What happens to a member of an LLC in North Carolina if that member files for bankruptcy?
Do I read this right that according to § 57C-3-02 Cessation of membership 3b the member filing for bankruptcy automatically looses all rights as a member of the LLC? So that member has no right to run the company or access financial resources?
2 attorney answers
This is a really good question. Frankly, I have found that the NC statute you reference (NCGS 57C-3-02) is one that many attorneys, including bankruptcy attorneys, do not even know exists! Years ago, I asked a bankruptcy Trustee what his thoughts were about the statute and he said, "huh?" True story.
In any event, the statute exists and is on the books, regardless of whether attorneys and Trustees know about it or not. The important thing is the ramifications of the statute. What I have found in filing over 2000 cases during the past decade and a half is that, from a practical standpoint, nothing happens. Maybe this is due to attorneys not knowing about the law, or maybe it is because the actual effect of the law is minimal. Moreover, if you look at the law carefully, most of the effects of it can be remedied by unanimous consent of the other members. Lots and lots of LLCs have only one Member. In that case, if the member files for bankruptcy protection, she can arguably simply vote to reinstate all of her rights post-filing. Many other LLCs are closely held between family members. Assuming they all get along, these family members can arguably vote to reinstate the rights of a member who filed for bankruptcy protection. Finally, operating agreements can be written at the outset to circumvent this, and other, issues involving bankruptcy and debt issues of the members.
If you and/or a co-member of a NC LLC are considering filing for bankruptcy protection then you should consult with a qualified bankruptcy attorney. As an Asheville Bankruptcy attorney and bankruptcy specialist, I would recommend a specialist who is certified by the NC State Bar. A specialist, particularly one who files business bankruptcies, can best discuss your options.
Usually that issue is covered in the Operating Agreement and it may be a "triggering" event that allows the other members to purchase the bankrupt party's membership interest and sometimes at a discounted price. BK triggering events are sometimes grouped with other items such as death, disability, retirement, etc. Take a look in the Op. Agmt to see if it contains such provisions (sometimes referred to as "Involuntary Transfers"). if not a repurchase event then many times a BK event changes a voting interest into a non-voting interest so that if a creditor succeeds to the BK member's interest the creditor can not cause any issues as to how the business is run.
My answer is not intended to be giving legal advice and this topic can be a complex area where the advice of a licensed attorney in your State should be obtained.