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IN THE SUPREME COURT OF THE STATE OF WASHINGTON 

NORTHWEST WHOLESALE, INC., a ) 

Washington corporation, ) No. 90891-5 

) 

Plaintiff, ) 

) 

v. ) 

) 

PAC ORGANIC FRUIT, LLC, a Washington ) 

limited liability company; GREG HOLZMAN, ) 

INC., a foreign corporation authorized to do ) 

business in the State of Washington; and ) 

HAROLD OSTENSON and SHIRLEY ) 

OSTENSON, ) 

) 

Defendants, ) EnBanc 

) 

HAROLD OSTENSON and SHIRLEY ) 

OSTENSON, on behalfofPAC ORGANIC ) 

FRUIT, LLC, a Washington limited liability ) 

company, ) 

) 

Petitioners, ) 

) 

v. ) 

) 

GREG HOLZMAN, an individual; TOTAL ) 

ORGANIC, LLC, a Washington limited ) 

liability company; and GREG HOLZMAN, ) 

INC., a foreign corporation authorized to do ) 

business in the State of Washington, ) 

) SEP 1 0 2015 Respondents. ) Filed 
No. 90891-5 

MADSEN, C.J.-This case concerns whether a 'debtor who has filed a voluntary 

bankruptcy petition may maintain a derivative action on behalf of a limited liability 

company (LLC), of which the debtor was a former member. The primary inquiry 

addresses the interplay of federal bankruptcy law and portions of the Washington Limited 

Liability Company Act (WALLCA), chapter 25.15 RCW, and whether the state 

provisions are superseded under the circumstances of this case; specifically, whether 11 

U.S.C. §§ 541 or 365 preempt RCW 25.15.130(l)(d). 1 We hold that the dissociation 

provision found in RCW 25.15. 13 0( 1 )(d) is not preempted by federal bankruptcy law and 

affirm the dismissal of the former LLC member's derivative claim under the facts of this 

case. 

FACTS 

Washington orchardists Harold and Shirley Ostenson (collectively Ostenson) and 

California organic fruit broker Greg Holzman (d/b/a Greg Holzman, Inc. (GHI)) formed 

Pac Organic Fruit LLC (Pac-0) in 1998. GHI held the majority interest and management 

responsibilities under the LLC' s operating agreement. Ostenson was required to rent his 

local Washington storage and packing facility to Pac-0, to run that facility, and to obtain 

and pay a loan to improve that facility. The business operated from 1998 through 2004 

but collapsed in 2005. During 2005, Pac-0 defaulted on its operating line of credit and 

1 The legislature amended the WALLCA in May 2015, repealing the provisions discussed herein 

and reissuing them in a revised but substantively comparable form relevant to the present matter 

effective January 1, 2016. See LAWS OF 2015, ch. 188. All references to the WALLCA (ch. 

25.15 RCW) in this opinion are to the version ofthat act in effect prior to the January 1, 2016 

effective date of the noted amendment. 

2 
No. 90891-5 

lease payments, Holzman fired Ostenson, and the bank foreclosed on the packing facility. 

Thereafter, Holzman, acting as Pac-O's agent, executed a demand promissory note in 

favor of GHI and transferred Pac-0' s assets to GHI to satisfy the note. 

On January 9, 2007, Ostenson filed a voluntary chapter 11 bankruptcy petition. In 

May 2007, a creditor ofPac-0, Northwest Wholesale Inc., filed the present suit against 

Pac-0, Ostenson, and GHI, alleging fraudulent conveyance from Pac-0 to GHI. In 

response, Ostenson filed cross claims and/or third party claims against Pac-0, Holzman, 

GHI, and Total Organic LLC (another Holzman company). Ostenson's claims against 

Holzman and his companies (collectively Holzman defendants or HDs) were as a 

derivative action on behalf ofPac-0. 

On January 24, 2011, the trial court dismissed Northwest Wholesale's claims 

following settlement of same. Thereafter, the only remaining claims were Ostenson's 

responsive claims against Pac-0 (seven counts) and his derivative claim (count VIII) 

against HDs. Trial commenced on July 11, 2011. On July 13, after Ostenson rested, 

HDs moved to dismiss count VIII under CR 41 (b )(3). l-IDs argued that under the 

W ALLCA, ( 1) a plaintiff asserting a derivative action must be a member of the LLC (see 

RCW 25.15.130(1)(d), .370, .375), (2) when Ostenson filed his bankruptcy petition he 

was dissociated as a member of the LLC (and thus had only the rights of an assignee, i.e. 

right to share in profits, but no management rights) (see RCW 25.15.130(1)(d)(ii), 

.250(1)-(2)), and: (3) as Ostenson had been dissociated from membership in Pac-0 by 

filing bankruptcy, he lacked authority (standing) to bring a derivative action on behalf of 

3 
No. 90891-5 

Pac-0. Ostenson answered the motion arguing that HDs had consented to the derivative 

action via a stipulation that was previously entered in the Ostenson's bankruptcy 

proceeding. 2 

The trial court took the matter under advisement and directed HDs to go forward 

and present their evidence. HDs presented witnesses over the remainder of that day 

(July 13) and the next day but did not finish their testimony. The trial court then 

continued the matter several times. Finally on September 7, 2012, following additional 

briefing, the trial court granted HDs' CR 41 motion. In its October 3, 2012 written 

findings and conclusions, the trial court (1) rejected Ostenson's contention that HDs had 

waived their CR 41 motion by putting on evidence, (2) rejected Ostenson's contention 

that HDs had consented to the derivative action in the stipulation in Ostenson's 

bankruptcy proceeding, and (3) ruled that Ostenson relinquished membership in Pac-0 

with his bankruptcy filing. 

