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LLC Member Bankruptcy and Automatic Buy-Out Provisions

LLC Member Bankruptcy and Automatic Buy-Out Provisions

Lindsey Brown

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When an LLC member claims bankruptcy, or otherwise becomes insolvent, it can pose problems for the LLC and other members. Many operating agreements contain provisions addressing this scenario, which often allow for the other members to immediately purchase the membership interests of the bankrupt or insolvent member. The buy-out process is often automatic, meaning the insolvent member has no choice in the selling of their membership interests. This is a harsh remedy, appropriately reserved for situations where the bankrupt or insolvent member is in serious financial peril. 

We recently worked on a litigation matter which involved an LLC member who had unpaid federal taxes. The operating agreement did not state whether this type of debt should trigger the insolvency provision. More specifically, the agreement failed to address whether the mere existence of this tax debt constituted a nonconsensual lien on the member’s membership interests, or if the affirmative filing of a federal tax lien was required. This was an important determination, as it ultimately would trigger the automatic buy-out process by the other members.

The drafter of the operating agreement had failed to articulate whether the mere existence of a federal tax debt, and in turn the arising of a statutory or inchoate lien, was sufficient to trigger the provision. It was also unclear whether the operating agreement required that such lien be filed in the state or county where the LLC was located. Ultimately, we were able to successfully advocate for our client, who had tax debt but did not want to offer their membership interests for sale under the terms of the insolvency provision. The Judge agreed that the Internal Revenue Service (IRS) must take affirmatives steps, such as filing a notice of federal tax lien, for the provision to be triggered. This makes sense, as the mere existence of a statutory lien does not pose any real or immediate threat to the LLC or its other members. While winning this argument was incredibly helpful to our client, it was not without cost.  

Had the drafter of the operating agreement clearly defined the triggering terms of the provision, the entire litigation could have been avoided. Making sure the terms and consequences of these type of insolvency provisions are crystal clear is of utmost importance. Drafting with such clarity affords protection to both the bankrupt member, and to the other members. While it is impossible to define every term or predict every situation that might arise in an LLC relationship, it is imperative that drafters of operating agreements clarify which specific scenarios trigger automatic buy-out provisions, as the consequences of such provisions are severe.

ABOUT THE AUTHOR

PARTNER

Lindsey is a litigation partner and mom to her one-and-a-half-year-old daughter. Lindsey is proud to work at Milgrom & Daskam, where being a parent and an attorney is celebrated and encouraged. Milgrom & Daskam works to support its working parents by fostering dialogue and understanding.

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How Employers Can Support Working Moms Post-Pandemic

How Employers Can Support Working Moms Post-Pandemic

Lindsey Brown

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Working moms have been especially hard-hit by the stress of pandemic life. When schools and daycares shut down, working moms* were expected to take on the role of teacher, in addition to their other two full-time jobs: mom and employee.

This added stress resulted in women leaving the work forces in droves, at a time when women’s participation had been setting record highs. In September 2020 alone, 865,000 women left the workforce, compared to 216,000 men. Women’s participation in the workforce is now the lowest it’s been in thirty years.

Working moms are expected to always be “on,” which results in exhaustion. A study by FlexJobs reported that 40% of working women were unable to unplug or were working more than they thought they should. This is compounded by the pressure to subvert “maternal bias,” the conscious or unconscious belief that a working mom can’t be effective both in work and in motherhood. It’s no wonder, then, that more women than men report exhaustion, burnout, and pressure to work more.

As life begins to return to normal (at least in the United States), employers are in a unique position to implement the lessons learned during the pandemic and to shape a future that better supports working parents. Given the downward trend in the size of the workforce, it is ultimately in employers’ best interest to support mothers, lest companies continue to lose valued employees.

So what can employers do to support working moms?

1. Build community; support engagement.

Parenting is tough. Parenting in a pandemic is even harder. But as we emerge from a year of isolation and lockdown, we’ve learned that having a supportive community of like-minded women can make all the difference.

Connecting working moms with other working moms—who understand the daily stress of meeting deadlines while also getting kids dropped off on time—really matters. Being able to tap into this community is incredibly valuable.

Whether they are groups of moms within a particular profession (like Denver-based MAMA for attorneys) or organized around motherhood generally (like the mama’hood), support systems for working moms are there, but moms may not know they exist or may be unsure of how to get involved. Companies can help by connecting their employees with community groups, and they can support participation and leadership within those groups. For example, employers can offer to cover membership fees or dues and can allow flexibility for parents to attend group events or classes.

2. Money matters.

Childcare costs are continuing to rise. For many families, monthly childcare costs equal or exceed their monthly mortgage. Employers can offer stipends to help cover the cost of childcare. Additionally, companies could offer subscriptions to services like TULA (a Denver-based, on-request personal assistant service), grocery or meal-kit delivery, or even house-cleaning services—anything to help ease the daily, mile-long checklist of working moms.

3. Continue flexible schedules, including time off.

A silver lining of the pandemic is that many businesses learned that their employees could succeed while working remotely or with flexible hours and could still maintain pre-pandemic productivity.

Employers should continue fostering a sense of adaptability and flexibility. Companies can implement parent-friendly scheduling policies and cultivate a culture where it’s encouraged and expected that these will be used. Offering a flexible schedule and then penalizing an employee who utilizes that option is disingenuous and undercuts the relationship between employer and employee.

Studies show a compressed work week or shorter workday can reduce burnout, but simply offering a flexible schedule won’t completely cure the problem. While flexible scheduling has allowed many moms to stay in the workforce, it has come at the cost of their well-being. The hours after kids’ bedtimes used to offer a brief reprieve from the daily chaos, but that time is now supposed to be used for catching up on emails and finishing projects, leading to burnout.

Employers can offer part-time or reduced schedules, extra paid time off, or even unpaid leave. Employers should let moms know that it’s acceptable to take time for themselves, and employers should respect those boundaries. Employees who have dedicated time away from work are more productive than those who are “always on.”

4. Most importantly, ask what moms need.

Companies should foster an understanding of the lived experiences of working moms. Having open and honest conversations about the needs and expectations of working parents will allow both employee and employer to succeed. Employees who feel heard and supported are far less likely to quit. Retention and employee satisfaction in turn increases productivity and the company’s bottom line. All employees, not just parents, will benefit from a culture of empathy and open communication.

While working moms have been hurt by the pandemic, employers have the opportunity to set the course for a better future. Employers who enact thoughtful policies that prioritize and support working moms will see the benefits of a culture of trust across the company.

*This piece focuses on women, as our society traditionally assigns the majority of child-rearing responsibilities to moms, either overtly or subconsciously, and because the author is writing from her perspective as a mother. However, the same supports equally apply for parents of all genders, as well as for other primary caregivers.

ABOUT THE AUTHOR

PARTNER

Lindsey is a litigation partner and mom to her one-and-a-half-year-old daughter. Lindsey is proud to work at Milgrom & Daskam, where being a parent and an attorney is celebrated and encouraged. Milgrom & Daskam works to support its working parents by fostering dialogue and understanding.

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