The Washington Supreme Court has held that the federal Bankruptcy Code does not preempt provisions in the Washington Limited Liability Company Act that dissociate an LLC member when that member files for bankruptcy (Northwest Wholesale, Inc. v. Harold and Shirley Ostenson, 90891-5). The question of federal pre-emption has generated a split of authority among the many federal bankruptcy courts that have confronted the issue. With this ruling, Washington becomes the first state to declare that state-level dissociation provisions continue to have effect in a member’s bankruptcy. As a result of this ruling, a member of a Washington LLC who files for bankruptcy will lose his or her right to participate in the management and governance of the LLC, though he or she will retain economic rights in the LLC. 

Said Bradley Duncan, HCMP principal and lead attorney representing the defendants, “This decision finally provides guidance in Washington on a topic that typically produces confusion when one or more members of an LLC file bankruptcy.” He continued, “The Court’s decision significantly alters the landscape in our state, and we believe this decision will become part of the legal discussion nationally.  Anyone who deals with LLCs in Washington will need to understand this decision.”

Duncan was joined by HCMP principals Josh Rataezyk and Amit Ranade in representing the defendants, who argued against preemption of Washington’s LLC statute below and in the Supreme Court.