On October 15, 2012 Ostenson filed a motion for reconsideration, arguing for the 

first time that federal bankruptcy law preempts W ALLCA regarding dissociation of LLC 

members upon filing bankruptcy. The trial court denied Ostenson's motion for 

2 In making this argument, Ostenson relied on the W ALLCA, arguing that the consent exception 

to the dissociation provision found in RCW 25.15.13 0( 1 )(d) applied to bar HDs' challenge to 

Ostenson's standing to bring the derivative action. Ostenson also argued that "in addition to the 

RCW [i.e., RCW 25.15.130(1)(d), which provided a consent exception to the dissociation 

provision], Your Honor, they [(HDs)] should be judicially and equitably estopped" from 

challenging Ostenson's standing to bring a derivative action. 3 Verbatim Report of Proceeding 

at 601. Ostenson reasserted those contentions on appeal (consent, judicial estoppel, collateral 

estoppel, and res judicata), but the Court of Appeals rejected each contention and affirmed the 

trial court. See Nw. Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wn. App. 459,490-93, 334 

P.3d 63 (2014), review granted, 182 Wn.2d 1009, 343 P.3d 759 (2015). Ostenson abandoned the 

issues of consent, judicial estoppel, collateral estoppel, and res judicata in his petition for review. 

4 
No. 90891-5 

reconsideration on January 23, 2013. Ostenson appealed, and Division Three affirmed, 

holding that HDs did not waive their CR 41 motion to dismiss, HDs did not consent to 

Ostenson bringing a derivative action, and federal bankruptcy law governing bankruptcy 

estates and executory contracts did not preempt WALLCA's dissociation statute. Nw. 

Wholesale, Inc. v. PAC Organic Fruit, LLC, 183 Wn. App. 459, 474-89, 334 P.3d 63 

(2014), review granted, 182 Wn.2d 1009, 343 P.3d 759 (2015). Ostenson sought and was 

granted review in this court on only two issues: waiver and preemption. 

ANALYSIS 

Waiver 

Ostenson argues that HDs waived their right to seek dismissal of his derivative 

claim, based on Ostenson's lack of standing, by presenting defense evidence after the 

court took HDs' CR 41 motion to dismiss under advisement. 3 Ostenson contends that the 

trial court's granting HDs' motion and the Court of Appeals affirmance of same are at 

odds with Hector v. Martin, 51 Wn.2d 707, 321 P.2d 555 (1958). That is incorrect. 

Hector stands for the proposition that a defendant waives the right to challenge the 

sufficiency of the plaintiffs evidence alone by presenting evidence in defense, thereby 

3

CR 41(b)(3) provides: 

After the plaintiff, in an action tried by the court without a jury, has completed the 

presentation of his evidence, the defendant, without waiving his right to offer 

evidence in the event the motion is not granted, may move for a dismissal on the 

ground that upon the facts and the law the plaintiff has shown no right to relief. 

The court as trier of the facts may then determine them and render judgment 

against the plaintiff or may decline to render any judgment until the close of all 

the evidence. If the court renders judgment on the merits against the plaintiff, the 

court shall make findings as provided in rule 52( a). Unless the court in its order 

for dismissal otherwise specifies, a dismissal under this subsection . . . operates 

as an adjudication upon the merits. 

5 
No. 90891-5 

allowing the court to consider the motion in light of all of the evidence. !d. at 709-10 

("[T]he failure of the trial court to rule on such motion before introduction of proof by a 

defendant, is tantamount to a denial of the motion. . . . Therefore, this case must be 

viewed in the light of all the evidence."). Here, the question in the motion to dismiss did 

not turn on the sufficiency of the evidence; the salient facts, the dates of Ostenson's 

bankruptcy filing and the subsequent filing of his derivative claim, were not in dispute. 

The motion turned on a legal question-Ostenson's standing to bring the derivative claim 

in light ofRCW 25.15.130(1)(d) (discussed below). And even if sufficiency ofthe 

evidence bore on any pertinent question, nothing indicates that the trial court limited 

itself to considering only Ostenson's evidence. 

Further, Hector does not address the circumstance here, where the trial court 

directed HDs to "go forward" and put on their evidence. 3 Verbatim Report of 

Proceeding at 603. Under these circumstances, HDs did not waive their CR 41 motion as 

Ostenson contends. The trial court did not err in granting the motion to dismiss under 

these circumstances. 4 

4 Cf State V. Eide, 2 Wn. App. 789, 791,470 P.2d 220 (1970) (where appellant, at the end ofthe 

state's case, started to move to dismiss, but was told by the trial judge that he could do so later 

without waiving his rights and then testified in his own behalf, "defendant had a right to rely 

upon the assurance of the trial court that he could introduce evidence without waiving his 

challenge to the sufficiency of the evidence at the close of the state's case"). 

6 
No. 90891-5 

Preemption5 

Ostenson repeats the argument he made below that "[b]oth 11 U.S.C. § 541(c)(1) 

and 11 U.S.C. § 365(e)(1) invalidate or render unenforceable ipso facto bankruptcy 

clauses." Appellant's Opening Br. at 28; Pet. for Review at 12.6 We begin by noting the 

strong presumption against preemption. While the supremacy clause of the United States 

Constitution provides that United States law is supreme, notwithstanding any contrary 

state law, see Hue v. Farmboy Spray Co., 127 Wn.2d 67, 78, 896 P.2d 682 (1995) (citing 

U.S. CONST. art VI, cl. 2), "any consideration of preemption issues 'start[s] with the 

assumption that the historic police powers of the States [are] not to be superseded by ... 

Federal Act unless that [is] the clear and manifest purpose of Congress."' (Alterations in 

original) (quoting Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 516, 112 S. Ct. 2608, 120 

L. Ed. 2d 407 (1992).). Accordingly, this court applies "a 'strong presumption against 

finding preemption [of State law] in an ambiguous case. . . . State laws are not 

superseded by federal law unless that is the clear and manifest purpose of Congress."' !d. 

5 HDs argued in part to both the trial court and to the Court of Appeals that Ostenson's 

preemption assertion, which was first raised in his motion for reconsideration, was untimely. 

