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Can A LLC President File for Bankruptcy Over Objections of Debtor’s Other Members?
By Lawrence J. Kotler and Drew S. McGehrin
Through a unilateral bankruptcy filing, a president and manager of a limited liability company sought to utilize the Chapter 11 process and sell a debtor’s business as a going concern over the objection of the debtor’s other members. In this case, the issue was whether the president was authorized to do so. In a recent decision issued on Sept. 30, 2024, the U.S. Bankruptcy Court for the Eastern District of Michigan examined this fundamental question of basic corporate governance and provided guidance to bankruptcy practitioners who may face similar questions in the future.
Facts and Procedural History
The Debtor and Its Operating AgreementOn May 20, 2011, the Eton Street Brewery (the debtor) was formed as a limited liability company under the Michigan Limited Liability Company Act. The debtor’s initial members were Bonnie J. LePage, as trustee of the Bonnie J. LePage Trust UAD 3/17/97, as amended (the Bonnie trust); and Mary E. Nicholson, as trustee of the Mary E. Nicholson Trust UAD 1/14/1988, as amended (the Mary trust). Each member held a 50% membership interest in debtor.
As this was a limited liability company, the debtor had an operating agreement that, among other things, provided that the company’s business was to be managed by two managers, to be appointed by the members. The debtor’s initial managers were Bonnie LePage, as president, and Mary Nicholson, as vice president. Pursuant to the terms of the operating agreement, the president was vested with the powers to make “ordinary and usual decisions” regarding the business and affairs of the company.
However, the operating agreement imposed explicit restrictions on the manager’s powers and outlined specific decisions that required the unanimous consent of all members of the company. These decisions included: the sale of all or substantially all of the assets of the debtor; any matter that could change the amount of character of the debtor’s capital or the business or affairs of the debtor; or any decision that would make it impossible for the debtor to carry on its ordinary business. Further, the operating agreement also expressly provided that the all of the members had the right to vote on the sale or other transfer of all or substantially all of the company’s assets to the extent such sales were outside the debtor’s ordinary course of business.
On Dec. 1, 2017, the members amended the Debtor’s operating agreement to admit Michael A. Nicholson, trustee of the Michael A. Nicholson Revocable Living Trust U/A/D 1/14/94 as a member (the Michael trust). Following the amendment, the Bonnie trust had a 50% membership interest in debtor, the Mary trust had a 40% interest, and the Michael trust had a 10% interest.
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