Fifth Circuit Certifies Texas LLC Exemption Question to State Supreme Court

United States Court of Appeals for the Fifth Circuit ____________ No. 25-10548 ____________ In the Matter of Willi am R. Canada Jr., Debtor, William R. Canada Jr., Appellant, versus Daniel J. Sherman, Appellee, ______________________________ Appeal from the United States District Cour t for the Northern District of Texas USDC No. 3:23-CV-2834 ______________________________ Before Southwick, Willett, and Ho, Circuit Judges. James C. Ho, Circuit Judge: To decide this appe al, we must de termine whether an interest in a limited liability company governed by Texas law is exempt property in a federal bankruptcy proceeding. The question turns on the proper interpretation of Texas law. The i ssue is sufficiently close, recurring, and important that we certify the ques tion to the Supreme Court of Texas. United States Court of Appeals Fifth Circuit FILED February 11, 2026 Lyle W. Cayce Clerk Case: 25-10548 Document: 53-1 Page: 1 Date Filed: 02/11/2026

No. 25-10548 2 I. William Canada declared bankruptcy. During those proceedings, Canada contended that hi s 70% ownership interest in DA D Drilling, LLC, is exempt from the bankruptcy estate. See In re Canada, 2023 WL 8446204, *1 (Bankr. N.D. Tex.). Daniel Sherman, the bankruptcy trustee, objected to this exemption. The bankruptcy court sided with Sherman and denied the exemption, noting that the Texas Business Organizations Co de does not explicitly create such an exemption, and that Texas courts have held that a membership interest in a limited liability company (LLC) is non-exempt property. Id. at *6. The district court affirmed the bank ruptcy court, and observed that no exemption is found in Chapter 42 of the Texas Property Code, where bankruptcy exemptions are norm ally found. See Canada v. Sherman, No. 3:23-CV-02834-E, *4 (N.D. Tex. March 18, 2025). Canada timely appealed. The parties agree that this appeal concerns a question of state law statutory interpretation, and that we review s uch questions de novo. II. Federal bankruptcy law allows debt ors to exempt property from the bankruptcy estate, pursuant to either fe deral law or the law of their domicile state. See 11 U.S.C. § 522(b); see also, e.g., In re G o f f, 706 F.2d 574, 579 (5th Cir. 1983) (“Section 522(b) permits a bankrupt a choice between a ‘federal’ or ‘state’ exemption system. The debtor may elect to exempt either as the ‘federal’ exemption the property set ou t in subsection (d) of Section 522 of the Code, or as the ‘state’ exemptions the property specified as exempted under the law of his do micile, plus prop erty exempted by ‘Federal law, other than subsection (d).’”); In re Walden, 12 F.3d 445, 448 (5th Cir. 1994) Case: 25-10548 Document: 53-1 Page: 2 Date Filed: 02/11/2026

No. 25-10548 3 (relying on Texas law to determine wh ether certain properties were exempt from the bankruptcy estate). The parties agree that state law can create exemptions in federal bankruptcy proceedings, and that the only question here is whether Texas has exempted LLC membership interests. Chapter 42 of the Texas Property Code contains a number of relevant exemptions. See, e.g., Tex. Prop. Code § 42.002. But exemptions can also be found in other provisions of Texas law. See, e.g., Tex. Ins. Code § 1108.051; Tex. Gov’t Code § 831.004. Consider, for example, the following provisions of section 101.112 of the Texas Business Organizations Code, concerning interests in limited liability companies: (c) A charging order constitutes a lien . . . [and] may not be foreclosed on under this code or any other law. (d) The entry of a charging order is the exclusive remedy by which a judgment cred itor of a member or of any other owner of a membership in terest may satisfy a judgment out of the judgment debtor’s membership interest. (e) This section may not be construed to deprive a member . . . of the benefit of any exemption laws applicable to the membership interest of the member. . . . (f) A creditor of a member or of any other owner of a membership interest does not have the right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company. Tex. Bus. Orgs. Code § 101.112. Texas courts have construed these pr ovisions to “prevent disruption of a partnership’s business by a judgme nt creditor seeking to force an execution sale of a partner’s interest to satisfy a nonpartnership debt.” Case: 25-10548 Document: 53-1 Page: 3 Date Filed: 02/11/2026

