Are "Termination On Bankruptcy" Clauses Enforceable?

If you read an operating agreement for a closely held business, it is common to find "termination on bankruptcy" language. Essentially, these contract clauses provide that a person's interest in the business is dissolved upon filing bankruptcy. These contract provisions are designed to protect the other shareholders/members in the event one of them files bankruptcy. However, the bankruptcy code will likely trump the contract provision and, therefore, the bankruptcy Court will still have control over the person's partial interest in the business.

First, the bankruptcy code specifically provides that a person does not lose their interest in property simply for filing bankruptcy (Section 541(c)). Further, an executory contract cannot be voided simply for filing bankruptcy (Section 365(e)). Ultimately, federal bankruptcy laws will trump the contract provision.

If the person's interest in the business remains, the bankruptcy Trustee can then step into the shoes of that person. The Trustee can exercise any rights under the contract, including selling the person's partial interest or even forcing a liquidation of the entire company. Naturally, that is a burden on the business and all of the shareholders/members.

Anyone involved in the ownership of a business should carefully review their operating agreement or other contracts with a business bankruptcy attorney prior to making the decision to file a bankruptcy case.

No Comments

Leave a comment
Comment Information
Email Us For A Response

Call Or Email Now

We Are Ready To Work With You!

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Hurley Gunsher, Ltd.

Middletown Office
301 N. Breiel Blvd
Suite A
Middletown, OH 45042

Phone: 513-318-9893
Fax: 513-878-1660
Middletown Law Office Map

Fairfield Office
1251 Nilles Rd.
Suite 15
Fairfield, OH 45014

Phone: 513-318-9893
Fax: 513-878-1660
Map & Directions