Publications + Presentations

Summary

• A Ninth Circuit Bankruptcy Appellate Panel ruling holds that a general partner's automatic loss of management rights upon bankruptcy filing is an unenforceable "ipso facto clause" under federal bankruptcy law.
• Ohio's LLC statute, updated as part of the state's 2022 Revised LLC Act, has a nearly identical automatic dissociation trigger, and no Ohio or Sixth Circuit court has yet addressed whether it survives this same preemption analysis.
• Removing a partner or member based on a bankruptcy filing, without first seeking relief from the bankruptcy court, can violate the automatic stay and expose remaining owners to actual damages, punitive damages, and attorneys' fees.
• Business owners with dissociation-on-bankruptcy provisions in their governing documents should understand those clauses may not function as written if a filing actually occurs.

Business owners often assume that if a partner or LLC member files for bankruptcy, the partnership or operating agreement’s default provisions kick in automatically: the bankrupt party is out, their management rights are gone, and the remaining owners can carry on without them. A recent decision from the Ninth Circuit Bankruptcy Appellate Panel is a useful reminder that this assumption can be wrong, and wrong in a way that creates real exposure for the parties who act on it. 

The case

In In re LeFever Mattson (9th Cir. B.A.P. June 29, 2026), a general partner in a California limited partnership filed Chapter 11. Under California’s limited partnership statute, a general partner’s bankruptcy filing automatically terminates the partner’s management rights. Relying on that statute, the limited partners voted to remove the bankrupt general partner and install a replacement.

The bankruptcy court, affirmed by the BAP, held that the removal violated the automatic stay and was void. The reasoning: a state statute (or a contract provision) that strips a party of property rights specifically because they filed bankruptcy is an “ipso facto clause,” and Bankruptcy Code § 541(c)(1)(B) preempts it. The general partner’s management rights became property of its bankruptcy estate the moment the partner filed bankruptcy, and the limited partners had no authority to vote the general partner out.

Why this isn't just a California problem

Ohio’s LLC statute contains a nearly identical provision. Ohio Rev. Code § 1706.411(F) dissociates a member from an LLC “upon becoming a debtor in bankruptcy,” with the same practical effect the California statute had here: loss of governance rights triggered solely by the filing.

No Ohio or Sixth Circuit court has yet ruled on whether that provision survives § 541(c)(1)(B); although this is not necessarily surprising, as Ohio amended its LLC statutes just a few years ago, so this specific statute is relatively new. (See Kegler Brown's prior post on Ohio's Revised LLC Act for background on that update.) But LeFever Mattson joins a substantial and largely one-directional body of bankruptcy court decisions from other jurisdictions, mostly involving LLCs, holding that automatic dissociation-on-bankruptcy provisions (whether they come from a statute or an operating agreement) are unenforceable ipso facto clauses. We’re not aware of an Ohio decision going the other way. If this issue is tested here, the reported trend suggests it would likely come out the same way it did in California.

What this means for our clients

• Don’t assume a bankruptcy filing automatically removes a partner or member from your business. Even if your operating agreement or partnership agreement has a clean dissociation-on-bankruptcy clause, and even if state law says the same thing, that provision may not be enforceable once the bankruptcy is filed.
• Removing someone prematurely can violate the automatic stay. As this case shows, acting on a state-law dissociation provision without relief from the bankruptcy court can render the removal void and expose the remaining owners to liability, including actual damages, punitive damages, and attorneys’ fees.
• The safer path is to seek relief from the bankruptcy court first. If a partner or member’s bankruptcy filing genuinely warrants a change in control, that generally needs to go through the bankruptcy process, not around it.
• This is a good moment to review your governing documents. If your partnership agreement or operating agreement relies on a bankruptcy trigger to reallocate management rights, it’s worth understanding that the clause may not do what it says it does if a filing actually occurs.

If you have a partner or member facing financial distress, or you’re drafting or revisiting a partnership or operating agreement with succession provisions tied to insolvency or bankruptcy, we’re glad to help you think through how these rules apply to your structure.