The Fifth Circuit Asks Texas Supreme Court – Is an Interest in a Texas LLC Exempt Property Under Texas Law?

Tex. Bus. Orgs. Code §101.112 protects the operations of Texas limited liability companies from disruption by prohibiting a creditor or other party not otherwise authorized “to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.” That same section, however, recognizes charging orders as liens, and in fact makes them “… the exclusive remedy by which a judgment creditor may satisfy a judgment” against a judgment debtor’s membership interest.  But it also provides that the lien may not be foreclosed on, leaving the creditor to hope to satisfy the judgment out of cash distributions on account of the interest.

In Matter of Canada, the case came to the Fifth Circuit on an appeal from the bankruptcy court to the district court, and then to the Fifth Circuit arising out of William Canada’s Chapter 7 bankruptcy case. No. 25-10548, 2026 WL 376475 (5th Cir. Feb. 11, 2026). Canada claimed his 70% interest in DAD Drilling, LLC as exempt property, and thus beyond the reach of his creditors. His trustee, Daniel Sherman, objected. The bankruptcy court upheld Sherman’s objection, finding no explicit exemption in the Tex. Bus. Organizations Act, and that other Texas courts held that the interest in a Texas LLC is non-exempt property.

Canada appealed to the U.S. District Court, which denied the appeal. The District Court affirmed the bankruptcy court and added that Chapter 42 of the Texas Property Code, containing a list of categories of Texas exempt property, did not mention LLC interests.

Canada appealed to the Fifth Circuit. In a panel decision, the court surveyed the law and noted subsection “(e) “ of the Tex. Bus. Orgs. Code §101.112: “This section may not be construed to deprive a member of … the benefit of any exemption applicable to the membership interest of the member….”

Texas intermediate courts have ruled that LLC interests are not exempt property, but the Fifth Circuit was concerned that subsection (e) might “muddy the picture.” Because the Texas Supreme Court has never ruled on the topic, and that the legal issue is “sufficiently close, recurring and important,” the Fifth Circuit had two options: (1) make an “Erie” guess about what the Texas S. Ct. might hold Texas law to be, or (2), just ask the Texas S. Ct., by way of a “certified question,” to decide the matter. While the appeal arose out of a bankruptcy case (a federal matter), state law defines property rights, thus making it important for state court litigators, corporate lawyers, as well as bankruptcy lawyers to know what Texas law is.

Thus, the Circuit certified the following question to the Texas Supreme Court:

Is an LLC membership interest exempt property in a federal bankruptcy proceeding, based on section 101.112 of the Texas Business Organizations Code?

As always, the Circuit disclaimed any intention to limit the Texas S. Ct. to the precise form or scope of the question.

What are the possible outcomes and why it matters?

The Texas Supreme Court may answer the question narrowly or change the scope of the question in its reply. Itis also possible the Texas S. Ct. will decline to answer, but that seems unlikely.

The Texas Supreme Court may simply confirm that, in its view, the Texas appellate courts properly stated the law that interests in Texas LLC’s are not exempt assets in bankruptcy cases.  That will leave unanswered whether there is some other exemption buried deep in a Texas statute that so far no one has found. This is what the Fifth Circuit described as “muddy.”

Whichever way the ruling goes will have an effect on state court litigation and collection actions as well as bankruptcy cases. Additionally, it will further inform investors on where, and under what corporate form, to base their businesses. 

Will the ruling strengthen already strong Texas LLC protections? Stay tuned for further developments.