On The Hook

The United States Court of Appeals for the Fourth Circuit vacated and remanded a district court decision in a law firm bankruptcy matter

In this bankruptcy appeal, we are asked to interpret the operating agreement of LeClairRyan PLLC, a now defunct law firm. The bankruptcy and district courts concluded that the 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.” J.A. 385.

Gary D. LeClair, a founding Member of the firm, attempted to withdraw, but the bankruptcy and district courts ruled that his attempt was ineffective because it came after LeClairRyan’s other Members voted to create a dissolution committee to wind up the firm. 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.

We agree with LeClair that the bankruptcy and district courts erred in concluding that the agreement prohibited his withdrawal, and so we vacate and remand.

The firm

LeClairRyan operated successfully for several decades, but by 2019 the firm was in financial distress. On July 26, 2019, LeClair announced his “withdraw[al] as a member of LeClairRyan PLLC, effective immediately” and his intent to “resign [his] employment effective as of 11:59 PM on August 4, 2019.” J.A. 408. LeClair’s resignation date was later advanced to July 31.

The firm filed a Chapter 11 that was later converted to Chapter 7 and he was listed as an equity holder

The Trustee explained that she couldn’t alter LeClairRyan’s tax status and that it was proper for her to rely on the equity holders list filed by the firm. But she continued to receive correspondence from some of the K-1 recipients.

To settle the issue, the Trustee 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. The court found that the effective date of dissolution was July 29, 2019, when LeClairRyan’s Members voted to dissolve the firm. And it concluded that the operating agreement prevented Members from transferring their shares back to the firm after dissolution. Accordingly, the court held that LeClair was properly listed as an equity holder.

LeClair appealed to the district court, which largely affirmed. But it reversed “to the extent that the Bankruptcy Court improperly ruled that the Trustee may rely on future revisions of the [equity holders list], as that aspect of the Bankruptcy Court’s ruling constituted an improper advisory opinion.” Adams v. Tavenner, 648 B.R. 800, 829 (E.D. Va. 2023). The court also directed the bankruptcy court to change the date of the equity holders list so that it mirrored the filing date of the bankruptcy petition.

The court

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. It follows then that the bankruptcy court abused its discretion in denying LeClair’s motion to amend on that basis. Given our ruling, we need not decide whether what transpired between LeClair’s announcement of his departure and his termination date constituted a dissolution event. 

ABA Journal reported on the firm’s rise and demise. (Mike Frisch)