![]() ![]() 6, § 18-806 empowers the bankruptcy Trustee, as personal representative of the last remaining member, to consent to the continuation of the LLC and to become the sole managing member of the LLC.”2īecause the LLC in question in Modanlo was a single member LLC, the bankruptcy court found that the Trustee “had the power to place into bankruptcy upon his appointment, and, standing in the shoes of the Debtor and complying with the mandates of the Delaware Act, possesses both the economic and governance rights to participate in the management of the LLC that the Debtor himself enjoyed prior to his bankruptcy filing.”3 The Colorado District Court in Albright came to a similar conclusion, holding that, upon the filing of the Chapter 7 Bankruptcy, the Trustee was effectively assigned the Debtor’s membership interest in the LLC, pursuant to 11 U.S.C. ![]() One of the threshold questions in determining the extent of a Trustee’s rights in a Debtor’s LLC membership interest is whether there are other membership interests in that LLC. The traditional rule with LLCs in bankruptcy has been that the property of the estate encompasses only the Debtor’s economic interests (i.e., rights to payment and distribution) and not any of the Debtor’s authority to manage or control the LLC. This is the typical result when a charging order is granted with respect to the LLC. In Modanlo the court, applying Delaware law, held that, though this truism did apply in situations where there were other members in the LLC besides the Debtor (“in order to protect them from the rigors of an undesired comanagement relationship”), it did not apply where the Debtor was the sole member of the LLC.1 Because the Chapter 11 Debtor was a sole member, and because Delaware law provides that a person ceases to be a member of an LLC if that person files a petition for bankruptcy, when the bankruptcy was filed, the LLC no longer had any members by operation of law and when an LLC “is dissolved for lack of remaining members, Del. LLCs where the Debtor is the single member and the LLC is member-managed:Īuthority for the Trustee to assume control over the single member LLC: Now you are ready to review the LLC membership interest of the Debtor and see if administration of the interest can be of benefit to the estate. There have been relatively few reported decisions on the administration of LLC interests by Trustees and even fewer by Chapter 7 Trustees. There are a number of issues that are particularly relevant in determining the relationship between the Debtor’s membership interest in the LLC and a Trustee’s ability to sell that interest, protect that interest from creditors outside of the Debtor’s bankruptcy or prevent the Debtor from dissipating assets of the LLC. It is important to understand the issues related to the LLC membership interests of the Debtors to determine if you have an asset with sufficient value to sell or liquidate for the benefit of the Bankruptcy Estate. As with any business interest of the Debtor, you need to obtain reliable information regarding whether the LLC’s liabilities exceed the value of its assets. You should request and obtain copies of the Articles of Organization and the Operating Agreement for the LLC. It is also important to determine how the Debtor’s membership interest compares to the total number of memberships outstanding in the LLC. If there is any other document, other than the Operating Agreement, which restricts how membership interest may be transformed, a copy of that document should also be obtained. Lastly, ask if other members’ interests have been sold in the LLC and obtain details of these transactions. Unlike corporations or partnerships, LLCs present unique issues. LLCs are formed by filing Articles of Organization with the appropriate state government agency on a prescribed form. The governance of the LLC is typically set forth in an Operating Agreement. The LLC can be managed by its members or a manager. If the LLC is run by a manager, the role of a Bankruptcy Debtor Member may become just a passive activity, simply waiting for periodic distributions from the LLC, provided it is profitable. Trustees are often faced with reviewing Debtors’ interests in businesses. As the tax benefits of pass-through entities became more popular, Debtors chose the Subchapter “S” Corporation (“S-Corporations”) format for their businesses. However, there were restrictions regarding the nature and number of shareholders in S-Corporations and the number of classes of stock ownership. The Limited Liability Company (“LLC”) became the answer to the SCorporation restrictions, since LLCs did not have to conform to all such restrictions. ![]()
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