MEMORANDUM OPINION
Martin P. Sheehan, the Chapter 7 trustee (the “Trustee”) for the bankruptcy estate of Benjamin F. Warner (the “Debt- or”), requests entry of summary judgment on his adversary complaint against George B. Warner, Sr., Karl K. Warner, Elizabeth A. Warner, Kristian E. Warner, Sr., Andrew M. Warner, and Monroe P. Warner (“Defendants”). The Trustee seeks a declaration that McCoy Farm, LLC, (“McCoy Farm”) is dissolved pursuant to its operating agreement, and a writ of mandamus for the manager of McCoy Farm to liquidate the company or the appointment of a receiver to proceed with liquidation.
On June 1, 2012, the court conducted a status hearing on the Trustee’s motion for summary judgment in Wheeling, West Virginia. After receiving post-hearing briefing the court took the matter under advisement. For the reasons stated herein, the court denies the Trustee’s motion for summary judgment.
I. BACKGROUND
In December 2002, McCoy Farm acquired its only asset: George Warner, Sr., conveyed to McCoy Farm all of his right, title and interest in real property consisting of approximately 141.37 surface acres and 157.81 acres of oil and gas located in Barbour County, West Virginia. The land contains a family lodge, farmhouse, small cottage, and a mobile home. According to McCoy Farm’s First Amended and Restated Operating Agreement (“Operating Agreement”), dated November 15, 2003, George Warner, Sr., is the named manager,
In 2006, the Debtor and some of his brothers needed capital funds to invest in business enterprises located in Morgan-town, West Virginia. Because they did not have enough capital to secure bank financ
About three months later, on April 22, 2010, the Debtor filed his Chapter 7 bankruptcy petition. Soon thereafter the Trustee brought an adversary proceeding in this court against Karl Warner to recover the transfer of the Debtor’s membership units in McCoy Farm. This court determined that the Operating Agreement expressly forbade the transfer of the Debt- or’s interest.
On December 2, 2011, the Trustee filed a complaint in the District Court for the Northern District of West Virginia, seeking, among other things, a declaration that the Operating Agreement requires the dissolution of McCoy Farm. The district court found that it had subject matter jurisdiction to hear the proceeding and then referred it to this court.
II. STANDARD OF REVIEW
Federal Rule of Civil Procedure 56, made applicable by Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment is only appropriate if the movant demonstrates “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A party seeking summary judgment must make a prima facie case by showing: first, the apparent absence of any genuine dispute of material fact; and second, the mov-ant’s entitlement to judgment as a matter of law on the basis of undisputed facts. Anderson v. Liberty Lobby, Inc.,
The movant bears the burden of proof to establish that there is no genuine dispute of material fact. Celotex Corp. v. Catrett,
If the moving party satisfies this burden, the nonmoving party must set forth specific facts that demonstrate the existence of a genuine dispute of fact for trial. Celotex Corp., 477 U.S. at 322-23,
III. DISCUSSION
The Trustee argues that the Debtor’s bankruptcy was an event of dissolution under the terms of the Operating Agreement and that either a writ of mandamus should be issued to the manager of McCoy Farm to liquidate the company, or a receiver should be appointed to dissolve the company. The Trustee draws support from two provisions in the Operating Agreement: Section 10(a)(ii) provides that McCoy Farm “shall be dissolved upon the occurrence of any of the following events: ... (ii) upon the death, retirement, withdrawal, expulsion, bankruptcy or dissolution of a Member ... ”; and § 10(c) which states that “the dissolution of the Company shall be effective on the date on which the event occurs giving rise to such dissolution .... [A] manager, or (in the absence of a manager) a liquidator ... shall liquidate the assets of the Company, apply and distribute the proceeds thereof....”
