Section 18-304(1)(b) of the Delaware Limited Liability Company Act states that, unless otherwise provided in a limited liability company agreement, or with the consent of all members, a person ceases to be a member of a limited liability company when the member files a voluntary petition in bankruptcy. In Zachman v. Real Time Cloud Services, Order, No. 260, 2020, 2021 WL 1561430 (Del. Apr. 20, 2021), the Delaware Supreme Court affirmed a Delaware Court of Chancery decision that Section 18-304 is not preempted by the Bankruptcy Code to the extent that it divests members who file for bankruptcy of the right to participate in the management of the company but not their economic interest. In so doing, the Supreme Court approved the Court of Chancery’s reliance on a 17-year old opinion by then Vice Chancellor Leo Strine in Milford Power v. PDC Milford Power, 866 A.2d 738 (Del. Ch. 2004).
Zachman was an appeal from a post-trial decision of Vice Chancellor Sam Glasscock of the Court of Chancery valuing the appellant James A. Zachman’s interest in Real Time Data Services, LLC and rejecting the cross-appeal of the Company’s counterclaims for damages. One issue that Zachman, raised was whether Section 18-304 was preempted by federal law as an ipso facto provision.