The trial court denied Ostenson's motion for reconsideration. On appeal, Division Three 

rejected HDs' reasserted timeliness argument, stating, '"By bringing a motion for 

reconsideration under CR 59, a party may preserve an issue for appeal that is closely related to a 

position previously asserted and does not depend upon new facts."' Nw. Wholesale, 183 Wn. 

App. at 480 (quoting River House Dev. Inc. v. Integrus Architecture, PS, 167 Wn. App. 221,231, 

272 P.3d 289 (2012)). HDs have not raised the timeliness issue in this court, and we express no 

opinion on the Court of Appeals discussion of timeliness and issue preservation. 6 Ostenson's arguments regarding the applicability of§ 365 have been a moving target. To the 

Court of Appeals and in his petition for review, Ostenson argued that§ 365(e)(1) prohibitions 

applied to the LLC operating agreement here as an executory contract. In his reply in support of 

his petition, he stated that the operating agreement was not an executory contract and that§ 365 

did not apply. But in his supplemental brief, he argues that§ 365(e)(1) does apply and raises two 

new arguments contending that§ 365(e)(2)'s exception to§ 365(e)(1)'s ipso facto clause 

prohibitions (discussed below) does not apply here. 

7 
No. 90891-5 

(alterations in original) (quoting Progressive Animal Welfare Soc'y v. Univ. of Wash., 

125 Wn.2d 243, 265, 884 P.2d 592 (1994)). Even ifthere is an express preemption 

clause, this court will give it "a 'fair but narrow reading."' Id. at 79 (quoting Cipollone, 

505 U.S. at 524).- With this presumption in mind, we turn to the statutes at issue. 

State Law (W ALLCA) Provisions 

RCW 25.15.375 provides: 

In a derivative action, the plaintiff must be a member at the time of 

bringing the action and: 

(1) At the time of the transaction of which the plaintiff complains; or 

(2) The plaintiffs status as a member had devolved upon him or her 

by operation of law or pursuant to the terms of a limited liability company 

agreement from a person who was a member at the time of the transaction. 

(Emphasis added.f Under RCW 25.15.130(1)(d)(ii), a member of a limited liability 

company loses his or her membership upon the filing of bankruptcy. The statute 

provides: 

(1) A person ceases to be a member of a limited liability company, and the 

person or its successor in interest attains the status of an assignee as set 

forth in RCW 25.15.250(2), upon the occurrence of one or more of the 

following events: 

(d) Unless otherwise provided in the limited liability company 

agreement, or with the written consent of all other members at the time, the 

member . .. (ii)files a voluntary petition in bankruptcy. 

(Emphasis added.) 

7 See also RCW 25.15.370, which provides: 

A member may bring an action in the superior courts in the right of a limited 

liability company to recover a judgment in its favor if managers or members with 

authority t9 do so have refused to bring the action or if an effort to cause those 

managers or members to bring the action is not likely to succeed. 

(Emphasis added.) 

8 
No. 90891-5 

Thus, under Washington law, Ostenson forfeited any right to bring a derivative 

action on behalf ofPac-0 when he petitioned for bankruptcy. The LLC agreement did 

not allow continued membership but conversely ended the bankrupt petitioning as a 

member in the limited liability company. As an assignee, the dissociated member retains 

rights to share in profits but loses any management rights. RCW 25.15 .250(2). 8 

Ostenson argues only that the dissolution provision of RCW 25.15.13 0( 1 )(d) is 

preempted by federal bankruptcy law; to this court he does not otherwise challenge the 

provisions or effect of the WALLCA. 

Federal Bankruptcy Law Provisions 

11 U.S.C. § 541 provides in part: 

(a) The commencement of a case under ... this title creates an 

estate. Such estate is comprised of all the following property, wherever 

located and by whomever held: 

(1) Except as provided in subsections (b)[9

] and (c)(2) 

of this section, all legal or equitable interests ofthe debtor in 

property as of the commencement of the case. 

(Emphasis added.) Section 541 (c)( 1) provides: 

Except as·provided in paragraph (2) of this subsection, an interest of the 

debtor in property becomes property of the estate under subsection (a) (I), 

8 RCW 25.15.250(1) and (2)(a) provide in relevant part, "The assignee of a member's limited 

liability company interest shall have no right to participate in the management of the business 

and affairs of a limited liability company," and "[a]n assignment entitles the assignee to share in 

such profits and losses, to receive such distributions, and to receive such allocation of income, 

gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent 

assigned." 

9 Under§ 541(b)(l), the debtor's bankruptcy estate expressly does not include "any power that 

the debtor may exercise solely for the benefit of an entity other than the debtor," which, by 

definition, would appear to include a derivative claim, the sole purpose of which is to benefit the 

entity. 

9 
No. 90891-5 

(a)(2), or (a)(5) of this section notwithstanding any provision in an 

agreement, transfer instrument, or applicable nonbankruptcy law-

(A) that restricts or conditions transfer of such interest 

by the debtor; or 

(B) that is conditioned on the insolvency or financial 

condition of the debtor, on the commencement of a case under 

this title, or on the appointment of or taking possession by a 

trustee in a case under this title or a custodian before such 

commencement, and that effects or gives an option to effect a 

forfeiture, modification, or termination of the debtor's interest 

in property. 

(Emphasis added.) 

State Law Determines Property Interest 

As can be seen, a bankruptcy filing triggers the creation of a bankruptcy estate into 

which the debtor's property interest devolves. See 11 U.S.C. § 541(a). The threshold 

i 

question, however, of how a debtor's interest is determined turns on application of state 

law. See, e.g., Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 59 L. Ed. 2d 136 

(1979) ("Property interests are created and defined by state law."). As the Ninth Circuit 

Court of Appeals explained inln re Pettit, 217 F.3d 1072, 1078 (9th Cir. 2000): 

Although the question whether an interest claimed by the debtor is 

"property of the estate" is a federal question to be decided by federal law, 

bankruptcy courts must look to state law to determine whether and to what 

extent the debtor has any legal or equitable interests in property as of the 

commencement of the case. 

