Pearce v. Woodfield (In re Woodfield)

602 B.R. 747
CourtUnited States Bankruptcy Court, D. Oregon
DecidedMay 16, 2019
DocketBankruptcy Case No. 18-32028-tmb11; Adv. Proc. No. 18-3120-tmb
StatusPublished
Cited by5 cases

This text of 602 B.R. 747 (Pearce v. Woodfield (In re Woodfield)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, D. Oregon primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Pearce v. Woodfield (In re Woodfield), 602 B.R. 747 (Or. 2019).

Opinion

TRISH M. BROWN, U.S. Bankruptcy Judge

This matter came before the court on a motion for summary judgment (the "Motion," ECF No. 16) filed by plaintiff Parley Pearce. In deciding this matter, I have carefully considered the written arguments of both parties, the documentary evidence in the record, and applicable legal authority, both as cited by the parties and as discovered through my own research. In light of my review, I grant the Motion in part and deny it in part, for the reasons set forth herein.

I. Relevant Facts

This is primarily a legal dispute based on a handful of material facts. Mr. Pearce filed a concise statement of facts in support of the Motion (the "CSF," ECF No. 18), as required by Local Bankruptcy Rule 7056-1(c). Although Debtor responded to the Motion, he did not respond to the CSF, as required by Local Bankruptcy Rule 7056-1(b). Accordingly, pursuant to Federal Rule of Civil Procedure 56(e)(2), I deem the facts alleged in Mr. Pearce's CSF to be undisputed.

Notwithstanding Debtor's failure to respond to the CSF, the pleadings filed by *753both parties indicate that most of the material facts are not subject to serious dispute. Debtor and Mr. Pearce are co-owners of a number of limited liability companies ("LLCs"), including the three at issue in this proceeding: Triple R Holdings, LLC; PB & R, LLC; and PB & SH, LLC (collectively, the "Subject LLCs"). Debtor and Mr. Pearce each own 50% of the membership interests in each of the Subject LLCs. The Subject LLCs are governed by substantially identical operating agreements (the "Operating Agreements," see ECF No. 28, Exhs. A - C).1

Debtor filed a voluntary chapter 11 petition on June 8, 2018. Oregon law creates a process of "dissociation" when a LLC member files a bankruptcy petition. Under the Oregon LLC statutes (chapter 63, Oregon Revised Statutes, the "LLC Act"),2 if a member of a multi-member LLC files a bankruptcy petition, that member ceases to be an LLC member, but retains the "right to receive and retain ... the distributions, as and when made, and allocations of profits and losses to which the [member] would be entitled." ORS 63.249(3) (applicable via ORS 63.265(2)(a) ). Oregon's dissociation provision applies only as a default rule, i.e., LLC members may create a different procedure as part of an operating agreement. ORS 63.265. Consistent with this flexibility, the Operating Agreements depart from the dissociation statute in one respect: instead of retaining the right to participate equally in distributions, a dissociated member is only entitled to payment of a set amount of money. Op. Agmt. § 13.2(b).

Mr. Pearce's complaint contains two claims for relief and the Motion seeks summary judgment on both. First, Mr. Pearce seeks a declaratory judgment that Debtor "ceased to be a member of" the Subject LLCs (in other words, he dissociated) upon the filing of his chapter 11 petition. Motion at 2; Complaint (ECF No. 1) ¶¶ 12-17. Second, he seeks a declaration that "to the extent certain operating agreements are executory, they are rejected." Motion at 2; Compl. ¶¶ 18-21. Mr. Pearce's arguments are grounded in Oregon law, but they find support in some bankruptcy case law. Debtor opposes the Motion, citing the Bankruptcy Code's ipso facto provisions and a different line of cases.

II. Analysis

In their combined eagerness to prevail at the end of the day, the parties' briefing leaps over some foundational concepts that are important for purposes of framing and resolving the ultimate questions. These conceptual building blocks are relevant for several reasons, first among which is the fact that the Bankruptcy Code makes no mention of LLCs, thus their treatment in bankruptcy must be determined in reference to broader, generally applicable, concepts. Accordingly, I will begin with a general *754discussion of LLCs before proceeding to the specific matters argued by the parties.

A. The Limited Liability Company

Despite their current popularity, LLCs are a fairly recent invention. When the Bankruptcy Code was enacted in 1978, only one state (Wyoming) recognized the LLC form of entity. Mark A. Sargent & Walter D. Schwidetzky, Limited Liability Company Handbook § 1:2 (rev. 2018). LLCs went on to became prevalent in business circles when the Internal Revenue Service clarified their tax treatment in 1998. Id. Currently, LLCs are a ubiquitous form of entity for businesses large and small. While many states have adopted the Uniform Limited Liability Company Act or the Revised Uniform Limited Liability Company Act, Oregon has not. Oregon's LLC Act was passed in 1993, before the uniform acts had been promulgated. 1 Advising Oregon Businesses § 7.1-2 (2017). Despite Oregon's somewhat unique statute, the general principles governing Oregon LLCs are the same as in most other states, including definitional concepts related to a member's interest.

To use an analogy familiar to most lawyers, an LLC membership interest is like a bundle of sticks3 -a member has various rights and obligations, most of which are governed by default statutory rules that can be varied by the terms of an operating agreement. The rights that comprise LLC membership can generally be sorted into two categories: economic rights and governance rights. 1 Larry E. Ribstein & Robert R. Keatinge Limited Liability Companies § 7:3 (rev. 2018). Economic rights include the right to share in the company's profits and losses, and to receive distributions. Governance rights include the right to vote on certain matters and the right to either manage the company's business (in the case of a member-managed LLC) or choose a manager (in the case of a manager-managed LLC).

Consistent with this generally accepted framework, the Oregon LLC Act addresses governance rights of members in sections 63.130 through 63.170; while economic rights are codified in sections 63.175 through 63.235. As mentioned previously, both the LLC Act and the Operating Agreements limit Debtor's governance and economic rights as a consequence of his bankruptcy petition. In bankruptcy, state law (including the common law of contracts) is used to determine a debtor's interest in property. Dunkley v. Rega Properties (In re Rega Properties) , 894 F.2d 1136, 1139 (9th Cir. 1990) ("Property interests are created and defined by state law." (quoting Butner v. U.S. , 440 U.S. 48

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Bluebook (online)
602 B.R. 747, Counsel Stack Legal Research, https://law.counselstack.com/opinion/pearce-v-woodfield-in-re-woodfield-orb-2019.