She owns 20 percent of a Taos LLC that runs a small inn, and the operating agreement gives her personally the exclusive right to run its restaurant. The two managing members locked her out anyway and leased the space to their own company. Weeks after she sued them in state court, the LLC filed Chapter 11 in the U.S. Bankruptcy Court for the District of New Mexico, and the managers’ lawyer wrote that her lawsuit now belongs to the bankruptcy estate.
That letter is often half right. Which claims stay hers decides who controls the case and whether a plan injunction can shut her out, and New Mexico law on the question is thinner than owners expect.
Who owns an LLC member’s lawsuit once a New Mexico LLC files bankruptcy?
The estate takes “all legal or equitable interests of the debtor in property as of the commencement of the case” under 11 U.S.C. § 541(a)(1), and lawsuits are property. A claim the LLC could bring against its managers goes to the estate; a claim the member holds in her own right does not. Butner v. United States, 440 U.S. 48, 55 (1979), holds that “Property interests are created and defined by state law,” and Sender v. Simon, 84 F.3d 1299 (10th Cir. 1996), applies that to causes of action: state law decides whether a claim belongs to the debtor.
Pressing an estate-owned claim can be an act “to exercise control over property of the estate,” barred by 11 U.S.C. § 362(a)(3), even against the managers. The bankruptcy judge decides ownership; the Tenth Circuit Bankruptcy Appellate Panel reversed a court that left it to a state judge in In re Hafen, 616 B.R. 570 (B.A.P. 10th Cir. 2020).
Her stake is narrow. “A member has no interest in an item of limited liability company property” (NMSA 1978, § 53-19-29(A)), and her own creditors can reach her interest only by charging order under § 53-19-35. That equity sits behind every creditor, so her leverage lies in the agreement’s personal promises.
How does New Mexico law decide whether an LLC member’s claim is direct or derivative?
The Limited Liability Company Act, NMSA 1978, § 53-19-1 et seq., has no member derivative-suit provision; § 53-19-58 by default requires a vote of non-adverse members before a member sues in the LLC’s name. Judge Jacobvitz noted the gap in In re Patel, Adv. No. 10-1200 J (Bankr. D.N.M. 2012), citing § 53-19-65(B), which supplements the Act with legal principles “including such principles applicable to corporations and their owners.” A 2023 bill to adopt the Revised Uniform LLC Act died.
So corporate law fills in. Marchman v. NCNB Texas National Bank, 120 N.M. 74 (1995), bars a shareholder suit over a corporate injury unless the wrongdoer owed the shareholder “a special duty, such as a contractual duty,” or the shareholder “suffered an injury separate and distinct from that suffered by other shareholders.” Clark v. Sims, 2009-NMCA-118, 147 N.M. 252, relaxed that for close corporations with an ALI test that asks whether a direct suit would prejudice creditors.
I found no New Mexico appellate decision applying either case to an LLC, and none citing Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Tooley asks who suffered the harm and who gets the recovery, and it disapproved the “special injury” idea Marchman’s second exception resembles. The Second Circuit applied Tooley in Little Hearts Marks Family II L.P. v. Carter, 130 F.4th 272 (2d Cir. 2025) because New York’s intermediate courts had adopted it. Predicting New Mexico’s rule from its lower courts and the weight of authority, as Wade v. EMCASCO Ins. Co., 483 F.3d 657 (10th Cir. 2007), directs, I expect the bankruptcy court here would start from Marchman and Clark and treat Tooley as support.
Can a Chapter 11 plan injunction wipe out a member’s claims against the managers?
Only the estate’s claims. Section 1123(b)(3) lets a plan settle estate claims or keep them for “a representative of the estate appointed for such purpose,” the basis for litigation trusts, and § 1141(a) binds members who voted no. Releasing her own claims against the managers without consent is different, and Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024) held the Code does not allow it. The Tenth Circuit had refused a similar injunction in In re Western Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990), because it effectively released a nondebtor.
Purdue left open what counts as consent, and I found no Tenth Circuit or District of New Mexico ruling on opt-out ballots since, so ignoring a ballot is risky. The larger trap is labels. In Little Hearts the sorting came after confirmation. The fiduciary claims against the managing member were enjoined as derivative while the member’s own operating-agreement claims survived, and those went back to the bankruptcy court to address jurisdiction and abstention first, the subject of the firm’s post on mandatory abstention and remand.
Is a “direct” claim always the better result for a frozen-out member?
No, and here I read Little Hearts differently from most summaries. Its direct claims ran against a co-member and its owner, not the debtor. If the LLC itself made the promise, the direct claim is an unsecured claim paid in plan dollars, and the debtor can reject the promise under 11 U.S.C. § 365(a), which turns it into a prepetition damages claim (§§ 365(g)(1), 502(g)(1)), as the firm’s post on rejecting a bad contract explains.