See also Fisher v. Apostolou, 155 F.3d 876, 880 (7th Cir. 1998) ("The nature of a 

debtor's interestin property is determined by state law, but the question whether the 

10 
No. 90891-5 

resulting interest should count as 'property of the estate' for§ 541 purposes is an issue of 

federal law." (citation omitted)). 

In re Farmers Markets, Inc., 792 F.2d 1400 (9th Cir. 1986), is instructive. Therein 

the Ninth Circuit Court of Appeals reversed a bankruptcy court's decision that the 

debtor's estate ~ould receive liquor licenses unhindered by transfer restrictions imposed 

by a state statute~ Id. at 1401-02. In so holding, the court addressed the limits of 11 

U.S.C. § 541 and how that provision is to be applied. Noting that the bankruptcy court's 

decisions rested upon the misinterpretation of§ 541, the court opined: 

[T]he [bankruptcy] court read§ 541(a)(l) to broaden the definition 

of the property of the debtor's estate. Regardless of§ 541(a)'s scope, 

reliance upon it is misplaced. That provision merely defines what interests 

of the debtor are transferred to the estate. It does not address the threshold 

questions of the existence and scope of the debtor's interest in a given asset. 

Under [federal bankruptcy law], we resolve these questions by reference to 

nonbankruptcy law. Section 541 (a) (I) was thus irrelevant to the inquiry. 

Id. at 1402 (emphasis added) (citations omitted). The court made clear that the 

'"bankrupt estate, insofar as it includes liquor licenses, has only the limited value of the 

licenses encumbered as they may be by the terms of the statutes which create the licenses 

and provide the conditions of their transfer."' I d. at 1403 (quoting In re Prof'l Bar Co., 

537 F.2d 339, 340 (9th Cir. 1976)). The court held, "Because the estate may take no 

greater interest than that held by the debtor, the estate takes the license subject to the 

restrictions imposed [by state statute] on the debtor by its transferor." Id.; see also In re 

S. Side House, LLC, 474 B.R. 391,402 (Banlcr. E.D.N.Y. 2012) ('"[T]he estate succeeds 

to no more interest than the debtor had, and the estate takes its interest subject to the 

11 
No. 90891-5 

conditions under which the debtor held the interest.'" (quoting In re Depoy, 29 B.R. 466, 

469 (Bankr. N.D. Ind. 1983)). 

Farmers also explained that the bankruptcy court had misapplied§ 541(c)(l)(A): 

[The bankruptcy court] read this provision to invalidate upon the 

commencement of bankruptcy proceedings all transfer restrictions on 

property in which the debtor holds an interest. Section 541(c)(1)(A), 

however, avoids only those restrictions which prevent transfer of the 

debtor's property to the estate .... [B]y its terms§ 541(c)(l)(A) applies 

only to "interest[s] of the debtor in property." ... Because [the state 

statute] placed no restrictions on the transfer of their entire interests to their 

respective estates, it does not conflict with§ 541(c)(1)(A). 

792 F.2d at 1402 (emphasis added). Applying Farmers to Ostenson's case, his debtor's 

bankruptcy estate took his interest as defined, determined, and encumbered according to 

state law. In other words, Ostenson's interest that devolved to his bankruptcy estate as 

determined by the above Washington statutes was his interest as an assignee and not as a 

member of the Pac-0 LLC. 

The Court of Appeals reached the same conclusion applying In re GarrisonAshburn, LC, 253 B.R. 700, 707 (Banlcr. E.D. Va. 2000), which applied a Virginia state 

law provision comparable to the above noted Washington statutes dissociating an LLC 

member upon the member's filing a banlcruptcy petition. In Garrison-Ashburn, an LLC 

member filed for bankruptcy and then sought to execute a real estate contract on behalf of 

the LLC. !d. at 704. The other members of the LLC disputed the debtor's right to bind 

the LLC because under Virginia law, a member is dissociated upon filing for bankruptcy. 

!d. at 707. The debtor retained his economic interest-to share in the profits and losses 

12 
No. 90891-5 

of the LLC-but could no longer participate in management. !d. The Garrison-Ashburn 

court held that§ 541(c) did not change this analysis: 

This result does not offend the Congressional intention behind 

Sections 54l(c) and 365(c) and (e). These provisions were intended to 

expand the bankruptcy estate to the maximum feasible extent and to 

prevent the loss of valuable assets by the operation of ipso facto clauses 

that terminate valuable leases and other rights upon bankruptcy. Here the 

estate received the entire interest of the debtor in [the LLC] including its 

burdens and restrictions. The economic interest, that is the membership 

interest, remains in the estate and is available for the benefit of creditors. 

The enforcement of [debtor's] statutory dissociation does not cause a 

forfeiture of those rights or impair the legal capacity of the company to 

continue in business. 

Id. at 709. 10 Garrison-Ashburn reconciled the application of both state law and the 

federal bankruptcy code by recognizing and applying the rule that state law defines the 

debtor's interest, including dissociation, then§ 541 brings that interest into the debtor's 

bankruptcy estate, burdened by whatever state law requires. 

10 While Garrison-Ashburn has been criticized by some subsequent cases, see, e.g., In re 

Klingerman, 388 B.R. 677, 679 (Bankr. E.D.N.C. 2008), other cases agree with GarrisonAshburn's approach. For instance, In re Albright, 291 B.R. 538, 540 n.7 (Bania. D. Colo. 

2003), observed: 

Where a single member files banlauptcy while the other members of a multimember LLC do not, ... the banlm1ptcy estate is only entitled to receive the share 

of profits or other compensation by way of income and the return of the 

contributions to which that member would otherwise be entitled. 

Additional cases that follow Garrison-Ashburn's approach include In re Western Asbestos Co., 

313 B.R. 832, 844 (Banl(r. N.D. Cal. 2003) ("The Court views the meaning of 'property,' as used 

in 11 U.S. C. § 541(c)(1)(B), as something that may be sold or collected to generate funds to be 

distributed funds to creditors."); In re A-Z Electronics, LLC, 350 B.R. 886, 890 n.12 (Bankr. D. 