The Defendants contend that McCoy Farm has not dissolved because the remaining members met in December 2011
In the event of dissolution of the Company pursuant to the events of dissolution described in Section 10a.(ii), ... [McCoy Farm] shall not be discontinued, and ... shall remain in existence ... if the remaining Members unanimously agree to continue the Company under this Agreement within sixty (60) days of such dissolution.
The Defendants allegedly agreed to continue McCoy Farm sometime “between July 1-10, 2011” and memorialized this resolution (“Resolution”) on December 17, 2011.
The enforceability of the Defendants’ Resolution is potentially dispositive because, if enforceable, McCoy Farm would not dissolve and the Trustee’s rights would be relegated to those of a disassociated member. The Defendants’ Resolution, however, suffers from two fatal infirmities which render it invalid insofar as it seeks to disassociate the Debtor and avoid dissolution of McCoy Farm.
First, the Defendants attempt to disassociate the Debtor violates the automatic stay. See In the Matter of Daugherty Const., Inc.,
Second, the Defendants attempt to continue McCoy Farm was untimely. Under § 10(a)(ii) and (b), McCoy Farm shall dissolve upon the filing of a bankruptcy petition by one of its members unless the remaining members unanimously agree to continue within sixty days from the date of petition. The Debtor filed bankruptcy on April 22, 2010, and therefore the Defendants had until June 21, 2010 to agree to continue McCoy Farm. Because the earliest act to continue the company was not until July 1, 2011, under the express terms of the Operating Agreement, McCoy Farm dissolved on April 22, 2010.
However, dissolving McCoy Farm because a member files bankruptcy raises a salient federal question: whether dissolving a LLC because a member files bankruptcy contravenes 11 U.S.C. § 541(c)(1). To evaluate this issue the court must consider (I) the applicability of 11 U.S.C. § 365, and (II) the extent of the Trustee’s interest in McCoy Farm, LLC. For purposes of disposition of the Trustee’s motion for summary judgment, the court will also analyze (III) the Trustee’s ability to liquidate the Debtor’s interest in McCoy Farm, LLC.
I. Applicability of § 365
Neither the Defendants nor the Trustee mention § 365 or argue whether the Operating Agreement is an executory contract. Nonetheless, the court must take up this inquiry as the determination is essential to an evaluation of the Trustee’s rights and powers in McCoy Farm. See Movitz v. Fiesta Inv., LLC (In re Ehmann),
Some courts reason that if an operating agreement “is an executory contract ... § 365 governs the trustee’s rights rather than § 541(c)(1).” Fursman v. Ulrich (In re First Protection, Inc.),
Other courts decline to examine whether a LLC operating agreement is an executo-ry contract if the trustee or debtor fails to timely assume. See § 365(d)(1) (“In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract ... within 60 days after the order for relief ... then such contract ... is
This court largely agrees with the observations made by In re First Protection and In re Ehmann regarding the implications of § 365.
An examination of whether an operating agreement is an executory contract is necessary even when the trustee fails to timely assume. A rejected operating agreement that is determined to be execu-tory brings with it significant implications. When a contract is deemed rejected it constitutes a breach of contract, relieving a debtor from any future obligations and permitting the other party to the contract to file a claim. See In re First Protection, Inc.,
Although § 365 does not define the term “executory contract,” the United States Court of Appeals for the Fourth Circuit defines a contract as executory if the “obligations of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.” Gloria Mfg. Corp.
In this case, the Operating Agreement reveals that there are no material unperformed and continuing obligations owed by the Debtor: the Debtor is not a manager of McCoy Farm;
Furthermore, the purpose for which the company was formed suggests that no material obligation is owed by the Debtor to McCoy Farm. Karl Warner, a member of McCoy Farm, testified that the purpose of the company is to hold family property; specifically, the land conveyed by George Warner, Sr. It seems unlikely that a member of a LLC holding company which already has its sole asset would have any material obligations; such unlikelihood is further corroborated by looking to § 3(a), which provides that “[a]ll Members are obligated to the Company to contribute the cash or property ... as set forth in said attached schedule, [Schedule of Members, Contributions and Interests] as such schedule attached to this Agreement constitutes an enforceable written promise by all Members.” Notably, there is no obligation to provide additional capital contributions other than by virtue of § 3(a). Other than George B. Warner, Sr., the Schedule of Members, Contributions and Interests does not note or otherwise indicate that any member is to contribute cash or property. The court finds that the Operating Agreement does not constitute an executory contract because there are no material obligations unperformed by the Debtor.
