Earlier this month, the American Bar Association’s Business Law Section held its annual LLC Institute at George Washington University Law School in Washington, D.C. Once again, I had the pleasure of joining a small and distinguished group of lawyers, judges, and academics for two days of presentations and discussions about the limited liability company.
For a business divorce practitioner who regularly wrestles with LLC governance, deadlock, dissolution, fiduciary duties, and succession planning, there is much to learn at the Institute.
This year’s program offered plenty for the business-divorce minded, including the peculiar challenges of family-owned businesses, the consequences of an LLC member’s bankruptcy, recent LLC decisions from around the country, and the growing body of law governing special litigation committees.
Link to Family Business Challenges: How Family Dynamics Impact Business Planning and Dispute Resolution Family Business Challenges: How Family Dynamics Impact Business Planning and Dispute Resolution
I had the pleasure of joining Professor Benjamin Means of the University of South Carolina School of Law and Thomas Rutledge for a panel moderated by Peter Mahler entitled Family Business Challenges: How Family Dynamics Impact Business Planning and Dispute Resolution.
Drawing from Professor Means’s three defining characteristics of family businesses: Intimacy, Integration, and Inheritance, the panel discussed how each characteristic seriously complicates the work of lawyers tasked with drafting the governing agreements of family businesses and resolving disputes when family relationships break down.
The most interesting discussions concerned intimacy, which introduces a core tension: Family relationships are inherently person-based. Family members are important because of who they are, not because of what they have agreed to. The LLC law, by contrast, is overwhelmingly agreement based—people are important because of what they agreed to. Members’ rights and obligations generally turn not on the nature of their personal relationships, but on the terms of their operating agreement and the applicable statutory defaults.
That tension prompts the ultimate question: how much work should the “reasonable expectations” standard for member oppression (a claim available in RULLCA states, but not New York) or the implied covenant of good faith and fair dealing do to bridge the gap between family-based expectations and contract-based expectations? Thomas Rutledge has thoughts.
Link to Understanding the Effect of an LLC Member Filing Bankruptcy Understanding the Effect of an LLC Member Filing Bankruptcy
Bankruptcy Judge Michelle Harner of the District of Maryland, Professor Carter Bishop, Professor James Wheaton, and Paul “Chip” Lion III led a fascinating discussion exploring what happens—and what should happen—when an LLC member files for bankruptcy.
One of the questions addressed was whether a bankrupt member’s management and governance rights become property of the bankruptcy estate, or whether the estate acquires only the member’s economic interest.
In In re LeFever Mattson Inc. (9th Cir. BAP 2026), the general partner of a California real estate limited partnership filed for Chapter 11 bankruptcy protection. The limited partners subsequently voted to remove the bankrupt general partner and install a replacement, invoking a California statute that automatically dissociates a general partner upon its bankruptcy filing.
The Court held that the bankrupt general partner’s management rights became property of the bankruptcy estate, that federal bankruptcy law preempted California’s automatic dissociation statute, and that the limited partners’ attempted removal violated the automatic stay and was void.
By contrast, in Northwest Wholesale, Inc. v. Pac Organic Fruit, LLC (Wash. 2015), a 49% member of a Washington LLC filed for Chapter 11 bankruptcy after his relationship with the controlling 51% member deteriorated and the company’s business collapsed. When the minority owner subsequently asserted derivative claims alleging that the controlling member improperly transferred the LLC’s assets to an affiliated company, the controlling member sought dismissal on the ground that the minority owner’s bankruptcy had automatically terminated his membership under Washington law.
The Washington Supreme Court agreed, rejecting the argument that federal bankruptcy law preempted the state’s automatic dissociation statute. The bankrupt owner retained only the economic rights of an assignee.
These decisions illustrate an important unresolved question: does federal bankruptcy law preserve governance rights that state law would otherwise extinguish upon bankruptcy?
Suffice to say that the familiar distinction between member and assignee is perhaps nowhere more consequential than in this context, where the remaining LLC members may suddenly find themselves dealing with a trustee or creditors’ committee asserting rights over the company’s management.
