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### IN THE SUPREME COURT OFTHE STATE OFWASHINGTON

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 ofWashington; and ) HAROLD OSTENSON and SHIRLEY ) OSTENSON, ) ) Defendants, ) EnBanc ) HAROLD OSTENSON and SHIRLEY ) OSTENSON, onbehalfofPAC 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 ofWashington, ) ) 

## SEP 10 2015 Respondents. ) FiledNo. 90891-5

MADSEN, C.J.-This case concerns whether a 'debtor who has filed a voluntary bankruptcy petition may maintain a derivative action on behalfofa limited liability company (LLC), ofwhich the debtor was a former member. The primary inquiry addresses the interplay offederal bankruptcy law and portions ofthe Washington Limited Liability Company Act (WALLCA), chapter 25.15 RCW, and whether the state provisions are superseded under the circumstances ofthis case; specifically, whether 11 U.S.C. §§ 541 or 365 preemptRCW 25.15.130(l)(d). 1 We hold that the dissociation provision found in RCW 25.15. 130(1 )(d) is notpreempted by federal bankruptcy law and affirm the dismissal ofthe former LLC member's derivative claim under the facts ofthis

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 FruitLLC (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 ofcredit and

1The legislature amended the WALLCA in May 2015, repealing the provisions discussed herein and reissuing them in arevised but substantively comparable form relevant to the presentmatter 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 effectprior to the January 1, 2016 effective date ofthe noted amendment. 2No. 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 ofGHI 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 actionon behalfofPac-0. On January 24, 2011, the trial court dismissed Northwest Wholesale's claims following settlement ofsame. Thereafter, the only remaining claims were Ostenson's responsive claims againstPac-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 CR41(b)(3). l-IDs argued that under the WALLCA, (1) aplaintiffasserting a derivative action must be a member ofthe LLC 

### (see RCW 25.15.130(1)(d), .370, .375), (2) when Ostenson filed his bankruptcy petitionhe

was dissociated as a member ofthe LLC (and thus had only the rights ofan 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 behalfof

3No. 90891-5
Pac-0. Ostenson answered the motion arguing that HDs had consentedto the derivative action via a stipulationthatwas previously entered in the Ostenson's bankruptcy proceeding.2 The trial courttookthe matter under advisement and directed HDs to go forward andpresent their evidence. HDs presented witnesses overthe remainder ofthat day (July 13) and the next day but did not finish their testimony. The trial courtthen continuedthe matter several times. Finally on September 7, 2012, following additional briefing, the trial court granted HDs' CR41 motion. In its October 3, 2012 written findings and conclusions, the trial court 

### (1) rejected Ostenson's contentionthat HDs had waivedtheir CR41 motionbyputting 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 lawpreempts WALLCA regarding dissociation ofLLC members upon filing bankruptcy. Thetrial court denied Ostenson's motion for

2In making this argument, Ostenson relied on the W ALLCA, arguing that the consent exception to the dissociationprovision found in RCW 25.15.130(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 bejudicially and equitably estopped" from challenging Ostenson's standing to bring a derivative action. 3 Verbatim Report ofProceeding at 601. Ostenson reasserted those contentions on appeal (consent,judicial estoppel, collateral estoppel, and resjudicata), but the Court ofAppeals 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 ofconsent,judicial estoppel, collateral estoppel, and resjudicatain his petition for review. 4No. 90891-5


### reconsideration on January 23, 2013. Ostenson appealed, and Division Three affirmed, holding that HDs did notwaive their CR41 motion to dismiss, HDs did not consentto Ostenson bringing a derivative action, and federal bankruptcy law governing bankruptcy estates and executory contracts did notpreempt 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 ofhis derivative claim, based on Ostenson's lack ofstanding, by presenting defense evidence after the courttook HDs' CR41 motion to dismiss under advisement.3 

### Ostenson contends that the trial court's granting HDs' motion and the Court ofAppeals affirmance ofsame 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 rightto challenge the sufficiency ofthe plaintiffs evidence alone by presenting evidence in defense, thereby

