In In re Envision Healthcare Corp., 23-90342 (Bankr. S.D. Tx. Sec. 12, 2023), Bankruptcy Judge Christopher M. Lopez held that Delaware law cannot strip away a member’s managerial and voting rights in a limited liability corporation when the member files a chapter 11 petition.[1] The case involved a contention between United States Bankruptcy Code and the Delaware Limited Liability Company Act. Specifically, Section 18-304 of the Delaware Limited Liability Company Act, which states “a person ceases to be a member of a limited liability company when the person – which includes an LLC starts a bankruptcy case.” Under Delaware law “person” includes a corporation like the debtor. Using Section 18-304, the other two members, without consent, changed the management agreement to say that the debtor no longer had voting or managerial interest in the LLC. As a result, the debtor filed a motion in the bankruptcy court seeking a declaration that the action violated the automatic stay. The other members opposed and stated that dispute was subject to an arbitration clause contained in the management agreement.
Despite Judge Lopez contending that the LLC management agreement contained a valid arbitration clause, he said, “this is not a contract dispute that should be arbitrated. There is nothing in the LCC Agreement to interpret.” Further, Judge Lopez discussed the direct conflict between the two codes and denied the motion to compel arbitration because the stay violation motion was a core proceeding and permitting arbitration would be “inconsistent with the purpose of the Bankruptcy Code.” Moreover, Judge Lopez stated that his decision “clarifies that a member of a Delaware LLC who starts a bankruptcy case keeps all legal and equitable interests in the LLC that is held as of the commencement of this case.” To support his contentions, Judge Lopez cited decisions from a district court in New York and West Virginia bankruptcy court decisions that reached similar conclusions about state laws. Ultimately, Judge Lopez emphasized that “Section 18-304 of the Act directly conflicts with, and must give way to, § 541 of the Bankruptcy Code. The August 2023 attempt to amend the LLC Agreement without AmSurg’s affiliated board members violated the automatic stay. To rectify this matter, this Court declares the August 2023 amendment void.”
[1] Article: https://www.abi.org/newsroom/daily-wire/bankruptcy-code-overrides-contrary-delaware-corporate-law-judge-lopez-says
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