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Involuntary Transfer Considerations for Operating Agreements in Bankruptcy

By Peter H. Webb

Transfer restrictions in operating agreements serve an important function in assuring that the members of limited liability companies (“LLCs”) are able to control the admission and withdrawal of their fellow members.  Members view these controls as fundamental to the business relationship, as they do not want to be forced into business with an unknown party without their consent.  Indeed, the right to freely choose with whom to associate is enshrined in the U.S. Constitution.[1]  However, the ability of members to approve or deny membership to others can be challenged in the context of an involuntary assignment by a fellow member’s bankruptcy estate to a creditor under the Bankruptcy Code (the “Code”).

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