3CR41(b)(3) provides: After the plaintiff, in an action tried by the court without ajury, has completed the presentation ofhis evidence, the defendant, without waiving his right to offer evidence inthe eventthe motion is not granted, may move for a dismissal on the ground that uponthe facts and the lawthe plaintiffhas shown no right to relief. The court as trier ofthe facts maythen determine them and renderjudgment againstthe plaintiffor may decline to render anyjudgmentuntil the close ofall the evidence. Ifthe courtrendersjudgment onthe merits againstthe plaintiff, the court shall make findings as provided inrule 52(a). Unless the court in its order for dismissal otherwise specifies, a dismissal under this subsection

. . . operates as an adjudication upon the merits. 5No. 90891-5 

### allowing the courtto consider the motion in light ofall ofthe evidence. 

### !d. at 709-10 ("[T]he failure ofthe trial courtto rule on such motion before introduction ofproofby a defendant, is tantamount to a denial ofthe motion.

. . . Therefore, this case must be viewed in the light ofall the evidence."). Here, the question in the motion to dismiss did notturn on the sufficiency ofthe evidence; the salient facts, the dates ofOstenson's bankruptcy filing and the subsequent filing ofhis 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 ifsufficiency ofthe evidence bore on any pertinent question, nothing indicates that the trial court limited itselfto 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 CR41 motion as Ostenson contends. The trial court did not err in granting the motion to dismiss under these circumstances.4

4 CfState V. Eide, 2 Wn. App. 789, 791,470 P.2d 220 (1970) (where appellant, atthe end ofthe state's case, started to move to dismiss, but was told by the trialjudgethat he could do so later without waiving his rights and thentestified in his own behalf, "defendanthad a rightto rely upon the assurance ofthe trial courtthat he could introduce evidence without waiving his challenge to the sufficiency ofthe evidence atthe close ofthe state's case"). 6No. 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 ipsofacto bankruptcy clauses." Appellant's Opening Br. at 28; Pet. for Review at 12. 6 

### We begin by noting the strongpresumption againstpreemption. While the supremacy clause ofthe 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. artVI, cl. 2), "any consideration ofpreemption issues 'start[s] with the assumption that the historic police powers ofthe States [are] not to be superseded by

... Federal Act unless that [is] the clear and manifestpurpose ofCongress."' (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 [ofState law] in an ambiguous case. . . . State laws are not superseded by federal law unless that is the clear and manifestpurpose ofCongress."' 

### !d.

5HDs argued in part to both the trial court and to the Court ofAppeals 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, '"Bybringing 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 RiverHouse Dev. Inc. v. IntegrusArchitecture, 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 onthe Court ofAppeals discussion oftimeliness and issue preservation. 6 Ostenson's arguments regarding the applicability of§ 365 have been a moving target. To the Court ofAppeals 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 thatthe 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 exceptionto§ 365(e)(1)'s ipso facto clause prohibitions (discussed below) does not apply here. 7No. 90891-5 

### (alterations in original) (quoting ProgressiveAnimal Welfare Soc'y v. Univ. ofWash., 125 Wn.2d 243, 265, 884 P.2d 592 (1994)). Even ifthere is an express preemption clause, this court will give it "a 'fairbut 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 (WALLCA) Provisions RCW 25.15.375 provides: In a derivative action, theplaintiff must be a member at the time of bringing the action and: (1)Atthe time ofthe transaction ofwhich the plaintiffcomplains; or (2) The plaintiffs status as a member had devolved upon him or her by operation oflaw or pursuantto the terms ofa limited liability company agreement from aperson who was a member at the time ofthe transaction. (Emphasis added.f Under RCW 25.15.130(1)(d)(ii), a member ofa limited liability company loses his or her membership upon the filing ofbankruptcy. The statute provides: (1)Aperson ceases to be a member of a limited liability company, and the person or its successor in interest attains the status ofan 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 ofall other members at the time, the member