Idaho 2006) (citing Albright with approval); Fotouhi v. Mansdorf, 427 B.R. 798, 802 (Batllcr. 

N.D. Cal. 201 0) (partner dissociated upon filing banlauptcy); Milford Power Co. v. PDC Milford 

Power, LLC, 866 A.2d 738, 759-61 (Del. Ch. 2004) (holding that neither§ 365 nor§ 541 

preempted state law provisions that deprive barum1pt members of governance rights). 

13 
No. 90891-5 

Ostenson cites to cases that have reached a result different than Garrison-Ashburn, 

but those cases either do not acknowledge or fail to apply Butner, 11 or are otherwise 

distinguishable or not persuasive. For instance, In re First Protection, Inc., 440 B.R. 821, 

830 (B.A.P. 9th Cir. 2010), held that under§ 541(a) all of the debtor's rights devolved to 

the estate and into the hands of the trustee, including the right to manage and control the 

LLC. Id. at 830. On the one hand, such holding arguably made practical sense in that the 

decision addressed a single-member LLC and, thus, there were no other members to 

manage the LLC if the trustee could not do so, nor were there any other non debtor . 

members' interests to be considered and protected. 12 However, the court's application of 

§ 541(a) is troubling. The court acknowledged the Butner rule-that a debtor's interest is 

determined by state law-but failed to apply that rule. The court acknowledged that a 

state statute specifically defined an LLC member's interest as '"a member's share of the 

profits and losses"' of the LLC and "'the right to receive distributions of [LLC] assets."' 

Id. at 828-29 (quoting ARIZ. REv. STAT.§ 29-601(13)). Nevertheless, the court applied§ 

541(a)'s language, "all legal or equitable interest" in the bankruptcy estate, broadly to 

include not just the interest as above defined by state law but also to include management 

rights. Such expansive use of§ 541(a) to define a debtor's interest is contrary to the 

11 See In re Klingerman, 388 B.R. 677, 679 (Bankr. E.D.N.C. 2008) (no mention of Butner.and 

no analysis of threshold determination of debtor's interest as determined by state law); In re 

LaHood, 437 B.R. 330 (Bania. C.D. Ill. 2010) (same); In re Dixie Mgmt. & Inv., Ltd. Partners, 

474 B.R. 698 (Bankr. W.D. Ark. 2011) (same). 12 The Ninth Circuit Banlauptcy Appellate Panel in First Protection acknowledged the 

distinction made in Albright (quoted above) that a different result would obtain where the LLC 

member who files a bankruptcy petition belongs to a single member LLC or a multiple member 

LLC. See First Prot., 440 B.R. at 829 n.13. 

14 
No. 90891-5 

Ninth Circuit's analysis in Farmers. See Farmers, 792 F.2d at 1402 (holding that 

§ 541(a) addresses only the transfer of debtor's interest to the estate and is "irrelevant" as 

to the threshold determination of the existence and scope of the debtor's interest). As this 

portion of the First Protection decision does not adhere to Butner, does not follow Ninth 

Circuit precedent, and is contrary to the presumption against preemption that this court 

applies, see Hue, 127 Wn.2d at 78, we do not find this portion of First Protection 

persuasive. 

Ostensen cites In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993), abrogated on 

other grounds by Law v. Siegel,_ U.S. _,134 S. Ct. 1188, 188 L. Ed. 2d 146 (2014), 

for the proposition that§ 541(a)(1)'s establishment of a bankruptcy estate sweeps broadly 

to include every conceivable interest of the debtor "future, nonpossessory, contingent, 

speculative, and derivative." But all examples given therein concern money. See id. The 

availability to the estate of all of the debtor's economic interest is not at issue in this case. 

Ostenson's interest as an assignee devolved to the estate. Further, Yonikus acknowledges 

Butner for the proposition that determination of a debtor's interest in property is decided 

by state law. See id. (stating, "The question whether an interest claimed by the debtor is 

'property of the estate' is a federal question to be decided by federal law; however, courts 

must look to state law to determine whether and to what extent the debtor has any legal or 

equitable interests in property as of the commencement of the case"). Yonikus does not 

assist Ostenson. 

15 
No. 90891-5 

Ostenson also relies on In re Daugherty Construction, Inc., 188 B.R. 607 (Banlcr. 

D. Neb. 1995), and In re Warner, 480 B.R. 641 (Banlcr. N.D. W.Va. 2012), in which the 

respective bankruptcy courts held that§ 541(c)(1) invalidated state statutory and 

contractual dissolution provisions. In those cases, the debtor's filing bankruptcy resulted 

in the dissolution of the LLC and the termination of all the debtor's interest therein. See 

Daugherty, 118 B.R. at 609-11 (statutory dissolution upon bankruptcy filing); Warner, 

480 B.R. at 655-56 (bankruptcy triggering dissolution, liquidation, and distribution of 

proceeds per operating agreement). Thus, dissolution of the LLC under the state statute 

or operating agreement in these cases would result in depriving the estate of all of the 

debtor's interest. That is not the situation here. 13 As explained above, Ostenson's 

banlcruptcy estate took his interest, as determined and encumbered by Washington 

statutes, as an assignee. By doing so, his economic interest is preserved in his banlcruptcy 

estate and "is available for the benefit of creditors." Garrison-Ashburn, 253 B.R. at 709. 

In sum, we find that the Court of Appeals properly followed Garrison-Ashburn, 

federal banlcruptcy code, and Washington law. 14 

13No party has argued that Ostenson's banlauptcy filing resulted in dissolution. But the 

operating agreement provides that "the Company shall dissolve upon ... the occurrence of ariy 

event of Member dissociation provided in the Act ... unless the business of the Company is 

continued with the consent of all of the remaining Members within ninety (90) days following 

such event." Defs.' Ex. 5 (Pac Organic Fruit LLC Agreement, page 13 (Article 8.1)). 

Presumably, Pac-0 continued operating with the consent of the remaining member, GHI. 