No. 25-10548 4 Pajooh v. Royal W. Invs. LLC, Series E, 518 S.W.3d 557, 562–63 (Tex. App.— Houston [1st Dist.] 2017, no pet.) (citing S t a n l e y v. R e e f S e c s., I n c., 314 S.W.3d 659, 664 (Tex. App.—Dallas 2010, no pet.)). But the parties agree that the Texa s Supreme Court has not answered the question of whether LLC membersh ip interests are exempt property. Resolving this appeal would ther efore require us to make an Erie guess. See, e.g., Hux v. Southern Methodist Univ., 819 F.3d 776, 780–81 (5th Cir. 2016). When making an Erie guess, we may look to the decisions of intermediate state appellate courts. But we need not follow those decisions if we determine that the highest court of the state would decide o therwise. See, e.g., id.; Am. Int’l Specialty Lines Ins. Co. v. Rentech Steel LLC, 620 F.3d 558, 567 (5th Cir. 2010). Alternatively, we can certify the question to the Supreme Court of Texas. “On occasion, we have cons idered the following factors when deciding whether to certify: (1) the closeness of the question and the existence of sufficient sources of state law; (2) the degree to which considerations of comity are relevant in light of the particul ar issue and case to be decided; and (3) practical limit ations of the certification process: significant delay and possi ble inability to frame the issue so as to produce a helpful response on the pa rt of the state court.” JCB, Inc. v. The Horsburgh & Scott Co., 912 F.3d 238, 241 (5th Cir. 2018) (quotations omitted). III. The question in this case is whether section 101.112 makes LLC membership interests exempt property in a federal bankruptcy proceeding. On the one hand, Texas intermediate courts have repeatedly found that LLC membership interests are no t exempt as a matter of Texas law. See, e.g., Klinek v. LuxeYard, Inc., 672 S.W.3d 830, 839 (Tex. App.—Houston Case: 25-10548 Document: 53-1 Page: 4 Date Filed: 02/11/2026

No. 25-10548 5 [14th Dist.] 2023, no pet.) (“A member’s ownership interest in a limited liability company is a non-exempt asset.”); Heckert v. Heckert, 2017 WL 5184840, *7 (Tex. App.—Ft. Worth, Nov. 9, 2017, no pet.) (holding that membership interests in LLCs are non-exempt under state law); Henderson v. Chrisman, 2016 WL 1702221, *4 (Tex. App.—Dallas Apr. 27, 2016, no pet.) (holding that section 101.112 of the Texas Business Organizations Code did not make the contested LLC membership interest exempt). But on the other hand, the plain language of section 101.112 may muddy the picture. By its terms, th e statutory text creates an exclusive remedy by which judgment credit ors may reach LLC membership interests—and that is arguably a stro nger statement of exemption than other uncontested exemptions, su ch as those which only exclude certain types of remedies. Compare Tex. Bus. Orgs. Co de § 101.112(d) (“The entry of a charging order is the exclusive remedy ”) (em phasis added), with Tex. Rev. Civ. Stat. art. 6243n § 11(d) (stating that the “funds or money mentioned... are not subject to execution, levy, attachment, garnishment, the operation of bankruptcy or insol vency law, or an y other process of law whatsoever”). Moreover, section 101.112(f) uses the wo rd “creditor” without modification or limitation—thus leaving room for the interpretation that the section restricts non-judgment creditors. The question in this case is rea sonably close and contested. It implicates the interplay betw een state and federal law. See 11 U.S.C. § 522(b) (allowing those declaring bankruptcy to choose between the exemptions offered by a state or t hose offered by federal law); see also JCB, Inc., 912 F.3d at 241 (noting “considera tions of comity” as a reason for certification). And we can expect the issue to recur, given the prevalence of LLCs in Texas. See, e.g., Press Release, Governor Abbott Celebrates Over 3 Million Active Texas Business Entities, Nov. 5, 2025, https://perma.cc/CS8A- Case: 25-10548 Document: 53-1 Page: 5 Date Filed: 02/11/2026

No. 25-10548 6 MLJ6 (stating that LLCs are the “largest classification” of business incorporations in Texas). Accordingly, we respectfully requ est that the Supreme Court of Texas address the question that we certify belo w, as we have done in other appeals involving asserted bankruptcy exemptions under Texas law. See, e.g., In re Villarreal, 402 F. App’x. 28 (5th Cir. 2010); In re Norris, 413 F.3d 526 (5th Cir. 2005). IV. We hereby certify the following question of law to the Supreme Court of Texas: Is an LLC membership interest exempt property in a federal bankruptcy procee ding, based on se ction 101.112 of the Texas Business Organizations Code? We disclaim any intention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the question certified. Case: 25-10548 Document: 53-1 Page: 6 Date Filed: 02/11/2026