. .. (ii)files a voluntarypetition 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 ofa limited liability company to recover ajudgment in its favor ifmanagers or members with authority t9 do so have refused to bring the action or ifan effort to cause those managers or members to bring the action is not likely to succeed. (Emphasis added.) 8No. 90891-5 Thus, under Washington law, Ostenson forfeited any rightto bring a derivative action on behalfofPac-0 when he petitioned for bankruptcy. The LLC agreement did not allow continued membership but conversely ended the bankruptpetitioning as a member in the limited liability company. As an assignee, the dissociated member retains rights to share inprofits but loses any managementrights. RCW 25.15.250(2).8 Ostenson argues only that the dissolution provision ofRCW 25.15.130(1 )(d) is preempted by federal bankruptcy law; to this courthe does not otherwise challenge the provisions or effect ofthe WALLCA. Federal Bankruptcy Law Provisions 11 U.S.C. 

### § 541 provides inpart: (a) The 

### commencement of a case under

... this title 

### creates an estate. Such estate is comprised ofall the following property, wherever located and bywhomeverheld: (1) Except as provided in subsections (b)[9] and (c)(2) ofthis 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 inparagraph (2) ofthis subsection, 

### an interest of the debtor inproperty becomesproperty of the estate under subsection (a) (I),

8RCW 25.15.250(1) and (2)(a) provide in relevant part, "The assignee ofa member's limited liability company interest shall have no right to participate in the management ofthe business and affairs ofa 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 ofincome, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned." 9Under§ 541(b)(l), the debtor's bankruptcy estate expressly does 

### notinclude "anypowerthat the debtor may exercise solely for the benefit ofan entity other than the debtor," which, by definition, would appear to include a derivative claim, the sole purpose ofwhich is to benefit the entity. 9No. 90891-5 (a)(2), or (a)(5) ofthis section 

### notwithstanding anyprovision in an agreement, transfer instrument, or 

### applicable nonbankruptcy law- (A) that restricts or conditions transfer ofsuch interest by the debtor; or (B) 

### that is conditionedon the insolvency or financial condition ofthe debtor, on the 

### commencement of a case under this title, or on the appointment ofor 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 ofthe debtor's interest in property. (Emphasis added.) State Law Determines Property Interest As can be seen, a bankruptcy filing triggers the creation ofa bankruptcy estate into whichthe debtor's property interest devolves. 

### See 11 U.S.C. § 541(a). The threshold i question, however, ofhow a debtor's interest is determined turns on application ofstate law. 

### See, e.g., Butner v. UnitedStates, 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 ofAppeals explained 

### inln re Pettit, 217 F.3d 1072, 1078 (9th Cir. 2000): Although the question whether an interest claimed by the debtor is "property ofthe estate" is a federal question to be decided by federal law, bankruptcy courts must look to state law to determine whether and to what extentthe debtor has any legal or equitable interests inproperty as ofthe commencement ofthe case. 

### See also Fisher v. Apostolou, 155 F.3d 876, 880 (7th Cir. 1998) ("The nature ofa debtor's interestinproperty is determined by state law, butthe question whether the

10No. 90891-5 

### resulting interest should count as 'property ofthe 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 ofAppeals reversed abankruptcy court's decision thatthe 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 thatprovision 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 ofthe property ofthe debtor's estate. Regardless of§ 541(a)'s scope, reliance upon it is misplaced. That provision merely defines what interests ofthe debtor are transferred to the estate. 

### It does not address the threshold questions ofthe existence and scope ofthe 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 limitedvalue ofthe licenses encumbered as they may be by the terms ofthe statutes which create the licenses and provide the conditions oftheir transfer."' Id. 

### at 1403 (quotingIn re Prof'lBar 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 subjectto 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 thanthe debtor had, and the estate takes its interest subject to the

11No. 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 ofbankruptcy proceedings all transfer restrictions on property in which the debtor holds an interest. Section 541(c)(1)(A), however, avoids only those restrictions which preventtransfer ofthe debtor's property to the estate.... [B]y its terms§ 541(c)(l)(A) applies only to "interest[s] ofthe debtor in property."