14 Two recent cases from Virginia demonstrate the lack of coherence in this area. In In re 

Virginia Broadband, LLC, 498 B.R. 90, 93-94 (Bankr. W.D. Va. 2013), a bankruptcy court 

addressed application of a state statute that dissociated an LLC member upon becoming a debtor 

in banlauptcy and thereby transformed the member's interest into that of an assignee with only 

economic interests. Purporting to rely on Garrison-Ashburn, the Broadband court held that the 

state statute in question was an invalid ipso facto provision under § 541 ( c )(1 )(B) and that the 

16 
No. 90891-5 

11 U.S.C. § 365 

Ostenson contends that "11 U.S.C. § 365(e)(l) [as wellll U.S.C. § 54l(c)(l)] 

invalidate or render unenforceable ipso facto bankruptcy clauses." Pet. for Review at 12. 

The relevant statute, 11 U.S.C. § 365 provides in relevant part: 

(e)(l) Notwithstanding a provision in an executory contract or unexpired lease, or 

in applicable law, an executory contract or unexpired lease of the debtor may not 

be terminated or modified, and any right or obligation under such contract or lease 

may not be terminated or modified, at any time after the commencement of the 

case solely because of a provision in such contract or lease that is conditioned 

on-

(B) the commencement of a case under this title ... 

(2) Paragraph (1) of this subsection does not apply to an executory contract 

or unexpired lease of the debtor, whether or not such contract or lease prohibits or 

restricts assigmnent of rights or delegation of duties, if--

(A)(i) applicable law excuses a party, other than the debtor, to such 

contract or lease from accepting performance from or rendering 

performance to the trustee or to an assignee of such contract or lease, 

whether or not such contract or lease prohibits or restricts assignment of 

rights or delegation of duties; and 

(ii) such party does not consent to such assumption or assignment. 

(Emphasis added.) 15 

debtor's economic and noneconomic interests in the LLC became property ofhis banlm1ptcy 

estate. Jd. at 96-97. However, in In re Williams, 455 B.R. 485 (Bankr. E.D. Va. 2011), another 

court, applying the same statute and also purporting to apply Garrison-Ashburn, came to the 

opposite conclusion. The Williams court held that§ 541(c)(l) "clearly controls" and that the two 

debtors' interests vested in their respective estates, but that such interest was determined by the 

state statute. Thus, as defined by the state statute, a dissociated member retained only economic 

rights, and since both LLC members had been dissociated through bankmptcy and no one was 

left to wind up the affairs ofthe LLC, the court would appoint a liquidating tmstee to do so. Id. 

at 501-02. Such ambiguities support applying a "'strong presumption"' against finding 

preemption ofRCW 25.15.130(l)(d)'s dissociation provision. Hue, 127 Wn.2d at 78 (quoting 

Progressive, 125 Wn.2d at 265). 

15 Similarly,§ 365(c) provides in part: 

17 
No. 90891-5 

Section 365 applies to executory contracts. 16 As First Protection explains, 

"Generally, the bankruptcy estate automatically succeeds to a debtor's assets. However, 

because an executory contract is both a potential asset and a potential liability of the 

debtor it is treated differently." 440 B .R. at 83 0. 17 Notably, "if the operating agreement 

is an executory contract ... § 365 governs the trustee's rights rather than§ 541(c)(l). In 

The trustee may not assume or assign any executory contract or unexpired 

lease of the debtor, whether or not such contract or lease prohibits or 

restricts assignment of rights or delegation of duties, if--

(l)(A) applicable law excuses a party, other than the 

debtor, to such contract or lease from accepting performance 

from or rendering performance to an entity other than the 

debtor or the debtor in possession, whether or not such 

contract or lease prohibits or restricts assignment of rights or 

delegation of duties; and 

(B) such party does not consent to such assumption or 

assignment .... 

(Emphasis added.) 

16 Ostenson argues in his petition that the LLC's operating agreement is an executory contract 

and thus subject to the ipso facto prohibition in§ 365(e)(1), but in his reply he contends that 

§ 365 does not apply. Then he reasserts in his supplemental briefthat § 365(e)(1) does apply 

while raising two new arguments to avoid§ 365(e)(2)'s exception to§ 365(e)(l)'s prohibition. 

In any event, as the Court of Appeals held, it ultimately does not matter whether the Pac-0 

operating agreement qualifies as an executory contract because, even if it does, under the 

circumstances of Ostenson's case§ 365(e)(2) would apply to negate the application of§ 

365(e)(1)'s prohibition, as explained herein. 

17 Executory contracts do not automatically devolve to the bankruptcy estate. 

"The trustee's power to reject those executory contracts which he finds 

burdensome to the bankrupt's estate is an extension of his power to renounce title 

to and abandon burdensome property which is already a part of the estate. 

Because executory contracts ... involve future liabilities as well as rights, 

however, an affirmative act of assumption by the trustee is required to bring the 

property into the estate in order to ensure that the estate is not charged with the 

liabilities except upon due deliberation. Thus, executory contracts ... -unlike 

all other assets-do not vest in the trustee as of the date of the filing of the 

bankruptcy petition. They vest only upon the trustee's timely and affirmative act 

of assumption." 

First Prot., 440 B.R. at 830 (alterations in original) (quoting In re Lovitt, 757 F.2d 1035, 1041 

(9th Cir.1985) (citations omitted)). 

18 
No. 90891-5 

that event, the restrictive provisions under [a state] LLC Act or the operating agreement 

that affect the transfer of [d]ebtor's rights and interests in [an LLC] may be enforced 

through operation of§ 365[(e)(2)] in some instances." Id. at 830-31. 

Whether a contract is executory within the meaning of the Bankruptcy Code is a 

"question of federal law." Id. at 831 (citing In re Alexander, 670 F.2d 885, 888 (9th 

Cir.1982)). "A contract is executory only when the 'obligations of both parties are so far 

unperformed that the failure of either party to complete performance would constitute a 

material breach and thus excuse the performance of the other."' Id. (quoting In re 

Ehmann, 319 B.R. 200, 204 (Bankr. D. Ariz. 2005)). 

