Whether to guard against outsiders gaining an interest in a closely-held business, to avoid regulatory oversight, or to achieve some other protection, LLC operating agreements often contain transfer restrictions limiting when, how, and to whom membership interests in the LLC may be conveyed. Typically, trustees and receivers of insolvent debtors that own interests in a subsidiary LLC understand that, even if the operating agreement restrains the transfer of the full membership interest (i.e., with all management, voting, and other control rights), the court-appointed fiduciary may still freely transfer the bare economic rights (i.e., to share in the LLC’s profits that are linked to the membership interest).

However, applying Oklahoma law, the U.S. Bankruptcy Appellate Panel for the Tenth Circuit recently held that provisions in an LLC operating agreement restricting the transfer of even the economic portion of a membership interest limits how a bankruptcy trustee may liquidate that asset. See Malloy v. Trak-1 Technology Inc. (In re Kramer), Case No. 21-005 (B.A.P. 10th Cir. Nov. 23, 2022).

Notwithstanding, whether a trustee or receiver can transfer an LLC economic interest without honoring transfer restrictions in an operating agreement will depend upon an interpretation of the law of the state in which the LLC was organized (and the operating agreement). For example, in Oklahoma, the statutory provision on transferability of LLC economic interests (Okla. Stat. § 2012.2(A)) specifically provides that economic interests are freely transferable “[u]nless otherwise provided in an operating agreement … .” On the other hand, North Carolina’s statutory provision on transferability of LLC economic interests (N.C. Gen. Stat. § 57D-5-02) contains no such qualifier. But see N.C. Gen. Stat. § 57D-2-30 (“… the provisions of [N.C.’s LLC Act] and common law will apply only to the extent contrary or inconsistent provisions are not made in … the operating agreement. …”).