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 4)

McBride Law Blog

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Real Life Stories (Cases) on the Issue: In re Modanlo (Delaware).

In Modanlo, Modanlo was the debtor and held a 100% ownership interest in NYSI, a Delaware single-member LLC.[1] Subsequently, the trustee filed a bankruptcy petition for NYSI and sought the court’s authorization to permit him to act as the manager of NYSI, among other things.[2] Modanlo objected, arguing that neither he nor the trustee as his successor had any authority to cause NYSI to do anything, including placing the LLC into a bankruptcy, once he filed his bankruptcy petition (causing him to cease being a member of NYSI and causing dissolution of NYSI).[3]

Under Delaware law, the court noted, an LLC is dissolved when there are no members, unless the remaining members or the personal representative of the last remaining member of the LLC decide otherwise prior to the filing of a certificate of cancellation with the secretary of state.[4] The same day Modanlo filed bankruptcy, the trustee, purportedly exercising Modanlo’s right as his personal representative, amended the LLC’s formation papers, designated himself as the LLC manager, consented to continuation of the LLC, and placed the LLC into voluntary bankruptcy, all prior to the filing of any certificate of dissolution.[5]  The court said that the trustee did revive the LLC in either (or both) of two ways: by amending the LLC’s formation papers to permit himself to be appointed the manager, and second, by the written consent of member(s) to continuation of the LLC and admission of the trustee as a member.[6] Although Modanlo maintained that the trustee was not his personal or legal representative, the court said that he was, as the successor to property of the debtor’s estate.[7] Accordingly, the court held that the trustee, as Modanlo’s personal/legal representative, effectively revived the LLC and had the authority to place the LLC into voluntary bankruptcy.[8] Importantly, citing Albright, the court acknowledged the special circumstances concerning single-member LLCs and confirmed that the trustee could and did acquire the debtor’s non-economic rights, including governance rights.[9]

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 Olmstead v. FTC,[10] a Florida Supreme Court case, which seems to be what broke the camel’s back.

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 Modanlo, 412 B.R. 715, 717 (D. Md. 2006).

[2] Id. at 717–18.

[3] Id. at 719–20.

[4] Id. at 721–22 (internal citations omitted).

[5] Id. at 722.

[6] Id. at 723–24.

[7] Id. at 724.

[8] Id.

[9] Id. at 731.

[10] Olmstead v. FTC, No. SC08-1009 (Fla. June 24, 2010).

Posted In: Bankruptcy, LLC, Personal Liability, Uncategorized

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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