Where partners in the now-defunct law firm LeClairRyan PLLC argued they were improperly included on the equity security holders, or ESH, list filed by the liquidating trustee, because they resigned from the firm after it voted to dissolve, but the firm’s operating agreement did not allow them to resign after the dissolution vote, the partners’ arguments were rejected.
Appellants, who were partners in the now-defunct law firm LeClairRyan PLLC, challenge their inclusion on the equity security holders, or ESH, list filed by the liquidating trustee in the bankruptcy suit due to tax consequences flowing from their placement on the list. The issues before the court are (1) whether the bankruptcy court erred in authorizing the trustee’s continued use of the ESH list and (2) whether the bankruptcy court erred by interpreting the firm’s operating agreement to find that appellants were correctly included on the list.
The court finds first that seeking authorization to proceed with the use of the ESH list with regard to the trustee’s responsibility to collect and determine taxes, and the subsequent objections and hearing on said motion, fall into the broad statutory and equitable powers of a Chapter 7 trustee.
The bankruptcy court did not err in denying the appellants’ motion to amend the ESH list. On July 29, 2019, the majority of the firm’s members affirmatively voted during a members’ meeting to dissolve the firm. As such, the dissolution resolution was adopted on July 29, 2019, pursuant to the firm’s operating agreement.
The court now turns to whether members of the firm who owned shares on July 29, 2019, could terminate their membership following dissolution. The court finds that as dissolution had occurred, but the winding up of the firm had not yet been completed, members remained unable to resign their membership from the firm. Because all appellants attempted transfer of their memberships back to the firm following the effective date of dissolution, their transfers failed. Because the court has determined that, pursuant to the operating agreement, all appellants remained members of the firm following July 29, 2019, the court now turns to the question of the correct date for the ESH list.
The court finds that the ESH list should be dated as of the petition date of the Chapter 11 bankruptcy filing – not the dissolution date of the firm – but, regardless, the list’s membership does not change between the two dates. Therefore, appellants correctly remain on the list and the court affirms the bankruptcy court’s denial of appellants’ efforts to amend the list.
Despite the proper usage of the ESH list in the bankruptcy proceeding, the court finds that the bankruptcy court issued too broad of an order authorizing its use, as an aspect of the order became advisory in nature. Specifically, the bankruptcy court erred when it held that “The Trustee … is authorized to continue to rely on the Debtor’s ESH List in its current form and … [t]o the extent there is any Revised ESH List, the Trustee … is authorized to rely on the Revised ESH List.” The prospective nature of the order involving an unknown revised ESH list results in the bankruptcy court granting permission to the trustee for future uses without the trustee bringing the specific issue before the bankruptcy court as a concrete, justiciable issue.
Bankruptcy court’s orders affirmed in part, reversed in part.
Adams v. Tavenner, Case No. 3:22-cv-237, Jan. 4, 2023. EDVA at Richmond (Novak). VLW 023-3-004. 43 pp.