... Because [the state statute] placed no restrictions on the transfer oftheir 

### entire interests to their respective estates, it does not conflict with§ 541(c)(1)(A). 792F.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 ofthe Pac-0 LLC. The Court ofAppeals 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 behalfof the LLC. 

### !d. at 704. The other members ofthe 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

12No. 90891-5
ofthe LLC-butcouldno longer participate in management. !d. The Garrison-Ashburn court heldthat§ 541(c) did not change this analysis: This result does not offendthe Congressional intentionbehind Sections 54l(c) and 365(c) and (e). These provisions were intendedto expandthe bankruptcy estate to the maximum feasible extent and to preventthe loss ofvaluable assets bythe operation ofipso facto clauses that terminate valuable leases and otherrights uponbankruptcy. Here the estate receivedthe entire interest ofthe debtor in [the LLC] including its burdens andrestrictions. The economic interest, that is the membership interest, remains inthe estate and is available for the benefit ofcreditors. The enforcement of [debtor's] statutory dissociation does not cause a forfeiture ofthose rights or impair the legal capacity ofthe companyto continue inbusiness. Id. at 709. 10 Garrison-Ashburn reconciled the application ofboth state law and the federal bankruptcy codebyrecognizing 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, burdenedbywhatever state law requires.

10 While Garrison-Ashburn has been criticizedby 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. Forinstance, In reAlbright, 291 B.R. 538, 540 n.7 (Bania. D. Colo. 2003), observed: Where a singlemember files banlauptcywhile the othermembers ofa multimemberLLC do not, ...thebanlm1ptcy estate is only entitled to receive the share ofprofits or other compensationbyway ofincome and the return ofthe contributions to which thatmemberwould otherwisebe entitled. Additional cases that follow Garrison-Ashburn's approach includeIn re WesternAsbestos 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 maybe sold or collected to generate funds to be distributed funds to creditors."); In reA-ZElectronics, LLC, 350 B.R. 886, 890 n.12 (Bankr. D. Idaho 2006) (citingAlbrightwith approval); Fotouhi v. Mansdorf, 427 B.R. 798, 802 (Batllcr. N.D. Cal. 2010) (partner dissociatedupon filing banlauptcy);MilfordPower Co. v. PDCMilford Power, LLC, 866 A.2d 738, 759-61 (Del. Ch. 2004) (holdingthat neither§ 365 nor§ 541 preempted state law provisions that deprivebarum1pt members ofgovernance rights). 13No. 90891-5


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

### butthose cases either do not acknowledge or fail to apply Butner,11 

### or are otherwise distinguishable or not persuasive. For instance, In re FirstProtection, Inc., 

### 440 B.R. 821, 830 (B.A.P. 9th Cir. 2010), held that under§ 541(a) all ofthe debtor's rights devolved to the estate and into the hands ofthe 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-memberLLC and, thus, there were no other members to manage the LLCifthe trustee could not do so, nor were there any other nondebtor

. 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-butfailed to apply that rule. The court acknowledged that a state statute specifically defined an LLC member's interest as '"amember's share ofthe profits and losses"' ofthe LLC and "'theright 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 notjustthe interest as above definedby 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 ofButner.and no analysis ofthreshold determination ofdebtor'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 TheNinth Circuit Banlauptcy Appellate Panel in FirstProtection acknowledged the distinction made inAlbright (quoted above) that a different result would obtain where the LLC member who files a bankruptcy petitionbelongs to a single member LLC or a multiple member LLC. See FirstProt., 440 B.R. at 829 n.13. 14No. 90891-5
Ninth Circuit's analysis in

### Farmers. See Farmers, 792 F.2d at 1402 (holding that § 541(a) addresses only the transfer ofdebtor's interestto the estate and is "irrelevant" as to the threshold determination ofthe existence and scope ofthe debtor's interest). As this portion ofthe 

