## Facts

- Gregory Leo Ehmann filed a Chapter 7 bankruptcy case and was a non-managing member of Fiesta Investments, LLC, a family investment entity formed by his parents.
- Fiesta allegedly did not make regular distributions to all members but made loans and disbursements to certain members.
- The Chapter 7 trustee, Louis A. Movitz, sought information and membership-related benefits from Fiesta but alleged that his efforts were unsuccessful.
- The trustee filed an adversary proceeding seeking (i) a declaration that he held the debtor’s membership interest in Fiesta as a member, (ii) a determination that Fiesta’s assets were being wasted or diverted, and (iii) dissolution and liquidation of Fiesta or appointment of a receiver.
- Fiesta argued the trustee held only an assignee’s economic right to receive distributions, not governance or information rights, and moved to dismiss the trustee’s declaratory and equitable-relief claim.

## Issues

1. Whether the LLC operating agreement, as applied to a non-managing member with no material ongoing duties, is an “executory contract” governed by Bankruptcy Code § 365.
2. If the operating agreement is not executory, whether Bankruptcy Code §§ 541(a) and 541(c)(1) transfer to the Chapter 7 estate the debtor’s full membership rights (including governance and information rights), rather than only distribution rights.
3. Whether the trustee, as alleged successor to the debtor’s membership status, stated a claim permitting equitable remedies such as dissolution, liquidation, or appointment of a receiver based on alleged waste or diversion of LLC assets.

## Decision

- The court held the LLC operating agreement was not an executory contract because it imposed no unperformed, material obligations on the non-managing member.
- The court held that, because § 365 did not apply, the trustee acquired all of the debtor’s rights and interests as a member under §§ 541(a) and 541(c)(1), and the limitations of §§ 365(c) and (e) were inapplicable.
- Applying the motion-to-dismiss standard, the court concluded the trustee could potentially prove facts entitling him to relief beyond merely awaiting distributions.
- The court denied Fiesta’s motion to dismiss the trustee’s claim seeking a declaration of membership status and related equitable relief.

## Legal Principles

- An LLC operating agreement that imposes no ongoing, material obligations on a member is not an executory contract under Bankruptcy Code § 365 (using the Countryman test).
- Upon a Chapter 7 filing, the debtor’s LLC membership interest becomes property of the estate under § 541(a), and § 541(c)(1) prevents bankruptcy-triggered restrictions from limiting what passes to the estate.
- When § 365 does not apply, the trustee may succeed to the debtor’s full bundle of membership rights, not merely the right to receive distributions.
- A complaint alleging member-level rights and misuse of LLC assets can support claims for equitable remedies (including dissolution or a receiver) at the pleading stage.

## Conclusion

The bankruptcy court denied dismissal because the LLC operating agreement was not executory and the Chapter 7 trustee plausibly succeeded to the debtor’s full LLC membership rights under § 541, allowing pursuit of member-based equitable remedies for alleged asset waste or diversion.


Movitz v. Fiesta Invs., LLC (In re Ehmann), 319 B.R. 200 (Bankr. D. Ariz. 2005)