## Facts

- Ichiban, Inc. filed for Chapter 7 bankruptcy, and a Chapter 7 trustee administered the estate.
- The estate owned a roughly 16% (about 16.3333%) membership interest in I3 Group, LLC (the company) and held a promissory note from the company payable to Ichiban in the principal amount of $600,000.
- The company’s operating agreement included § 9.01, a transfer-restrictions provision containing a right of first refusal (ROFR) governing sales of membership interests.
- Under § 9.01, a member seeking to sell its interest had to first offer the interest to the company at the proposed sale price; the operating agreement stated that failing to make that offer was a material breach.
- Section 9.01 also required the company, in the event of a potential sale of a membership interest in a bankruptcy proceeding, to give notice to the company’s members and manager; the operating agreement stated that the company’s failure to provide the required notice was a material breach.
- Section 9.01 imposed additional direct and contingent duties on the company and the members concerning the procedures and timing for exercising the ROFR.
- During the bankruptcy case, the trustee moved to sell the estate’s membership interest and the promissory note together at a public auction to maximize value, without first offering the membership interest to the company under § 9.01.
- A prospective purchaser (Partnership Liquidity Investors) expressed interest in acquiring the membership interest and the note as a single lot.
- The company objected to the trustee’s proposed sale procedure, asserting that under § 9.01 it could purchase the membership interest at the end of the auction for the highest bid price.

## Issues

1. Whether the ROFR in § 9.01 of the LLC operating agreement was an executory contract (or part of an executory contract) that could be assumed or rejected under 11 U.S.C. § 365(a).
2. If the ROFR was executory, whether it had expired by its terms or had been rejected because the trustee did not assume it, such that the trustee could sell the membership interest without honoring the ROFR.

## Decision

- The court held there is no blanket rule that LLC operating agreements are always executory or always nonexecutory; the court must examine the particular agreement and the remaining obligations.
- Applying the Fourth Circuit’s Countryman definition, the court concluded § 9.01 imposed continuing, material obligations on both sides (the selling member and the company), including first-offer and notice duties expressly labeled “material breaches” if not performed.
- The court held the ROFR provisions were executory and therefore subject to assumption or rejection under § 365(a).
- Because the trustee did not assume the ROFR by the required time, the ROFR either expired under the operating agreement’s terms or was rejected in bankruptcy.
- The court granted the trustee’s motion to sell and overruled the company’s objection, allowing the public auction sale of the membership interest and the promissory note without a post-auction matching right under § 9.01.

## Legal Principles

- Under 11 U.S.C. § 365(a), a trustee may assume or reject an executory contract.
- In the Fourth Circuit, an executory contract is one where obligations of both parties remain so unperformed that a failure by either to complete performance would be a material breach excusing performance by the other (the Countryman test).
- Whether an LLC operating agreement (including a transfer-restriction provision within it) is executory is determined on an agreement-by-agreement basis, focusing on unperformed obligations and whether they are material under applicable law and the contract’s terms.
- A ROFR within an operating agreement can be executory when it creates ongoing, bilateral duties—such as first-offer requirements and notice obligations—where nonperformance is treated as a material breach.
- If an executory provision is not timely assumed, it may be rejected (or may lapse under its own terms), and it will not function as a contractual limit on the trustee’s sale process; the nondebtor’s remedy, if any, is generally a claim arising from rejection rather than specific performance of the rejected terms.

## Conclusion

In re Ichiban, Inc. held that the LLC operating agreement’s ROFR provision was executory because it imposed continuing, material duties on both the selling member and the company, and because the trustee did not assume it, the ROFR either expired or was rejected under § 365, permitting the trustee to proceed with a § 363 auction sale of the estate’s LLC interest and related promissory note free of the asserted ROFR constraint.


In re Ichiban, Inc., 2014 WL 2937088 (2014)