Link to Case Law Update: Interesting LLC Issues and Business Divorce Cases Case Law Update: Interesting LLC Issues and Business Divorce Cases
No LLC Institute would be complete without a survey of recent cases. NYBD authors Becky Baek and Peter Mahler teamed up with Delaware’s Melissa Donimirski to offer an especially interesting collection of recent LLC decisions from around the country.
One featured decision was the New York Court of Appeals’ closely divided ruling in 111 West 57th Investment LLC v 111 W57 Mezz Investors LLC, addressing whether a lender’s express contractual right to act in its “sole discretion” nonetheless remained constrained by the implied covenant of good faith and fair dealing.
I discussed that decision at length in an earlier post, Let’s Talk (Again) About the Implied Covenant of Good Faith and Fair Dealing in Owners Agreements. Suffice to say that the Court’s 4–3 decision, and the sharply divergent views expressed by the majority and dissent concerning the extent of judicial intervention in sophisticated commercial agreements, generated precisely the sort of debate that makes the LLC Institute worthwhile.
One more favorite:
In Beardslee v Ratliff Family LLC, No. 1 (Idaho 2026), a member of a family-owned ranching LLC sought judicial dissolution, alleging that the controlling members engaged in oppressive conduct by directing livestock and logging operations near her home and excluding her from the economic benefits of the business. The trial court applied a “fair dealings test,” asking whether the controlling members’ conduct was objectively improper, burdensome, or intended to harass the minority member.” It rejected the oppression claim, holding that by putting her house on the property near the livestock and logging routes, the complainant had “effectively moved to the nuisance”—a line I can see myself adopting.
The Idaho Supreme Court vacated that determination, holding that the trial court applied the wrong legal standard. After considering competing approaches to oppression, the Court adopted the well-known reasonable expectations test and remanded the case for reconsideration.
Also covered were Antigone v. Taustin (Va. 2026), addressing whether an LLC’s indemnification provision covered a member’s legal fees incurred in affirmative litigation against another member; and Ticonderoga Farms LLC v. Knop (Va. 2025), in which the Virginia Supreme Court affirmed the judicial dissolution of a family-owned LLC rather than the expulsion of its minority members amid an irreconcilable family dispute.
Link to Special Litigation Committees: Cutting-Edge Issues and Considerations Special Litigation Committees: Cutting-Edge Issues and Considerations
Professor Emeritus Daniel Kleinberger, Lisa Jacobs, and Janel Dressen presented a program entitled Special Litigation Committees: Cutting-Edge Issues and Considerations, examining the legal and practical challenges associated with using special litigation committees (SLCs) to investigate and potentially seek dismissal of derivative claims on behalf of LLCs.
The program covered a host of thorny issues, including the selection and independence of committee members, the retention of separate counsel and other advisors, the relationship between company counsel and SLC counsel, and the preservation of attorney-client privilege throughout the investigative process.
Among the cases featured was Grabski v. Andreessen (Del. Ch. 2026), a derivative action involving Coinbase in which a special litigation committee sought dismissal of claims challenging transactions involving company insiders. Following an extensive investigation, the SLC recommended dismissal of the claims. But the Delaware Court of Chancery denied the SLC’s motion, finding a material factual dispute concerning the independence of one committee member who maintained professional and financial relationships with one of the defendants and his venture capital firm.
The decision illustrates a recurring theme in Delaware’s SLC jurisprudence: no matter how thorough the investigation, a committee’s conclusions are only as credible as the independence of its members.
Link to Closing Thoughts Closing Thoughts
As in prior years, the LLC Institute offered a welcome opportunity to step outside the day-to-day demands of litigation and consider some of the larger questions that make LLC law fascinating.
The recurring tension throughout this year’s discussions was between the freedom of contract that lies at the heart of LLC law and the messy realities of the people, relationships, and circumstances those contracts are intended to govern.
Judging by the discussions in Washington, those tensions will continue to supply plenty of material for this blog for years to come.