Source: https://www.ultratrust.com/court-cases/re-ashley-albright-debtor-us-bankruptcy-court-colorado-april-4-2003.html
Timestamp: 2019-04-23 00:09:29+00:00

Document:
re Ashley ALBRIGHT, Debtor. US Bankruptcy Court, D. Colorado.
In re Ashley ALBRIGHT, Debtor.
United States Bankruptcy Court, D. Colorado.
James H. Hahn, Greenwood Village, CO, for debtor.
Sally Zeman, Denver, CO, Chapter 13 Trustee.
Charles F. McVay, Denver, CO, for trustee.
BRUCE A. CAMPBELL, Bankruptcy Judge.
THIS MATTER is before the Court on the (1) Motion to Allow Trustee to Take Any and All Necessary Actions to Liquidate Property Owned by Western Blue Sky LLC (“Motion to Liquidate”); (2) Motion to Appoint and Compensate Bob Karls as Real Estate Broker to the Trustee; and (3) Debtor’s Response to Trustee’s Motion to Retain Realtor and Liquidate LLC Property. Following a hearing on February 4, 2003, the parties agreed to submit the matter on briefs.
Ashley Albright, the debtor in this Chapter 7 case (“Debtor”), is the sole member and manager of a Colorado limited liability company named Western Blue Sky LLC.  The LLC owns certain real property located in Saguache County, Colorado (the “Real Property”). The LLC is not a debtor in bankruptcy.
The Chapter 7 Trustee contends that because the Debtor was the sole member and manager of the LLC at the time she filed bankruptcy, he now controls the LLC and he may cause the LLC to sell the Real Property and distribute the net sales proceeds to his bankruptcy estate.  The Debtor maintains that, at best, the Trustee is entitled to a charging order  and cannot assume management of the LLC or cause the LLC to sell the Real Property.
The Colorado limited liability company statute provides that the members, including the sole member of a single member limited liability company, have the power to elect and change managers.  Because the Trustee became the sole member of Western Blue Sky LLC upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of the entity’s assets.
Because of the Court’s ruling herein, the Debtor may be entitled to a claim for her contributions made to preserve an asset of this bankruptcy estate based on post-petition mortgage payments on the Real Property. The parties were asked to brief the issue, but the Debtor has not formally asserted such a claim. Therefore, the Court does not rule on the issue at this time.
 The Debtor initiated this case on February 9, 2001, under Chapter 13. It was converted to Chapter 7 by the Debtor on July 19, 2001.
 If the Trustee is entitled to control of the LLC, he could, presumably, as an alternative, dissolve the LLC, distribute its property to his bankruptcy estate, and then sell the property himself. The Trustee has not asserted any alter ego theory and has not attempted to pierce the veil of the LLC.
 The Debtor further asserts that because the LLC is “non-profit” pursuant to its operating agreement, no distribution of “profit” will ever be made and thus the value of this interest is zero. This argument erroneously assumes that a member of a Colorado limited liability company’s distribution rights are limited only to “profits.” They are not. Colo.Rev.Stat. § 7-80-102(10)(“Membership interest means a member’s share of the profits and losses of a limited liability company and the right to receive distributions of such company’s assets.”) See also Colo.Rev.Stat. § 7-80-702(1).
(1) The interest of each member in a limited liability company constitutes the personal property of the member and may be transferred or assigned. However, if all of the other members of the limited liability company other than the member proposing to dispose of his or its interest do not approve of the proposed transfer or assignment by unanimous written consent, the transferee of the member’s interest shall have no right to participate in the management of the business and affairs of the limited liability company or to become a member. The transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled.
 This reading of § 7-80-702 is reinforced in Colo.Rev.Stat.§ 7-80-108(3)(a). Section 108 sets forth the effect of an operating agreement and what provisions are non-waivable. Section 108(3) states that “[u]nless contained in a written operating agreement or other writing approved in accordance with a written operating agreement, no operating agreement may […] [v]ary the requirement under section 7-80-702(1) that, if all of the other members of the limited liability company other than the member proposing to dispose of the member’s interest do not approve of the proposed transfer or assignment by unanimous written consent, the transferee of the member’s interest shall have no right to participate in the management of the business and affairs of the limited liability company or to become a member.” Colo.Rev.Stat. § 7-80-108(3)(a). The clause “other than the member proposing to dispose of the member’s interest” confirms that the “other members” identified in § 7-80-702 does not include the transferee.
 Under Colo.Rev.Stat. § 7-80-702, supra, the result would be different if there were other non-debtor members in the LLC. Where a single member files bankruptcy while the other members of a multi-member LLC do not, and where the non-debtor members do not consent to a substitute member status for a member interest transferee, the bankruptcy estate is only entitled to receive the share of profits or other compensation by way of income and the return of the contributions to which that member would otherwise be entitled. Thus, Mountain States Bank v. Irvin, 809 P.2d 1113 (Colo.App.1991); Union Colony Bank v. United Bank of Greeley National Association, 832 P.2d 1112 (Colo.App.1992) and Prefer v. PharmNetRx LLC, 18 P.3d 844 (Colo.App.2000), cited by the parties, are distinguishable as they relate to multi-partner or member entities.
Rights of creditor against a member. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest thereon and may then or later appoint a receiver of the member’s share of the profits and of any other money due or to become due to the member in respect of the limited liability company and make all other orders, directions, accounts, and inquiries which the debtor member might have made, or which the circumstances of the case may require. To the extent so charged, except as provided in this section, the judgment creditor has only the rights of an assignee of the membership interest. The membership interest charged may be redeemed at any time before foreclosure. If the sale is directed by the court, the membership may be purchased without causing a dissolution with separate property by any one or more of the members. With the consent of all members whose membership interests are not being charged or sold, the membership may be purchased without causing a dissolution with property of the limited liability company. This article shall not deprive any member of the benefit of any exemption laws applicable to the member’s membership interest.
 The harder question would involve an LLC where one member effectively controls and dominates the membership and management of an LLC that also involves a passive member with a minimal interest. If the dominant member files bankruptcy, would a trustee obtain the right to govern the LLC? Pursuant to Colo.Rev.Stat. § 7-80-702, if the non-debtor member did not consent, even if she held only an infinitesimal interest, the answer would be no. The Trustee would only be entitled to a share of distributions, and would have no role in the voting or governance of the company. Notwithstanding this limitation, 7-80-702 does not create an asset shelter for clever debtors. To the extent a debtor intends to hinder, delay or defraud creditors through a multi-member LLC with “peppercorn” co-members, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse. 11 U.S.C. § 544(b)(1) and 548(a).
 See Colo.Rev.Stat. § 7-80-402 and § 7-80-405.

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