### FirstProtection decision does not adhere to 

### Butner, does not follow Ninth Circuitprecedent, and is contrary to the presumption againstpreemptionthatthis court applies, 

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

### FirstProtection persuasive. Ostensen cites

### In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993), 

### abrogatedon othergrounds by Law v. Siegel,_U.S. _,134 S. Ct. 1188, 188 L. Ed. 2d 146 (2014), for the propositionthat§ 541(a)(1)'s establishment ofa bankruptcy estate sweeps broadly to include every conceivable interest ofthe debtor "future, nonpossessory, contingent, speculative, and derivative." But all examples given therein concern money. 

### See id. The availability to the estate ofall ofthe 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 ofa debtor's 

### interest in property is decided by state law. 

### See id. (stating, "The question whether an interest claimed by the debtor is 'property ofthe estate' is a federal question to be decided by federal law; however, courts must look to state law to determine whether and to what extentthe debtor has any legal or equitable interests in property as ofthe commencement ofthe case"). 

### Yonikus does not assist Ostenson.

15No. 90891-5


### Ostenson also relies onIn 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 ofthe LLC and the termination ofall 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 ofthe LLC under the state statute

or operating agreement in these cases would result in depriving the estate ofall ofthe debtor's interest. That is notthe 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 ofcreditors." Garrison-Ashburn, 

### 253 B.R. at 709. In sum, we find thatthe Court ofAppeals properly followed Garrison-Ashburn, 

### federal banlcruptcy code, and Washington law. 14

13No party has argued that Ostenson'sbanlauptcy filing resulted in dissolution. Butthe operating agreementprovides that "the Company shall dissolve upon ... the occurrence ofariy event ofMember dissociationprovided inthe Act

... unless the business ofthe Company is continued with the consent ofall ofthe 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 withthe consent ofthe remaining member, GHI. 14 Two recent cases from Virginia demonstrate the lack ofcoherence in this area. InIn re Virginia Broadband, LLC, 498 B.R. 90, 93-94 (Bankr. W.D. Va. 2013), a bankruptcy court addressed application ofa state statute that dissociated an LLC member upon becoming a debtor inbanlauptcy and thereby transformed the member's interest into that ofan assignee with only economic interests. Purporting to rely on Garrison-Ashburn, the Broadbandcourt held thatthe state statute in question was an invalid ipso facto provisionunder § 541( c)(1)(B) and that the 16No. 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 orrenderunenforceable ipsofacto bankruptcy clauses." Pet. for Review at 12. The relevant statute, 11 U.S.C. § 365 provides inrelevantpart: (e)(l) Notwithstanding a provision in an executorycontract orunexpiredlease, or in applicable law, an executorycontract orunexpired lease ofthe debtor maynot be terminated ormodified, and anyright or obligationunder such contract or lease maynotbe terminated ormodified, at anytime afterthe commencement ofthe case solelybecause ofa provision insuch contract orlease that is conditioned on- (B) the commencement ofa case underthis title

... (2) Paragraph (1) ofthis subsectiondoes notapply to an executory contract or unexpired lease ofthe debtor, whether ornot such contract orlease prohibits or restricts assigmnent ofrights or delegation ofduties, if-- (A)(i) applicable law excuses aparty, otherthanthe debtor, to such contract orlease from accepting performance from orrendering performance to the trustee orto an assignee ofsuch contract or lease, whether ornot such contract orleaseprohibits orrestricts assignment of rights or delegation ofduties; and (ii) suchpartydoes not consentto such assumption or assignment. (Emphasis added.)15

debtor's economic and noneconomic interests in the LLC becameproperty ofhisbanlm1ptcy estate. Jd. at 96-97. However, inIn 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 theirrespective estates, but that such interest was determinedbythe state statute. Thus, as defined bythe state statute, a dissociated memberretained only economic rights, and since both LLC members had been dissociated throughbankmptcy 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 "'strongpresumption"' against finding preemption ofRCW 25.15.130(l)(d)'s dissociationprovision. Hue, 127 Wn.2d at 78 (quoting Progressive, 125 Wn.2d at 265). 15 Similarly,§ 365(c) provides inpart: 17No. 90891-5
Section 365 applies to executory contracts. 16 As 

