McBride Law Blog

LLC Owners, If You Owe Someone Money, Your Ownership of an LLC Might Not Be Protected: When It Comes to Single-Member LLCs, Charging Order May Not Be the Exclusive Remedy (Part 3)

McBride Law Blog

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Real Life Stories (Cases) on the Issue: In re A-Z Electronics, LLC (Idaho).

A-Z Electronics, another bankruptcy case involving a single-member LLC, follows the reasoning in Albright to reach the conclusion that a debtor-member’s bankruptcy filing assigns his or her entire membership interest, economic and non-economic, to the bankruptcy trustee where there are no other members. In that case, Ryan, along with his wife, filed bankruptcy and listed A-Z Electronics, LLC (the “LLC”) as an asset with a value of “$0.00.”[1] Subsequently, the LLC also filed bankruptcy, signed by Ryan as the sole and managing member of the entity.[2] The trustee brought a proceeding to dismiss the LLC’s bankruptcy case, arguing that Ryan did not have power to authorize the filing.[3]

The bankruptcy court said, under Idaho law, a debtor-member’s membership interest in a limited liability company is personal property and thus, it becomes property of the bankruptcy estate upon the filing of the debtor’s petition.[4] The court went on to cite Albright, which held that the sole member’s bankruptcy filing effectively assigned her entire membership interest in the LLC to the bankruptcy estate and the trustee obtained all her rights, including the right to control the management of the LLC.[5] Following the same logic, upon filing the bankruptcy petition, the court reasoned, all of Ryan’s interests in the LLC became property of the bankruptcy estate subject to the sole and exclusive authority of Ryan’s bankruptcy trustee who was the only one entitled to manage the LLC and decide, among other things, whether the LLC would or would not file bankruptcy.[6] Because Ryan did not have any managing authority and the trustee did not authorize the bankruptcy filing of the LLC, the court concluded that the LLC’s bankruptcy filing was not property authorized and dismissed the case.[7]

This post was a part of a multi-part blog series on single-member LLCs and creditors’ rights. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will look at In re Modanlo,[8] the last of the single-member LLC bankruptcy trilogy.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

[1] In re A-Z Elecs., LLC, 350 B.R. 886, 888 (Bankr. D. Idaho 2005).

[2] Id.

[3] Id.

[4] Id. at 890 (internal citations omitted).

[5] Id. (internal citations omitted).

[6] Id. at 891.

[7] Id.

[8] 412 B.R. 715 (D. Md. 2006).

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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