Because § 365 does not apply in this case, nothing in § 365 alters the court’s conclusion that the language of the Operating Agreement requires dissolution of McCoy Farm. The court must now examine what property rights of the Debtor entered his estate under § 541(a), and whether § 541(c) acts to bring those rights into his bankruptcy estate notwithstanding the Operating Agreement dissolving McCoy Farm.
II. The Extent Of The Trustee’s Interest In McCoy Farm, LLC
A. Section 541(a)
When the Debtor filed his Chapter 7 petition a bankruptcy estate was created by operation of law. § 541(a). Property of his estate includes, inter alia, “all legal or equitable interests ... in property as of the commencement of the case.” Id.; In re Yonikus,
The ULLCA governs the law surrounding the formation, operation, and termination of limited liability companies in West Virginia. W. Va.Code §§ 31B-1-101 et seq. In West Virginia, a LLC is a legal entity distinct from its members. W. Va.Code § 31B-2-201. A member of a LLC is “not a coowner of, and has no transferable interest in, property of a limited liability company.” W. Va.Code § 31B-5-501(a). Consequently, members of a LLC do not have an ownership interest in the specific property of the company. But members do have a personal property interest in the distributions of a LLC. Mott v. Kirby,
Here, the Operating Agreement delineates each member’s authority to participate in the affairs of McCoy Farm.
The ULLCA and the Operating Agreement differ, however, in how they
Specifically, the Operating Agreement requires that McCoy Farm dissolve because the Debtor filed for bankruptcy. The court must next examine whether dissolution of McCoy Farm acts to modify, terminate or forfeit the Debtor’s economic or non-economic interest in the company. § 541(c)(1).
B. Section 541(c)(1)
At the status conference on June 1, 2012, the court requested the parties to address the implications of § 541(c). The Trustee’s post-hearing brief poses the issue before the court in two ways: whether the bankruptcy estate can choose to be bound by the provisions of the Operating Agreement, resulting in dissolution of McCoy Farm and payment to the Debtor that is commensurate with his interest, or whether § 541(e) always renders dissolution provisions inoperable. The Trustee urges the court to adopt the first approach, and find that he has the same rights as the Debtor in McCoy Farm as of commencement of the case and the expanded rights the bankruptcy estate acquires by virtue of the transfer; namely, the right to opt for dissolution under § 10(a)(ii) of the Operating Agreement. He argues that the public policy underpinnings of § 541(c) — preventing harm to creditors and preserving debtors ability to reorganize — lose force in a Chapter 7 context because automatically preempting dissolution provisions would destroy value for creditors of the estate. The Trustee eschews the second approach, contending that disabling dissolution provisions would make liquidating a debtor’s interest exceedingly difficult because of boiler plate restrictions that generally exist in operating agreements, such as rights of first refusal, outright prohibitions on transfers, and one-sided buyout provisions.
In response, the Defendants assert that § 541(c) preempts § 10(a)(ii) of the Operating Agreement because dissolving a LLC based solely on a member filing bankruptcy would defeat the purpose of § 541(c) and is inconsistent with the Bankruptcy Code. The Defendants admit that the Trustee has all the rights and powers possessed by the Debtor at the time he filed his petition, but argue that those rights do not authorize the Trustee to dissolve McCoy Farm.