### FirstProtection 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 ofthe debtor it is treated differently." 440 

### B.R. at 830. 17 Notably, "ifthe operating agreement is an executory contract ... § 365 governs the trustee's rights rather than§ 541(c)(l). In

The 

### trustee may notassume or assign 

### any executory contract or unexpired lease 

### of the debtor, whether ornot such contract or lease prohibits or restricts assignment ofrights or delegation ofduties, 

### if-- (l)(A) 

### applicable law excuses aparty, otherthanthe debtor, to such contract or lease from accepting performance from orrendering performanceto an entity otherthanthe debtor orthe debtor inpossession, whether or not such contract or leaseprohibits or restricts assignment ofrights or delegation ofduties; 

### and (B) 

### suchparty 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)'sprohibition. In any event, as the Court ofAppeals held, it ultimately does not matter whetherthe Pac-0 operating agreement qualifies as an executory contractbecause, even ifit does, under the circumstances ofOstenson'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 powerto reject those executory contracts whichhe finds burdensome to the bankrupt's estate is an extension ofhis power to renounce title to and abandon burdensome property which is already apart ofthe estate. Because executory contracts ... involve future liabilities as well as rights, however, an affirmative act ofassumption 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 ofthe date ofthe filing ofthe bankruptcy petition. They vest only upon the trustee's timely and affirmative act ofassumption." First Prot., 440 B.R. at 830 (alterations in original) (quoting In re Lovitt, 757 F.2d 1035, 1041 (9th Cir.1985) (citations omitted)). 18No. 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 ofthe Bankruptcy Code is a "question offederal law." Id. at 831 (citingIn reAlexander, 670 F.2d 885, 888 (9th Cir.1982)). "A contract is executory only when the 'obligations ofboth parties are so far unperformed that the failure ofeitherparty to complete performance would constitute a material breach and thus excuse the performance ofthe other."' Id. (quotingIn re Ehmann, 319 B.R. 200, 204 (Bankr. D. Ariz. 2005)). Here, the Court ofAppeals 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 contractbecause the court otherwise held that"§ 365(e) ofthe 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 thatthe "final step" in any analysis ofexecutory 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 notLLCs. Pet. for Review at 17. ButDivision

19No. 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 didnot err in applying by analogy a partnership case that addressed application ofsection§ 365(e)(2). In

### Finkelstein, Division One held that a state law provisionthat dissolved a general partnership uponthe filing ofbankruptcyby any ofthe partners was not supersededby§ 365(e)(1)'s invalidation ofipso facto provisions. Therein, Finkelstein

was a minoritypartner in two related general partnerships, each ofwhich served as general partners for several limitedpartnerships. Finkelstein filed for bankruptcyunder chapter 11 and later converted to chapter 7. Before the bankruptcy filing, each general partnership agreementprovidedthat the partnership wouldnot dissolve orterminate upon the death, incapacity, orbankruptcy ofanypartner. After Finkelstein filed bankruptcy, each general partnership then amended its partnership agreement to exclude Finkelstein

as a partner. Finkelsteinthen sued the general partnerships for an accounting andbreach offiduciary duties andbrought a derivative action onbehalfofseveral ofthe limited partnerships. The trial court dismissed Finkelstein's claims on statute oflimitations grounds, and Division One affirmed, holding inpart that state partnership law was not supersededbyfederal bankruptcy law, thatthe partnerships dissolvedunder state partnership law whenFinkelsteinbankruptcy case was convertedto chapter 7, andthat as

18 See also Sally S. Neely, Partnerships andPartners andLimitedLiability Companies and Members in Bankruptcy: ProposalsforReform, 71 AM. BANKR. L.J. 271, 317 (1997) ("[B]ecause ofthe similarities between LLCs and partnerships in this area ofinquiry, the cases [involvingpartnerships] also provide guidanceregarding the appropriate consequences ofthe bankruptcy ofa member ormember-manager ofa[n] LLC."). 20No. 90891-5

a former partner Finkelsteinhad no standing to bring breach offiduciary duty claims or a derivative action onbehalfofthe limitedpartnerships. 

