Law firm partner could withdraw after dissolution

A law firm operating agreement did not prohibit a member of the firm from withdrawing after a dissolution event, the 4th U.S. Circuit Court of Appeals has determined, reversing two lower court rulings.

Gary D. LeClair, a founding member of LeClairRyan, announced his withdrawal from the firm in 2019. The firm’s other members then voted to dissolve the firm and filed for bankruptcy.

When the firm’s bankruptcy petition listed LeClair as one of the equity holders, he objected, arguing that he had withdrawn from the firm.

Both the Bankruptcy Court and the District Court disagreed, refusing to amend the equity holders list, but the 4th Circuit reversed based on the firm’s operating agreement.

“[W]e agree with LeClair that the provision doesn’t prevent members from withdrawing after a dissolution event,” Chief Judge Albert Diaz wrote for the panel. “As always, we begin with the provision’s text. And that text doesn’t prohibit a member from leaving the firm’s membership generally but only while retaining shares. The bankruptcy and appellate courts effectively read this condition out of the provision, which is contrary to Virginia law.”

The 15-page opinion is LeClair v. Tavenner (VLW 025-2-049).

David R. Berry of Gentry Locke in Roanoke, who represented LeClair, declined to comment on the decision.

Richmond attorney Paula S. Beran of Tavenner & Beran, who represented the trustee, did not respond to a request for comment.

Firm dissolution, bankruptcy

LeClairRyan operated successfully for several decades, but by 2019 the firm was in financial distress.

On July 26, 2019, LeClair announced his withdrawal as a member of the firm, effective immediately, with a resignation date of July 31.

At the time of his announcement, LeClair held common and preferred shares of the firm. Although he purported to withdraw immediately, under the firm’s operating agreement he continued to hold his shares and so remained a member until his resignation date.

As always, we begin with the provision’s text. And that text doesn’t prohibit a member from leaving the firm’s membership generally but only while retaining shares.

— 4th Circuit Chief Judge Albert Diaz

On July 29, the firm’s other members voted to dissolve the firm. After considering various possibilities, the Dissolution Committee opted to file for bankruptcy.

LeClairRyan filed a bankruptcy petition, accompanied by a list of its equity security holders. The list included LeClair as one of the firm’s equity holders.

When LeClair contacted trustee Lynn Tavenner, she explained that it was proper for her to rely on the equity holders list filed by the firm. To resolve the issue, she moved to have the Bankruptcy Court approve her reliance on the list of equity holders.

LeClair objected and separately moved to amend the equity holders list.

The Bankruptcy Court ruled for the trustee. It concluded that the operating agreement prevented members from transferring their shares back to the firm after dissolution, which was effective on July 29.

LeClair appealed, but the District Court largely affirmed, and LeClair appealed again.

Operating agreement

LeClair argued that the list of equity holders wrongly included him because he withdrew from the firm before it filed for bankruptcy, and therefore he held no equity as of that date.

Under the firm’s operating agreement, only firm employees who were lawyers were allowed to own equity in the firm, and owning equity made a lawyer a member.

Section 5.03 of the agreement provided that “[s]o long as a member continued to hold any shares, such member shall not have the ability to withdraw or resign as a member prior to the dissolution and winding up of the [firm] and any such withdrawal or resignation or attempted withdrawal or resignation by a member prior to the dissolution or winding up of the [firm] shall be null and void and of no force or effect. As soon as any person who is a member ceases to hold any shares, such person shall no longer be a member.”

LeClair told the 4th Circuit panel that under the operating agreement, he could not terminate his employment at the firm without transferring his shares. His employment ended on July 31, so he contended that when that happened, his shares were automatically returned to the firm, and he was no longer a member.

Looking at the plain meaning and context of section 5.03, the panel agreed with LeClair that the provision did not prevent members from withdrawing after a dissolution event.

The text does not prohibit a member from leaving the firm’s membership generally, but only while retaining shares – a condition the Bankruptcy and District courts read out of the provision, the panel found.

“Instead, they divined a new temporal condition that prohibited member withdrawal after a dissolution event,” Diaz wrote. “But that limitation is nowhere in the agreement.”

While section 5.03 states that when a member owns shares, any attempted withdrawal is ineffective “prior to the dissolution and winding up” of LeClairRyan, that language simply signaled that the link between membership and owning shares applied so long as LeClairRyan existed.

“A member can’t withdraw before the firm’s dissolution and winding up – ‘[s]o long as [the] member continues to hold any shares,’” Diaz said. “But it doesn’t prohibit member withdrawal after dissolution.”

Shares equal member

The structure of section 5.03 also supported that conclusion, the panel found, as the second and third sentences work together to make clear that someone is a member only if he or she owns shares.

Although the District Court reasoned that the third sentence did not apply in the case, “this conclusion requires reading section 5.03 as providing for alternative scenarios, with different parts of the section applying in different circumstances,” Diaz wrote. “A better interpretation views the section as a whole and gives effect to each sentence. Our interpretation does so.”

Background principles of Virginia law on business organizations reinforced that holding, Diaz added. Under the state’s Limited Liability Company Act, members by default can dissociate from a firm without impacting their membership interests, except as provided in the articles of organization or an operating agreement.

“The second and third sentences of section 5.03 of the operating agreement alter these default rules and make clear that LeClairRyan members must hold shares,” Diaz wrote. “This backdrop of Virginia corporate law confirms our reading that all section 5.03 does is link membership and holding shares during LeClairRyan’s existence.”

The Bankruptcy and District courts erred in concluding that section 5.03 of LeClairRyan’s operating agreement prohibited LeClair from withdrawing from the firm after a dissolution event, the court held, remanding the case for the Bankruptcy Court to determine whether any equitable considerations warrant denial of the motion to amend despite LeClair’s correct interpretation of the operating agreement.