498 B.R. 90
Bankr. W.D. Va.2013Background
- Virginia Broadband, LLC (VABB), a manager-managed Virginia LLC, filed Chapter 11 on November 1, 2012; two managers (Sullivan and Chapman) authorized the filing.
- Chapman, a manager and 28.2317% member, filed an individual Chapter 13 on August 23, 2012; his Chapter 13 was dismissed on September 12, 2012.
- On August 27, 2012 an August Consent removed two managers (Chang, Smith) and appointed Sullivan and Huggins; an October Consent ratified the August Consent and made it retroactive to August 27.
- The Committee moved to dismiss VABB’s Chapter 11 under 11 U.S.C. § 1112(b), arguing the corporate filing was unauthorized because Chapman, as a bankrupt, lost non‑economic rights and could not validly vote.
- Central legal dispute: whether Chapman’s non‑economic membership rights became property of his bankruptcy estate despite Va. Code §13.1‑1040.1(6)(a) (which dissociates a member who becomes a bankrupt), and if those rights revested on dismissal so his October Consent vote was valid.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a debtor‑member’s non‑economic LLC rights become property of the bankruptcy estate despite Va. Code §13.1‑1040.1(6)(a) | Committee: Virginia law dissociated Chapman on filing, stripping non‑economic rights so they never became estate property | Debtor: 11 U.S.C. §541(c)(1) invalidates ipso‑facto forfeiture; Chapman’s economic and non‑economic rights became estate property | Court: Held §541(c)(1) preempts the state ipso‑facto provision; Chapman’s economic and non‑economic interests became property of his estate |
| Whether Chapman’s non‑economic rights revested on dismissal of his individual case so his vote counted for the October Consent | Committee: Even if rights were affected, Chapman did not follow state procedures to restore them, so vote invalid | Debtor: §349(b)(3) causes revesting on dismissal, restoring January rights as of dismissal date | Court: Held §349(b)(3) revested Chapman’s interests on dismissal (Sept. 12, 2012), restoring his member/manager rights and validating his October Consent vote |
| Whether VABB’s Chapter 11 filing was authorized by a majority of the Board | Committee: Without Chapman’s vote, the Consents lacked a majority and filing was unauthorized | Debtor: With Chapman’s rights restored, the Consents formed a majority and ratified Board composition; filing was authorized | Court: Held the Board majority was valid (Sullivan + Chapman), so VABB’s filing was valid and dismissal for lack of authorization was not warranted |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (bankruptcy court authority and core proceeding analysis)
- In re Garrison‑Ashburn, L.C., 253 B.R. 700 (Bankr. E.D. Va. 2000) (debtor’s membership and non‑economic rights become property of the estate)
- Sheehan v. Warner (In re Warner), 480 B.R. 641 (Bankr. N.D. W. Va. 2012) (section 541(c)(1) prevents enforcement of ipso facto provisions stripping non‑economic LLC rights)
- In re LaHood, 437 B.R. 330 (C.D. Ill. 2010) (treatment of membership interests as estate property under §541)
- Spain v. Williams (In re Williams), 455 B.R. 485 (Bankr. E.D. Va. 2011) (discussed differing view on whether non‑economic rights become estate property)