Source: https://www.samuelson-law.com/llcs-and-llps-in-bankruptcy.html
Timestamp: 2019-04-21 20:13:46+00:00

Document:
I. Bankruptcy filings by or against such entities.
II. Having someone with general liability is the key distinction.
III. “Insolvency” as a variation among the entities.
. Disagreements as to whether to file a voluntary bankruptcy.
V. A limited partner or member as an “Insider”.
VII. One potential gift a real estate debtor can offer – tax savings.
A. Who can be a “debtor”. 11 U.S.C. §109 governs what type of entity may be a debtor. In re: QDN LLC, 363 Fed. Appx. 873; 2010 U.S. App. LEXIS 2592 (Footnote 4) (3rd Cir.); In re: 4 WHIP, LLC, 332 B.R. 670, 2005 Bankr. LEXIS 2138, 45 Bankr. Ct. Dec. 168 (Bankr. Conn.); and see the other cases cited herein.
B. An entity that is dissolved before it files. [A dissolution not caused by a personal bankruptcy of a partner or member]. Aside from dissolutions that may be triggered by a personal bankruptcy of a member or partner, a Delaware limited partnership or a Delaware LLC should be able to file for bankruptcy (at least for the purpose of liquidating, rather than reorganizing) between the date that an act or dissolution occurs until a certificate of cancellation is filed. 6 Del. C. §§17-803 and 18-803. See In re: Lovell’s American Car Care, LLC, 2010 Bankr. LEXIS 2063 (Bankr. App. Panel for the 10th Cir.). Secondly, if the dissolution was caused by a failure, on the part of the entity, to make an annual state filing, many state statues permit a retroacte reval of the entity. See, for example, 6 Del. C. §15-1210(c) as to partnerships; 6 Del. C. §15-1003(f) as to LLPs; and 6 Del. C. §18-1109(c) as to LLCs. See In re: Nader Modanlo, 412 B.R. 715; 2006 Bankr. LEXIS 4526 (D.MD., Baltimore Dision). Thirdly, loss of all but one partner may not be fatal, either. Many statutes permit the partnership to convert to a single-member LLC. See, for example, 6 Del. C. §18-214 for the conversion of a “incorporated business”.
II. Having someone with general liability is the key distinction. In re: Promedicus Health Group, LLP, 416 B.R. 389, 2009 Bankr. LEXIS 4066 (W.D.N.Y.).
A. Partnerships. Entities in which there is at least one partner with general liability. Under 11 U.S.C. §723, a general partner remains personally liable for the entity’s debts.
C. LLPs. A partner of a LLP is personally liable, for the LLP’s debts, only to the extent that he/she is personally liable for those debts under the state statute under which the LLP was formed.
. Disagreements as to whether to file a voluntary bankruptcy. What happens if the partners or members disagree as to whether the entity should file a voluntary bankruptcy?
A person filing a voluntary bankruptcy petition on a partnership’s behalf must be authorized to do so, and authorization must dere from state law. See Price v. Gurney, 324 U.S. 100, 106, 89 L. Ed. 776, 65 S. Ct. 513 (1945). See also Keenihan v. Heritage Press, Inc., 19 F.3d 1255 (8th Cir. 1994).
See, also, In re: Wyatt & McAlister, PLLC, 2010 Bankr. LEXIS 1413 (Bankr. S.D. Miss.).
B. Person in “control” to make the filing. However, the person filing a voluntary bankruptcy on behalf of an entity must be “in control” of that entity under Bankruptcy Rule 9001(5)(A). “Control” is not defined in the Bankruptcy Code. In In re: King Brand Food Products Inc., 52 B.R. 109; 1985 Bankr. LEXIS 5998 (Bankr. S.D. Fla.), the Court dissolved a voluntary petition filed, on behalf of the corporation, by a person who was in the middle of purchasing all of the capital stock of the debtor/corporation. In doing so, the Court to a close look at the particular facts and seemed to find the most important ones to be: (1) although the buyer may have had control, of the day-to-day operation of the corporation, on paper, the seller was still conducting those operations; and (2) that capital stock was still in escrow – among other things, the seller still had not finished paying for it. See, also, the definition of “insider” below.
Even if Mr. Duke were the president of the company, a corporate president does not have the authority to file a voluntary chapter 11 proceeding on behalf of the corporation in the absence of an enabling resolution by the board of directors. See In re Al-Wyn Food Distributors, Inc., 8 B.R. 42 (M.D. Fla. 1980). The filing of a chapter 11 proceeding is clearly not in the ordinary course of business and is an event, which requires more than presidential discretion. In re Al-Wyn, supra. Mr. Duke’s own testimony referred to the fact that nothing had happened in terms of board of directors actity. He characterized the status of the company as “being in limbo.” “Being in limbo” is not the same as being in control.
Thus, the partnership or operating agreement needs to be read carefully to distinguish between the general/managing partners (or manager’s) authority with respect to day-to-day operations, as opposed to extraordinary acts such as filing for bankruptcy; and, in any event, he/she may, inherently, not have the authority to make a bankruptcy filing.
E. A limited partner or member as simply an equity holder. A limited partner is not, by reason of his/her status as such, a “creditor” and, thus, not able, as such, to seek an involuntary bankruptcy of the entity. In re: Royal Gate Associates, Ltd., 81 B.R. 165; 1988 Bankr. LEXIS 10 (Bankr. M.D. Ga., Albany Dision). The reason is that he/she is not deemed to need the same protection as a general partner. 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).
F. Conflicts of interest. “Bad boy guaranties” gen by partners or members create such conflicts. See the Decision and Order rendered by the Supreme Court of the State of New York in Lichtenstein v. Willkie Farr & Gallagher LLP (April 22, 2013), a copy of which is attached hereto; In re: USA Detergents, Inc., 418 B.R. 533, 2009 Bankr. LEXIS 3305 (Bankr. Dela.); and In re: Direct Response Media, Inc., 466 B.R. 626; 2012 Bankr. LEXIS 41 (Bankr. Dela.). Such conflicts may include an officer’s wanting to keep his/her job, to keep skeletons in the closet, or to purchase, personally, the debtor or its assets out of the bankruptcy estate (sometimes to eliminate dissenting members or partners).
G. Counting the votes. Except as otherwise provided in the LLC’s operating agreement, the assignee of a LLC interest is entitled to only his/her share of the profits and losses of the LLC, not the right to become a substitute member or to have the voting rights of the assignor, unless all of the other members consent. 6 Del. C. §§18-702 and 18-704.
In judging whether a member is an “insider”, courts look to both (a) whether the member’s position as such ges him/her authority analogous to that of a director of a corporation (whether or not the member exercises that authority); and (b) whether he/she had actely participated in the management of the LLC. 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.); In re: Land Resource, LLC, 2011 Bankr. LEXIS 5491; 23 Fla. L. Weekly Fed. B 351 (Bankr. M.D. Fla., Jacksonville Dision). LLC statutes generally provide that, in the absence of an agreement to the contrary, management of an LLC is vested in the members. See 6 De. C. §18-402. As to LPs, see 6 Del. C. §17-303; can a limited partner’s actions preserve his limited liability under state law, but still make him an “insider”?
VI. Inadvertently discharging guarantors. A restructuring of a guaranty, as part of a plan of reorganization in a bankruptcy of the borrower, even though that restructuring has no demonstrated practical adverse effect upon the liability of the guarantor, could result in discharging the guarantor. Ex Parte Eagerton, 2013 Ala. LEXIS 46 (2013).

References: V. 
 §109
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 §723
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