicitly cause a forfeiture, modification, or termination of a debtor's interest in property from entering the estate. The BAP agreed with the bankruptcy court's ruling that § 541(c)(1)(A) did not invalidate the LLC's operating agreement because the provision does not prevent the membership interest from becoming property of the estate. Similarly, § 541(c)(1)(B) did not invalidate the operating agreement's provision restricting sale of the capital interest of the membership because the provision did not cause forfeiture or termination of the membership rights ipso facto upon bankruptcy or insolvency.
Romero, Jacobvitz, and Rosania

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