Bankruptcy: Former law firm founder seeks to avoid tax obligation

Where the bankruptcy and district courts held a member of a law firm could not withdraw from the firm after it elected to dissolve, they erred. The plain language of the firm’s operating agreement didn’t prevent members from withdrawing after a dissolution event.

Background

Gary D. LeClair, a founding member of LeClairRyan PLLC, a now defunct law firm, attempted to withdraw from the firm. The bankruptcy and district courts concluded that the firm’s operating agreement barred the law firm’s members from withdrawing from the firm after a dissolution event, including “[a]n election to dissolve the [firm] made by holders of a majority of the Common Shares.” Because LeClair remained a member on the day the firm filed for bankruptcy, he was on the hook for some of the firm’s tax obligations. Faced with this tax burden, LeClair appeals.

Jurisdiction

While appellate courts ordinarily have jurisdiction over appeals from the “final decisions” of lower courts, the rules are different in bankruptcy appeals. In that context, district courts have appellate jurisdiction over the “final judgments, orders, and decrees” of bankruptcy courts. Since the bankruptcy court’s order conclusively interpreted LeClairRyan’s operating agreement, it was appealable to the district court.

This court has jurisdiction to hear bankruptcy appeals from “all final decisions, judgments, orders, and decrees” entered by the district courts or bankruptcy appellate panels. The district court’s order, like the bankruptcy court’s, conclusively interpreted the operating agreement. And though the district court directed the bankruptcy court to modify its order on remand, its directions were ministerial since they left the bankruptcy court without discretion. This court therefore has appellate jurisdiction over the district court’s order.

Merits

The bankruptcy rules require chapter 11 debtors to file “a list of the debtor’s equity security holders of each class showing the number and kind of interests registered in the name of each holder.” The list may be amended by the debtor at will or upon the motion of a party in interest after notice and a hearing.

LeClair contends that the list filed in this case wrongly includes him because he withdrew from the firm before it filed for bankruptcy and therefore held no equity as of that date. He challenges the bankruptcy and district courts’ conclusions that (1) LeClairRyan dissolved on July 29, 2019, when its members voted to form the Dissolution Committee and (2) members could not withdraw under the operating agreement once that happened. The court agrees with LeClair’s second challenge

Looking at the plain meaning and context of § 5.03 of the firm’s operating agreement, the provision doesn’t prevent members from withdrawing after a dissolution event. Starting with the provision’s text, it does not prohibit a member from leaving the firm’s membership generally but only while retaining shares. The bankruptcy and district courts effectively read this condition out of the provision, which is contrary to Virginia law. Instead, they divined a new temporal condition that prohibited member withdrawal after a dissolution event. In their view, once a dissolution event occurred, members couldn’t withdraw. But that limitation is nowhere in the agreement.

To be sure, § 5.03 says that while a member owns shares, any attempted withdrawal is ineffective “prior to the dissolution and winding up” of LeClairRyan. Yet all this language signals is that the link between Membership and owning shares applies so long as LeClairRyan exists (i.e., during the life of the firm). A member can’t withdraw before the firm’s dissolution and winding up—“[s]o long as [the] Member continues to hold any Shares[.]”But it doesn’t prohibit member withdrawal after dissolution. Rather, it bars withdrawal only when two conditions are met: the firm has not wound up, and the member holds shares.

Both the structure of § 5.03 and background principles of Virginia law on business organizations reinforce this holding. And while the trustee suggests that LeClair first identified these provisions of Virginia law on appeal, so he has forfeited any reliance on them, this court rejects that contention. LeClair’s arguments simply offer more reasoning in support of his central claim that the bankruptcy and district courts misread § 5.03 of the operating agreement.

Vacated and remanded.

LeClair v. Tavenner, Case Nos. 23-1131, 23-1133, 23-1134, Feb. 7, 2025. 4th Cir. (Diaz), from EDVA at Richmond (Novak). David Robert Berry for Appellant. Paula Steinhilber Beran for Appellee. VLW 025-2-049. 15 pp.