Here, the Court of Appeals analyzed the obligations in the Pac-0 operating 

agreement and noted that while they "may suffice to create an executory contract," the 

court ultimately "need not decide" whether the Pac-0 operating agreement is an 

executory contract because the court otherwise held that"§ 365(e) of the bankruptcy code 

excuses further performance under the agreement." Nw. Wholesale, 183 Wn. App. at 

487-88; see In re Tsiaoushis, 383 B.R. 616, 620 (Bankr. E.D. Va. 2007) (Mem. Op.) 

(noting that the "final step" in any analysis of executory contracts under § 365 is the 

applicability of§ 365(e)(2)'s exemption from§ 365(e)(l)'s ipso facto prohibition). To 

address this issue, Division Three applied Finkelstein v. Security Properties, Inc., 76 Wn. 

App. 733, 888 P!2d 161 (1995). See Nw. Wholesale, 183 Wn. App. at 488. 

Ostenson asserts that Division Three's reliance on Finkelstein was error because 

that case addresses partnerships and not LLCs. Pet. for Review at 17. But Division 

19 
No. 90891-5 

Three's reliance on a partnership case was not improper. See Tsiaoushis, 383 B.R. at 618 

(noting because LLC's are relatively new statutory creations, "decisions concerning 

partnership agreements are helpful"). 18 Accordingly, Division Three did not err in 

applying by analogy a partnership case that addressed application of section§ 365(e)(2). 

In Finkelstein, Division One held that a state law provision that dissolved a 

general partnership upon the filing of bankruptcy by any of the partners was not 

superseded by§ 365(e)(1)'s invalidation of ipso facto provisions. Therein, Finkelstein 

was a minority partner in two related general partnerships, each of which served as 

general partners for several limited partnerships. Finkelstein filed for bankruptcy under 

chapter 11 and later converted to chapter 7. Before the bankruptcy filing, each general 

partnership agreement provided that the partnership would not dissolve or terminate upon 

the death, incapacity, or bankruptcy of any partner. After Finkelstein filed bankruptcy, 

each general partnership then amended its partnership agreement to exclude Finkelstein 

as a partner. Finkelstein then sued the general partnerships for an accounting and breach 

of fiduciary duties and brought a derivative action on behalf of several of the limited 

partnerships. The trial court dismissed Finkelstein's claims on statute of limitations 

grounds, and Division One affirmed, holding in part that state partnership law was not 

superseded by federal bankruptcy law, that the partnerships dissolved under state 

partnership law when Finkelstein bankruptcy case was converted to chapter 7, and that as 

18 See also Sally S. Neely, Partnerships and Partners and Limited Liability Companies and 

Members in Bankruptcy: Proposals for Reform, 71 AM. BANKR. L.J. 271, 317 (1997) 

("[B]ecause of the similarities between LLCs and partnerships in this area of inquiry, the cases 

[involving partnerships] also provide guidance regarding the appropriate consequences of the 

bankruptcy of a member or member-manager of a[n] LLC."). 

20 
No. 90891-5 

a former partner Finkelstein had no standing to bring breach of fiduciary duty claims or a 

derivative action on behalf of the limited partnerships. Finkelstein, 76 Wn. App. 733. 

Relevant here, noting that courts have "'generally assumed that partnership 

agreements are ... executory contracts,"' Division One held that "[debtor's] bankruptcy 

trustee was not free to assume the contract under § 3 65 because the other partners were 

not obligated to accept such an assumption." !d. at 736-37 (quoting In re Cutler, 165 

B.R. 275, 279-80 (Bania. D. Ariz.1994)). This is so because "[p]artnerships are 

voluntary associations, and partners are not obligated to accept a substitution for their 

choice of partner." !d. at 737. The court additionally held that "[t]he restraint on 

assumability also makes the deemed rejection provision of§ 365[(d)(l)] inapplicable to 

the partnership agreement. Therefore,§ 365(e)'s invalidation of ipso facto provisions 

does not apply, and state partnership law is not superseded." !d. (citation omitted). The 

Finkelstein court relied on a Fifth Circuit case, In re Phillips, 966 F.2d 926, 935 n.ll (5th 

Cir. 1992), which noted that 

[C]ourts which have ruled that§ 365(e) supersedes state partnership law 

have failed to apply§ 365(e)(2) to their analysis. Section 365(e) was 

designed to invalidate banlm1ptcy termination clauses (ipso facto 

provisions) in contracts. Section 365( e )(2) clarifies Congress' intention to 

prevent only private contracts from counteracting the Banlauptcy Code, not 

to prevent state law, such as partnership law, from determining the status of 

a partnership. 

Finkelstein, 76 Wn. App. at 737 n.3. Division One further explained, "Section 365 is 

clearly not applicable to the executory portion of the partnership contract [i.e., described 

as management rights and duties] because partnership agreements are purely consensual 

21 
No. 90891-5 

and the freedom of the partners to associate and dissociate is the heart of partnership 

law." !d. at 738. Accordingly, the Finkelstein court held that§ 365 was not applicable 

and did not supersede state partnership law. !d. 

The only ~uties owed to [debtor] after his removal from the partnership 

were the duties to account and pay to him (or his estate) the value of his 

share. [Debtor] ceased to be a member of the partnership upon dissolution, 

and has no rights against the remaining partners for their continuing 

business. It follows that he has no claims against the remaining partners for 

any alleged subsequent self-dealing. For the same reasons, we also affirm 

the trial court's dismissal of[debtor's] derivative action. 

!d. at 740 (emphasis added). 

