474 B.R. 698
Bankr. W.D. Ark.2011Background
- Duncan and Cantrell seek a declaratory judgment that Dixie Management & Investment, Limited Partners became a disassociated member of MIG upon Dixie’s bankruptcy filing.
- Dixie argues the operating agreement (OA) is an executory contract and that § 365(e)(1) and § 541(c)(1) protect Dixie’s interests from modification or termination due to bankruptcy.
- Dixie also contends that, if the OA is not executory, § 541(c)(1) prevents forfeiture or modification of Dixie’s membership because it became property of the bankruptcy estate.
- The OA provides six events of disassociation, including bankruptcy, and Arkansas § 4-32-802(a)(4)(B) recognizes disassociation upon bankruptcy.
- The Court finds the OA’s disassociation provision inconsistent with federal bankruptcy law and Arkansas statute, but analyzes whether Dixie’s membership remains property of the estate under § 541(c)(1).
- The Court concludes that Dixie did not disassociate under § 541(c)(1)(B) and that the OA and Arkansas provision are invalid to the extent they conflict with federal law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the OA an executory contract or a property interest? | Duncan argues OA is an executory contract triggering disassociation on bankruptcy. | Dixie argues OA governs disassociation as a contract with potential modification rights. | Court finds OA may be an executory contract or property interest but does not determine definitively; analysis continues by treating other authorities. |
| If OA is executory, did Dixie assume it under § 365(d)(2)? | Duncan relies on § 365(d)(2) to argue assumption was possible before confirmation. | Dixie contends no executory contracts were listed in Schedule G, so § 365(e)(1) cannot apply. | Dixie did not assume any executory contract because Schedule G listed none; § 365(e)(1) is inapplicable. |
| Does § 541(c)(1) keep Dixie’s membership in MIG as property of the estate despite OA provisions? | Duncan asserts OA/AArkansas provisions alter the debtor’s interest despite § 541(c)(1). | Dixie argues the OA and state law govern disassociation regardless of bankruptcy. | § 541(c)(1) prevails; Dixie’s membership remains property of the estate notwithstanding OA/Arkansas provisions. |
| Are the OA disassociation provisions and Arkansas statute invalid under Supremacy Clause? | Duncan argues these provisions conflict with federal bankruptcy law and are invalid. | Dixie argues state law applies to disassociation events. | OA provision and Arkansas statute are invalid to the extent they conflict with federal law; Supremacy Clause controls. |
| May Dixie continue as a member under § 363(l) despite the disassociation provisions? | Duncan contends Dixie loses status, affecting the estate’s rights. | Dixie argues the estate has rights to continue Dixie’s membership. | Dixie may continue as a member; estate rights remain consistent with § 363(l). |
Key Cases Cited
- In re Daugherty Const., Inc., 188 B.R. 607 (Bankr. Neb. 1995) (Countryman definition and treatment of executory contracts; relation to property interests)
- Klingerman v. ExecuCorp, LLC (In re Klingerman), 388 B.R. 677 (Bankr.E.D.N.C. 2008) (bankruptcy estate rights; debtor's rights as of petition)
- In re Garrison-Ashbum, L.C., 253 B.R. 700 (Bankr.E.D.Va. 2000) (economic rights; membership interest becomes property of estate)
- Daugherty Const. (same matter cited at 188 B.R. 611), 188 B.R. 611 (Bankr. Neb. 1995) (analysis of § 541(c)(1) and preemption by federal law)
- LaHood v. Covey (In re LaHood), 437 B.R. 330 (Bankr. C.D. Ill. 2010) (estate rights; debtor’s economic and non-economic rights; § 363)
- Movitz v. Fiesta Inv., LLC (In re Ehmann), 319 B.R. 200 (Bankr. D. Ariz. 2005) (Trustee rights; estate has debtor’s rights as of start of case)
- Garrison-Ashburn, 253 B.R. 708 (Bankr. E.D. Va. 2000) (alternative view on estate rights versus contractual limits)