Source: https://www.samuelson-law.com/unique-aspects-of-llcs-in-bankruptcy.html
Timestamp: 2019-04-21 20:14:03+00:00

Document:
For Bankruptcy purposes, limited liability companies (“LLC’s”) are not treated as limited partnerships, but as corporations. Even a single member LLC is treated differently from an “individual” in Bankruptcy. The Bankruptcy of a member of a LLC call have a sever impact on the LLC itself. This Article is from a program recently given by Ken Samuelson, and deals with (a) some of the unique aspects of LLCs under Bankruptcy law; and (b) issues that frequently arise in Bankruptcies of LLCs, even if not unique to LLCs.
I. Classifications of an LLC and Limited Partnership for Bankruptcy Purposes; Classification of a Membership Interest in an LLC.
A. For Bankruptcy purposes, an LLC, a PLLC, and a limited liability partnership (having no general partner having unlimited personal liability) are each classified as corporations, and a limited partnership is classified as a “partnership” (if it has a general partner having broad personal liability).
Most state LLC, PLLC and limited liability partnership statutes fall within clause (ii) above. In re: RMAA Real Estate Holdings, LLC, 2010 Bankr. LEXIS 4580, 64 Collier Bankr. Cas. 2d (MB) 1877, 54 Bankr. Ct. Dec. 19 (E.D.VA, 2010); In re: Wyatt & McAlister, PLLC, 2010 Bankr. LEXIS 1413 (S.D. Miss., 2010); In re Promedicus Health Group, LLP (Wallach v. Douglas, et al.), 416 B.R. 389; 2009 Bankr. LEXIS 4066, appeal dismissed 2010 U.S. Dist. LEXIS 83269 (W.D.N.Y., 2010) (the degree of protection afforded owners is what matters); In re: Rambo Imaging, L.L.P., 2008 Bankr. LEXIS 2311, 50 Bankr. Ct. Dec. 95 (W.D. Texas, 2008); In re: James Giampietro (AE Restaurant Associates, LLC v. Giampietro), 317 B.R. 841, 2004 Bankr. LEXIS 2158, 53 Collier Bankr. Cas. 2d (MB) 1012 (Nevada, 2004).
B. Most state LLC statutes classify a member’s interest in an LLC as personal property, even if the LLC is a “single asset real estate” entity. Uniform Limited Liability Company Act (1995), §501; In re: A-Z Electronics, LLC, 350 B.R. 886; 2006 Bankr. LEXIS 2105 (Idaho, 2006).
II. Filings of Bankruptcy Petitions By or Against LLCs.
A. The LLC’s getting its internal authorization to file is governed by state law and the LLC’s governing articles and operating agreement. Wyatt, supra; A-Z Electronics, supra (see, however, authority of a Chapter 7 Trustee of the member of a single member LLC).
B. A LLC cannot take advantage of the broader definition of “insolvent” (available to a partnership) to qualify for, or to avoid, a bankruptcy.
C. A LLC cannot take advantage of the alternative (available to a partnership) to break a deadlock by filing an involuntary bankruptcy.
RMAA Real Estate Holdings and Rambo Imaging, both supra.
However, a member entitled to guaranteed payments, regardless of the LLC’s profits, may be a creditor, as well as an equity holder. In re: IDS Holding Company, LLC. IDS Holding Company, LLC v. Madsen, 292 B.R. 233, 2003 Bankr. LEXIS 400, 41 Bankr. Ct. Dec. 55 (Conn., 2003).
D. Proving that a single member LLC is an abusive filer requires a lot more evidence that the mechanical 180-day bar of 11 USCS §109(g) for an “individual”. In re: 4 WHIP, LLC, 332 B.R. 670, 2005 Bankr. LEXIS 2138, 45 Bankr. Ct. Dec. 168 (Conn., 2005).
(1) If the LLC has an operating agreement and it is deemed to be an “executory contract”, then §365(c)(1) governs. For the operating agreement to be an “executory contract”, both the Debtor and the LLC must have substantial unperformed or ongoing obligations toward the other. Those duties may not be merely structural or too remote or hypothetical. Courts seem to agree that continuing obligations to participate in the management of the LLC and to make additional capital contributions are executory. Some courts also require that the identity of the assignee be critical (as distinguished from the assignee’s being merely a passive investor) in order for the operating agreement to be an executory contract.
(3) Objections can be waived by course of conduct. In re McSwain and McSwain (Norberg v. Hawks Prairie Casino, LLC), 2011 Bankr. LEXIS 3921, 55 Bankr. Ct. Dec. 153 (Wash., 2011).
(4) A mere passive economic interest in the LLC may draw a far-lower interest from third parties. In re: Garbinski and Garbinski (Cardiello v. USA, et al.), 465 B.R. 423, 2012 Bankr. LEXIS 515 (W.D. PA., 2012). An attempt to buy the assets cheap.
In addition, see In re Jundanian (Caymus Venutures, et al. v. Jundanian), 2012 Bankr. LEXIS 1370 (Maryland, 2012); In the Matter of: H & W Food Mart, LLC, 461 B.R. 904, 2011 Bankr. LEXIS 5190 (N.D.Ga., 2011); In re: Prebul (Bensusan v. Prebul, et al.), 2011 Bankr. LEXIS 2795 (E.D.Tenn., 2011); In re: Tsiaoushis (Endeka Enterprises, LLC v. Calomiris), 2007 U.S. Dist. LEXIS 53376 (E.D. Va., 2007); In re: Allentown Ambassadors, Inc. (Allentown Ambassadors, Inc. v. Northeast American Baseball, LLC), 361 B.R. 422, 2007 Bankr. LEXIS 267, 47 Bankr. Ct. Dec. 251 (E.D. Pa., 2007)(in relation to the automatic stay).
III. A Member as an “Insider” for the Purposes of 11 USCS.
Each member is likely to be held to be an “insider”, especially if the LLC is member-managed (as distinguished from manager-managed), unless the operating agreement places unusual and very substantial limits upon his/her authority and influence with the Debtor. In re: Longview Aluminum, L.L.C. (Appeal of Forte), 657 F.3d 507, 2011 U.S. App. LEXIS 18302, Bankr. L. Rep. (CCH) p.82,067, 66 Collier Bankr. Cas. 2d (MB) 577, 55 Bankr. Ct. Dec. 111 (7th Cir., 2011); In re: Lull (Kotoshirodo v. Dorland and Associates, Inc. CPAs), 2008 Bankr. LEXIS 4543 (Hawaii, 2008).
IV. Can Offer Tax Savings.
A sale of real estate, under a confirmed plan of reorganization, is exempt from State and local recordation and transfer taxes. 11 USCS §1146; In re Hechinger Investment Company of Delaware, Inc. (Baltimore County, Maryland, et. al v. Hechinger Liquidation Trust), 335 F.3d 243, 2003 U.S. App. LEXIS 14449, Bankr. L. Rep. (CCH) p.78,886, 41 Bankr. Ct. Dec. 162 (3rd Cir., 2003).

References: v. 
 v. 
 §501
 v. 
 §109
 §365
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 §1146
 v.