Here, the Court of Appeals sustainably relied on Finkelstein in holding that§ 365 

did not preempt Washington law that removed Ostenson as a member of Pac-0 upon his 

bankruptcy filing. See Nw. Wholesale, 183 Wn. App. at 489. The same rights of 

voluntary association on which the Finkelstein decision turned apply equally to LLC 

membership. Se(! Daugherty Constr., 188 B.R. at 611 ("Like a partnership, members of 

the LLC have voluntarily associated in a business enterprise and the relationship among 

members may be personal in character.''); see also Sally S. Neely, Partnerships and 

Partners and Limited Liability Companies and Members in Bankruptcy: Proposalsfor 

Reform, 71 AM. BANKR. L.J. 271,312 (1997) (same); First Prot., 440 B.R. at 832 (plain 

language of§ 365(c)(l) and§ 365(e)(2)(A) makes clear that the provisions are not for the 

debtor's protection). "These sections[§ 365(c)(1) and§ 365(e)(2)(A)] were designed 'to 

protect non-debtor third parties whose rights may be prejudiced by having a contract 

performed by an :entity other than the one with which they originally contracted."' First 

22 
No. 90891-5 

Prot., 440 B.R. at 832 (quoting In re C. W Mining Co., 422 B.R. 746, 761 (B.A.P. lOth 

Cir. 2010)). The WALLCA clearly protects the voluntary association rights ofnondebtor 

LLC members. For instance, while RCW 25.15.250 authorizes the assignability of a 

member's LLC interest "in whole or in part," that statute nevertheless expressly protects 

the associational interests of the remaining members by providing: 

The assignee of a member's limited liability company interest shall have no 

right to participate in the management of the business and affairs of a 

limited liability company except . .. [u]pon the approval of all of the 

members of the limited liability company other than the member assigning 

his or her limited liability company interest. 

RCW 25.15.250(l)(a) (emphasis added). Similarly, RCW 25.15. 260, which addresses 

the right of an assignee to become a member, states in pertinent part, "An assignee of a 

limited liability company interest may become a member upon ... [t]he approval of all of 

the members of the limited liability company other than the member assigning his or her 

limited liability company interest." RCW 25.15.260(1)(a) (emphasis added). Given the 

strong protection ofLLC members' voluntary associational interests, comparable to 

partnerships, the Court of Appeals did not err in applying Finkelstein to Ostenson's case 

and affirming the dismissal of his derivative claim. 

Ostenson does not effectively argue otherwise. He cites to Summit Investment & 

Development Corp. v. Leroux, 69 F.3d 608 (1st Cir. 1995) for the proposition that 

§ 541(c)(l) and§ 365(e)(l) invalidate or render unenforceable ipso facto bankruptcy 

clauses. But the Summit court addressed only § 365( e) and did not undertake any 

analysis of§ 541. !d. at 614 n. 8. And while the First Circuit indeed held in Summit that 

23 
No. 90891-5 

§ 365(e) preempted a Massachusetts statute comparable to RCW 25.15.130(1)(d)(ii), the 

Ninth Circuit expressly rejected Summit's approach in In re Catapult Entertainment, Inc., 

165 F.3d 747 (9th Cir.), cert. dismissed, 528 U.S. 924 (1999). The Ninth Circuit Court of 

Appeals noted that under the statute's plain language, while§ 365(e)(l) nullifies ipso 

facto clauses, "§ 365( e )(2)(A) expressly revives 'ipso facto' clauses" under the 

circumstances noted therein. Id. at 753 n.6. The Ninth Circuit held, "[W]here applicable 

nonbankruptcy law makes an executory contract nonassignable because the identity of 

the nondebtor party is material, a debtor in possession may not assume the contract 

absent consent of the nondebtor party." Id. at 754-55. As noted, RCW 25.15.250(1)(a) 

and RCW 25.15.260(1)(a) of the WALLCA require the express approval ofthe LLC 

nondebtor members regarding any transfer or assumption of member management rights. 

To the extent the LLC operating agreement may qualify as an executory contract 

concerning management, the noted "applicable law excuses a party, other than the debtor 

[i.e., the nondebtor members], ... from accepting performance from or rendering 

performance to ... an assignee," and "such party [i.e., the nondebtor members have] not 

consent[ed] to such assumption or assignment." 11 U.S.C. § 365(e)(2). Accordingly,§ 

365(e)(2)'s exception to§ 365(e)(1)'s prohibition of ipso facto provisions applies. 19 

19 Ostenson raises two new issues in his supplemental brief. First, he contends that because his 

bankruptcy petition was filed under chapter 11 (reorganization), he is a debtor in possession and 

thus he may be treated as the same entity before and after his bankruptcy filing. Because there 

will be no assignment of the operating agreement to a different entity, the§ 365(e)(2) exception 

to§ 365(e)(1)'s prohibition to ipso facto provisions is not triggered. Second, Ostenson contends 

that the stipulation entered in his bankruptcy proceeding qualifies as the required consent under 

§ 365(c)(1)(A) and§ 365(e)(2) and thus the§ 365(e)(2) exception is not triggered. See Pet'rs' 

Suppl. Br. at 17-20. We decline to address Ostenson's newly raised arguments. "Under the 

24 
No. 90891-5 

CONCLUSION 

We conclude that HDs did not waive their CR 41 motion to dismiss and that 

federal bankruptcy law, 11 U.S.C. §§ 541 or 365, does not preempt RCW 

25.15.130(1)(d)'s dissociation provision. As to the latter issue, we hold that state law 

defines what the bankruptcy debtor's interests are and that § 541 brings such interests 

into the bankruptcy estate, burdened by whatever state law requires. Additionally, if 

executory contracts are involved, § 365 applies to determine what may be done with such 

contracts. But here, the express protections of associational rights ofnondebtor members 

found in the WALLCA triggers§ 365(e)(2)'s exception, rendering§ 365(e)(1)'s 

prohibition against ipso facto clauses inapplicable. We affirm. 

Rules of Appellate Procedure, 'the Supreme Court will review only the questions raised in ... 

the petition for review and the answer, unless the Supreme Court orders otherwise upon the 

granting of the ... petition."' Denaxas v. Sandstone Court of Bellevue, LLC, 148 Wn.2d 654, 

671, 63 P.3d 125 (2003) (alterations in original) (quoting RAP 13.7(b)). 

25 
No. 90891-5 

WE CONCUR: 

26