[The other articles in this seven-part series are here: Part I, Part II, Part III, Part IV, Part V, Part VII.]
In the last installment of this series, we discussed a few of the bankruptcy cases in which the court, faced with a question of the trustee’s right to exercise the debtor’s noneconomic rights as a member of a limited liability company, considered whether the LLC’s operating agreement was an executory contract under Section 365 of the Bankruptcy Code. In this post we discuss bankruptcy cases that concluded that all the debtor’s membership rights, both economic and noneconomic, were automatically the property of the estate under Section 541 without considering whether the operating agreement was an executory contract. In doing so, those courts tacitly (and erroneously, in the author’s respectful opinion) treat a member’s rights in a limited liability company as if they were equivalent to a shareholder’s rights represented by stock in a corporation. Unlike the rights held by LLC members, the economic and noneconomic rights represented by a share of stock are essentially inseparable and both are correctly treated as in the nature of property rights, not contractual rights.
We’ve already mentioned the case that prompted this series, In re Lee, 524 B.R. 798 (Bankr. S.D. Ind. 2014), in which the court held that the trustee acquired all the debtor’s rights, both economic and noneconomic, without considering the potential applicability of Section 365, possibly because neither of the parties to the proceeding that the court argued that the operating agreement was an executory contract. Although the Lee court cited to a number of cases to support its holding that the trustee acquired both the economic and noneconomic membership rights of the debtor, all but one them reached that conclusion without addressing whether it was necessary to consider the possible applicability of Section 365. While In re Lee is consistent with those cases, none of them actually holds that the trustee acquires the debtor’s noneconomic rights with no need to analyze the operating agreement under Section 365.