The Debtor’s economic and non-economic rights fit within the ambit of § 541(c)(1) because these interests are property of his estate under § 541(a)(1). By filing bankruptcy, the Debtor triggered McCoy Farm’s dissolution and liquidation under § 10(a)(ii) of the Operating Agreement. Cessation of the Debtor’s ongoing right to participate in the affairs of the company and receive distributions effects a “modification, or termination” of his interest in property. § 541(c)(1)(B). Absent application of § 541(c)(1), the Debtor’s bankruptcy filing would modify the nature of his interest in McCoy Farm: Prior to his bankruptcy he held the full array of economic and non-economic rights provided under the Operating Agreement in a viable, operating company; while after his bankruptcy, he held an economic interest in a defunct LLC
III. The Trustee’s Ability To Liquidate the Debtor’s Interest in McCoy Farm, LLC
The Trustee contends that automatic preemption of dissolution provisions destroys value for creditors of the estate which is “at the heart of the very notion of bankruptcy law.” He emphasizes that preempting all dissolution provisions leaves trustees with few avenues by which to realize value for the estate. The Trustee urges that the appropriate solution is to recognize that he has the same rights as the Debtor in McCoy Farm, as well as “expanded rights” the bankruptcy estate acquired by virtue of the transfer. Under the Trustee’s theory, he would have the discretion to exercise § 10(a)(ii).
The court rejects the Trustee’s argument because it expands his rights beyond those held by the Debtor. The Trustee steps into the Debtor’s shoes and succeeds to all his rights under the Operating Agreement. E.g., In re First Protection, Inc.,
Additionally, the Trustee’s policy arguments regarding the purpose of bankruptcy law and the practical problems for trustees in realizing value for the estate fail to contemplate countervailing considerations. Admittedly, upsetting non-debtor member expectations under contract law is not novel in the bankruptcy arena. The suspension and modification of non-debtor parties “is the principal legal mechanism by which orderly liquidation and successful reorga
The court acknowledges that a trustee holding a debtor’s interest in a LLC is in a knotty position to realize value for the estate. See In re Garbinski,
The court’s holding does not strip the Trustee of his ability to expeditiously liquidate assets of the estate; for instance, he might be able to redeem the Debtor’s interest or appoint a receiver to operate the company. In re Ehmann,
[o]n application by a member ... upon entry of a judicial decree that: (i) The economic purpose of the company is likely to be unreasonably frustrated; (ii) Another member has engaged in conduct relating to the company’s business that makes it not reasonably practicable to carry on the company’s business with that member; (iii) It is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement....
W.Va.Code § 31B-8-801(b)(5).
Whether the Trustee can succeed in one or more of the alternatives available to him remains to be seen. The point is that, although he is not entitled to a decree that McCoy Farm can be dissolved on the basis articulated in his motion for summary judgment, he is not necessarily left without other avenues for realizing value for the Debtor’s estate. In that regard and consistent with the district court’s order of reference, the court by separate order, will set a status conference to address further proceedings in this ease, including any action upon the Trustee’s Verified Complaint and Motion for Preliminary Injunction.
IV. CONCLUSION
For the above-stated reasons, the court denies the Trustee’s motion for summary judgment without prejudice. A separate order will be entered contemporaneously with this memorandum opinion pursuant to Fed. R. Bankr.P. 9021.
Notes
. The Defendants have informed the court that George Warner, Sr., is now deceased.
. Neither the oral nor written agreements were effective to transfer the Debtor's membership units to Karl Warner because the agreements did not comport with the strictures of the Operating Agreement: "[T]he Debtor’s membership units were not first offered for sale to McCoy Farm; the Debtor's membership units were not offered for sale to all other members; and/or the prior written consent of all members to allow the transfer of the Debtor's ownership units was not obtained.” In re Warner,
. The district court found that this proceeding "relates to” a title 11 case under 28 U.S.C. § 1334 because it impacts the rights and liabilities of the Debtor and its outcome "may have a substantial impact on the assets available for distribution to creditors of the bankruptcy estate.” Sheehan v. Warner (In re Warner), Case No. 1:11CV193,
. Accompanying the Defendants’ response to the Trustee's motion for summary judgment is a document titled “Resolution Of The Members Of McCoy Farms, LLC Evidencing And Memorializing Actions Taken By The Members Between July 1-10, 2011 In Consideration of the July 1, 2011 Opinion And Order Of The Bankruptcy Court Regarding The Membership Interest Of Benjamin F. Warner.” (Doc. No. 15). The document was signed on December 17, 2011.
