In re Ichiban, Inc.

Ichiban, Inc. (debtor) filed for chapter 7 bankruptcy. Ichiban’s bankruptcy estate owned a roughly 16 percent membership interest in I3 Group, LLC (the company) and a promissory note payable to Ichiban from the company. Section 9.01 of the company’s operating agreement set out a right of first refusal that required a member interested in selling its membership interest to first offer the interest to the company at the sale price. The member’s failure to offer the interest constituted a material breach of the operating agreement. Section 9.01 also obligated the company to give notice to the company’s members and manager of the potential sale of a membership interest in a bankruptcy proceeding. The company’s failure to give the required notice constituted a material breach of the operating agreement. Section 9.01 also placed additional direct and contingent obligations on the company and its members related to the right of first refusal. During the bankruptcy proceeding, Ichiban’s chapter 7 trustee proposed to sell the bankruptcy estate’s membership interest and the promissory note at a public auction without first offering the interest to the company. The company objected based on § 9.01 and asserted that the company had the right at the end of the auction to purchase the membership interest at the highest bid. In considering the trustee’s motion to sell, the bankruptcy court needed to determine whether the right of first refusal in the operating agreement was an executory agreement and could thus be assumed or rejected under 11 U.S.C. § 365. If the court deemed the right of first refusal to be an executory contract, the trustee had already rejected it by failing to assume it by a specified date. By contrast, if the right of first refusal was deemed a nonexecutory contract, the trustee could not reject it, and it would remain enforceable.