4th Cir.: LeClair v. Tavener- Withdrawal as Partner Prior to Bankruptcy

Summary:

The Fourth Circuit vacated and remanded a bankruptcy court ruling that had held Gary D. LeClair, a founding member of the now-defunct law firm LeClairRyan PLLC, liable for tax obligations due to his status as a firm member at the time of its bankruptcy filing.

LeClair had attempted to withdraw from the firm in July 2019, before it filed for Chapter 11 bankruptcy in September 2019. However, the bankruptcy and district courts concluded that the firm’s operating agreement prohibited members from withdrawing after a dissolution event, which they determined occurred on July 29, 2019, when the firm's members voted to form a Dissolution Committee.

The Fourth Circuit disagreed, finding that the operating agreement did not prohibit members from withdrawing after a dissolution event. Instead, it only prevented withdrawal while a member still held shares in the firm. Because the agreement required a withdrawing member’s shares to be automatically transferred back to the firm upon termination of employment, LeClair effectively ceased to be a member when his employment ended on July 31, 2019.

The court ruled that the bankruptcy court’s denial of LeClair’s motion to amend the firm’s equity holders list—where he had been listed as a member as of the bankruptcy filing—was an abuse of discretion. However, the appellate court left it to the bankruptcy court on remand to determine whether equitable considerations might still justify denying LeClair’s request to amend the list.

Accordingly, the Fourth Circuit vacated the district court’s ruling and remanded the case for further proceedings.

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