United States: Court Holds That Bankruptcy Trustee Succeeded To Right To Control LLC

In a recent decision from the United States District Court for the Southern District of Indiana, it affirmed a determination of the Bankruptcy Court that when a member of an LLC with voting control thereof filed personal bankruptcy, that right to control the LLC became vested, as part of the bankruptcy estate, in the trustee. As such, going forward, the bankruptcy trustee has control of that LLC. In re Lester L. Lee, No. 4-15-cv-00009-RLY-WGH, Adv. Proc. No. 14-59011 (S.D. Ind. August 10, 2015).

The operating agreement of Lee Group Holding Company, LLC ("Lee Group") identified a number of members, allocating to them certain economic and voting rights within the company. While Lester Lee did not enjoy any right to either interim or liquidating distributions from the LLC, he was afforded 51 votes therein; the balance of the members held, collectively, 50 votes. As such, Lester individually controlled a majority of the voting rights in the company.

Lester Lee then filed personal bankruptcy. After that filing, with the consequent entry of an automatic stay, the trustee's counsel reviewed the Lee group operating agreement and wrote a letter providing in part that "this non-economic interest [in Lee Group] became property of the estate subject to control of the Trustee on the filing of the [bankruptcy] petition pursuant to 11 U.S.C. § 541." Thereafter, the other members of the Lee Group executed documents purporting to accept Lee's resignation from the Lee Group and the termination of his voting rights thereunder. These actions were taken in the face of a provision of the operating agreement which provides, inter alia, that decisions require the approval of 51% of the voting rights allocated amongst the various members. They also sought to adopt amendments to the operating agreement, again acting without consideration of the 51 voting units held by Lester Lee. After these actions were challenged by the trustee, the bankruptcy court "concluded that the Debtor's voting rights were property of the estate as of the filing of the Petition and that the [actions of the other members of Lee Group] purporting to terminate his voting rights violated the automatic stay imposed by 11 U.S.C. § 362 and, therefore, had no legal effect." In re Lester L. Lee, 524 B.R. 798 (Bankr. S.D. Ind. 2014).  

It was from that ruling that this appeal to the District Court was taken. On appeal, the Court's primary focus was upon whether the right to vote in an LLC constitutes "property of the estate," defined by section 541(a)(1) of the Bankruptcy Code as "all legal or equitable interest of the Debtor in property as of the commencement of the case. After finding that Lee could be a "member" of the LLC notwithstanding the absence of any share in the company's profits and losses or the distributions it should make, the Court was able to determine that Lee was a member. In a belt and suspenders analysis, the Court determined also that the voting rights themselves could constitute "economic rights in the company" affording him the opportunity to, for example, "ensure his continued employment as manager" thereof.

On that basis, the determination of the trial court to the effect that any effort to strip Lee of his right to control the LLC through the exercise of the 51 voting rights was invalid as a violation of the automatic stay. HERE IS A LINK to this decision.

Curiously not addressed by this opinion (it was not addressed by the trial court below) is Section 23-18-6-5(a)(3)(B) of the Indiana LLC Act, which provides that "a person ceases to be a member of a [LLC] upon the occurrence of any of the following events:... (3) the person is removed as a member:... (B)... By the affirmative vote, approval or consent of a majority in interest of the members after the member has assigned the member's entire interest in the [LLC]." By this omission, the Court may be saying that, in effect, the assumption by the bankruptcy trustee of the voting rights within the estate is not an "assignment" as contemplated by this provision. Whether that is the Court's thinking is, however, still unknown.

There have been a long series of cases that have addressed the question of whether the bankruptcy estate succeeds to a member's right to participate in the management and affairs of an LLC. Famously, in In re Ashley Albright, it was determined that the bankruptcy court did succeed to the management rights. See alsoThomas E. Rutledge and Thomas Earl Geu, The Albright Decision - Why a SMLLC is Not an Appropriate Asset Protection Vehicle, 5 Business Entities 16 (Sept./Oct., 2003).  That, however, was in the context of a single member LLC; Lee Group was a multiple-member LLC in which different concerns were present. This decision is yet another in which it was held, inter alia, that multiple-member versus single-member is not of itself a distinguishing factor (although certainly those fact changes may impact upon the executor contract analysis).  See, e.g., Matter of H&W Food Mart, LLC, 461 B.R. 904 (Bankr..N.D.Ga., 2011); Norberg v. Hawks Prairie Casino, LLC (In re McSwain), 2011 WL 4706982 (Bankr. W.D.Wa., 2011); In re Alameda Investments, LLC, 2013 WL 3216129 (Bankr.C.D.Cal., 2013).  

Essentially, the members of the Lee Group vested control in Lester Lee. Now, for all effects and purposes, control of the LLC has been vested in Lester Lee's bankruptcy trustee, and it appears there is little the members may do about that. While they may be trapped in that situation, counsel drafting LLC operating agreements (similar issues can arise under limited partnership agreements) need to carefully consider how voting control is allocated and address mechanisms by which, subject to the limitations of the automatic stay, operational control of the business venture may be properly removed from a bankruptcy trustee should that eventuality arise.

Originally published on Kentucky Business Entity Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.