### Finkelstein, 76 Wn. App. 733. Relevanthere, noting that courts have "'generally assumed thatpartnership agreements are ... executory contracts,"' Division One held that "[debtor's] bankruptcy trustee was not free to assume the contract under § 365 because the otherpartners 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, andpartners are not obligatedto accept a substitution for their choice ofpartner." 

### !d. at 737. The court additionallyheld that "[t]he restraint on assumability also makes the deemedrejectionprovision of§ 365[(d)(l)] inapplicable to the partnership agreement. Therefore,§ 365(e)'s invalidation ofipso facto provisions does not apply, and state partnership law is not superseded." 

### !d. (citation omitted). The 

### Finkelstein courtrelied 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 ruledthat§ 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' intentionto prevent onlyprivate 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 clearlynot applicable to the executoryportion ofthe partnership contract [i.e., described

as managementrights and duties] becausepartnership agreements are purely consensual

21No. 90891-5 

### and the freedom ofthe partners to associate and dissociate is the heart ofpartnership 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 ofhis share. [Debtor] ceased to be a member ofthe 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 ofAppeals sustainably relied onFinkelstein in holding that§ 365 did not preempt Washington law that removed Ostenson as a member ofPac-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 apartnership, 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 andLimitedLiability Companies andMembers in Bankruptcy: Proposalsfor Reform, 71 AM. BANKR. 

### L.J. 271,312 (1997) (same); FirstProt., 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 prejudicedby 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 (quotingIn 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 ofa member's LLC interest "inwhole or in part," that statute nevertheless expressly protects the associational interests ofthe remaining members by providing: The assignee ofa member's limited liability company interest shall have no right toparticipate in the management of the business andaffairs 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 ofan assignee to become a member, states in pertinentpart, "An assignee ofa 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 ofAppeals did not err in applying Finkelstein 

### to Ostenson's case and affirming the dismissal ofhis derivative claim. Ostenson does not effectively argue otherwise. He cites to SummitInvestment & 

### 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. Butthe 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

23No. 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 CatapultEntertainment, Inc., 165 F.3d 747 (9th Cir.), 

### cert. dismissed, 528 U.S. 924 (1999). The Ninth Circuit Court of Appeals noted that underthe 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 Circuitheld, "[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 ofthe nondebtor party." 

### Id. at 754-55. As noted, RCW 25.15.250(1)(a) and RCW 25.15.260(1)(a) ofthe WALLCArequire the express approval oftheLLC nondebtor members regarding any transfer or assumption ofmembermanagementrights. To the extentthe LLC operating agreement may qualify as an executory contract concerning management, the noted "applicable law excuses a party, otherthan the debtor [i.e., the nondebtor members],

... from accepting performance from or rendering performance to ... an assignee," and "suchparty [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)'sprohibition ofipso 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 ofthe operating agreement to a different entity, the§ 365(e)(2) exception to§ 365(e)(1)'s prohibitionto 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 24No. 90891-5
CONCLUSION We conclude that HDs did not waive their CR41 motion to dismiss and that federal bankruptcy law, 11 U.S.C. §§ 541 or 365, does notpreemptRCW 25.15.130(1)(d)'s dissociationprovision. As to the latter issue, we hold that state law defines whatthe 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. Buthere, the express protections ofassociational rights ofnondebtormembers found in the WALLCA triggers§ 365(e)(2)'s exception, rendering§ 365(e)(1)'s prohibition against ipso facto clauses inapplicable. We affirm.

Rules ofAppellate 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 ofthe

...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)). 25No. 90891-5



### WE CONCUR:



### 26