.The court is presently reluctant to embrace the concept that if § 365 is inapplicable then § 541(c)(1) "acts to render ... [state and contract] restrictions and conditions unenforceable as against the Trustee.” In re Ehmann,
. Section 365(c)(1) provides:
(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if — (1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (2) such party does not consent to such assumption or assignment....
. Section 365(e)(1) provides:
Notwithstanding a provision in an executo-xy contract or unexpired lease, or in applicable law, an executory contract ... of the debtor may not be terminated or modified, and any right or obligation under such contract ... may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract ... that is conditioned on ... (B) the commencement of a case under this title.
. An overlap, arguably a conflict, exists between §§ 365 and 541(c)(1). See In re Garbinski,
. Compare Allentown Ambassadors, Inc. v. Northeast Am. Baseball, LLC (In re Allentown Ambassadors, Inc.),
. Section 7(a) "delegate[s] full and exclusive responsibility and authority for management of the business and affairs” of McCoy Farm to the manager. Section 7(d) provides that “George B. Warner, Sr. is hereby appointed the Manager of the Company ... and shall serve until his or her successor has been appointed and has undertaken the duties of such Manager.”
. Section 3(a) provides that in exchange for the Debtor’s interest in McCoy Farm, he “shall contribute, to the extent accepted by the Company, cash, services rendered ... in the amounts set forth opposite his ... name on the attached Schedule of Members, Contributions, and Interest.” According to the Schedule of Members, Contributions and Interest, the Debtor has contributed nothing. In fact, George B. Warner, Sr., is the only contributing member.
. Section 9(f) provides that a member may withdraw from McCoy Farm "upon not less than six (6) months prior written notice to each of the Members.”
. The Operating Agreement also details the economic interests of the members. Section 5(a) provides that the profits and losses "shall be allocated ratably among the Members in accordance with their proportionate Units in the Company."
. The court recognizes the Defendants took disparate positions: They argue that the Debt- or has been disassociated by the Resolution and is no longer a member while also stating that “Benjamin Warner's interest [in McCoy
. Section 10(c) of the Operating Agreement provides that dissolution of McCoy Farm shall be effective on the date which an event of dissolution occurs. Upon dissolution, the manager of McCoy Farm (or a liquidator in the absence of a manager) shall liquidate the assets of the company and distribute the proceeds.
. The extent of a member’s ability to make decisions on behalf of a LLC changes upon it dissolving and entering a "wind up” phase. See generally W. Va.Code § 31B-8-804(b) ("A member ... who ... subjects a limited liability company to liability by an act that is not appropriate for winding up the company’s business is liable to the company for any damage caused to the company arising from the liability.”). Further, the winding up of a LLC is not of infinite duration, and subjects members to deadlines to ensure the orderly liquidation of the company. See generally W. Va.Code § 31B-8-803(c) ("A person winding up a limited liability company’s business may preserve the company's business or property as a going concern for a reasonable time....”).
. As noted, the court denies the Trustee's motion for summary judgment without prejudice. The court encourages the parties to explore all available options for an amicable resolution of the Trustee’s claims; the court stands ready to facilitate mediation among the parties if requested. Although the court’s guidance is hortatory only, it seems necessary as "tjjudicial intervention in the affairs of the corporation ... should be a last resort.” Klingerman v. ExecuCorp LLC (In re Klingerman), Case No. 07-02455-5-ATS,