Bankruptcy Law Questions? Ask a Bankruptcy Lawyer.
ARS 29-733 is intended to prevent a bankruptcy trustee from stepping into the shoes of an LLC member who files for bankruptcy protection, under the theory that the trustee obtains control of the interest in all of the debtor's properties.
ARS 29-707 permits a creditor of the debtor member to receive regular distributions from the LLC, the same as the debtor member, without exercising any management control over the LLC.
The above statutes are "defaults. Each statute permits the LLC operating agreement to overrue the statute. So, if you want to remain a member of the LLC during your Chapter 13, then you can do so by modifying the operating agreement to permit the desired result.
Hope this helps.
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The bankruptcy trustee's powers are extremely broad, and the bankruptcy estate includes practically all of the debtor's legal and equitable interest in property.
That said, you can modify the agreement to simply stated that bankruptcy will not cause an automatic withdrawal of a member. However, I cannot think of any manner under which you could prevent the bankruptcy trustee from obtaining control over the member's interests.
This Az provision related to LLCs is unusual. As an example, neither California or Delaware LLCs have anything like this automatic withdrawal. There isn't any case law on the effect of the member's interest in bankruptcy that I've been able to find. It may, in fact be unlawful under federal law.
The general rule is that if an effect on a debtor's property is conditioned upon bankruptcy, then it is deemed invalid and unenforceable under 11 USC §541(c). So, whatever change to the operating agreement you may decide to make, you cannot create a "triggering" or "accelleration" clause that limits your interests in the LLC upon filing bankruptcy.
You may want to discuss this with local bankruptcy counsel to determine if there are any "customs" concerning this law in the AZ bankruptcy court.
For a BK lawyer referrral, see: http://www.abanet.org/legalservices/lris/directory/main.cfm?id=AZ and www.martindale.com.