A derivative recovery pays creditors first, but it is often the bigger claim, and a trustee may sell it under § 363(b)(1) or place it in a trust the member helps fund for a share of collections. Little Hearts also noted that a direct recovery may shrink the member’s share of any fiduciary recovery.
How would a Taos restaurant member’s claims sort out in the New Mexico bankruptcy court?
An illustrative example with invented figures: four members own a Taos LLC with a 22-room inn. Elena holds 20 percent, and the operating agreement gives her the exclusive right to operate the restaurant through 2031, which the other members promise to honor. In March 2026 the two managing members, holding 60 percent, lock her out and lease the space to their own company at $900 a month; fair rent is $2,000. The LLC files Chapter 11 on March 1, 2027, owing the bank $2.4 million and trade creditors $310,000.
The cheap lease costs the LLC $13,200 over the year, and the managers’ company keeps about $95,000 in restaurant profit. Both harms fall on the company, and § 53-19-16(D) makes managers hold as trustee for the LLC any benefit from using its property, so that $108,200 claim is derivative and goes to creditors first. Elena’s lost profits, say $150,000, rest on a contractual duty owed to her alone, so her claim against the managers is direct and needs her consent to release. Against the LLC, the same claim at a 20 percent plan dividend is worth $30,000. The lost value of her 20 percent is a closer call, but with creditors unpaid I would expect a derivative ruling despite Clark.
What should a frozen-out member do before the plan is confirmed?
A creditor scheduled as disputed, contingent, or unliquidated must file a proof of claim under Fed. R. Bankr. P. 3003(c)(2) or lose voting and distribution rights. Under § 1109(b) she can be heard on any issue, including release language, and should demand a carve-out for her direct claims. Managers running the debtor will not sue themselves; § 1104(a)(1) permits a trustee for “dishonesty” or “gross mismanagement” by current management. A § 362(d)(1) motion or comfort order protects a continued suit in Taos.
A cheap settlement of the derivative claim needs approval under Fed. R. Bankr. P. 9019, on notice to creditors, and she can object. Abandonment under 11 U.S.C. § 554(a) generally returns the claim to the debtor and the same managers. Appeals are limited to persons “directly and adversely affected pecuniarily” (Holmes v. Silver Wings Aviation, Inc., 881 F.2d 939 (10th Cir. 1989)), so a member who is also a creditor or bidder stands on firmer ground.
| Claim in the Taos example | Who owns it | Where a recovery goes | Member’s move |
|---|---|---|---|
| Below-market lease and diverted profit | Estate (derivative) | Creditors first | Seek a trustee or bid |
| Managers’ breach of her exclusive-use promise | Member (direct) | Member | Carve-out; opt out |
| LLC’s breach of the same promise | Member, as creditor | Plan dividend | Proof of claim; watch for rejection |
| Lost value of her 20 percent | Likely the estate | Creditors first | Treat as derivative unless Clark fits |
Frequently Asked Questions
Can I keep suing the managers after the LLC files Chapter 11?
Claims personal to you generally are not estate property, but overlapping claims may be. The bankruptcy court decides, so ask it for stay relief or a comfort order first.
Has New Mexico adopted the Delaware Tooley test for LLC member claims?
Not that I could find. New Mexico courts use Marchman’s two exceptions, which Clark v. Sims relaxed for close corporations, and the LLC Act points courts to corporate principles.
Does a plan injunction against estate claims bar all my claims against the managers?
No. It reaches only claims the estate owns, and after Purdue Pharma a plan cannot release your own claims against nondebtors without consent. Read the ballot, because consent is still unsettled.
If my operating-agreement claim is direct, will it be paid in full?
Only if it runs against someone who can pay. Against the managers personally it keeps full value; against the bankrupt LLC it is an unsecured claim paid at the plan’s rate.
Can I buy the estate’s claim against the managers?
Often. A trustee can sell litigation after notice and a hearing, and a plan can move claims into a trust. A member who outbids the settlement value can end up controlling the case.
How North Star Law Firm Can Help
North Star Law Firm’s bankruptcy practice advises New Mexico LLC members on proofs of claim, plan objections, and claim purchases when a company files Chapter 11 or Subchapter V.
Phillip Zagotti, JD/CPA, is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS and the U.S. Tax Court. The firm works alongside New Mexico-licensed counsel on state-law questions. If you have been frozen out of a New Mexico LLC that is now in bankruptcy, contact North Star Law Firm.