My family has an Limited Liability Company, we own and manage our real estate. The managing manager is filing bankruptcy, Chap 7

Asked over 1 year ago - San Francisco, CA

and I am worried that his personal bankruptcy might somehow affect our LLC, whether a creditor calls into question his involvement and possible ownership. She, the manager, bought into the LLC for a 10% membership interest, which we offered years ago for her loyalty. So when she files BK, will her filing affect our LLC structure? Should be liquidate her interest to her ahead of time, in cash or property? If she files I assume she will have to list her 10% interest on her filing papers, and then place a value on her interest? I just want to get her out of the picture and told her to hold off filing until we figure out the possible pitfalls.

Attorney answers (6)

  1. Brian Crozier Whitaker

    Contributor Level 17

    4

    Lawyers agree

    Answered . If she sells her share and receives reasonably equivalent value for it, then your LLC would not be involved. It would then be her problem to exempt the proceeds of that sale. If, on the other hand, her interest is less than, say, $20,000, it is probably exemptable in her BK and the Trustee would have no interest in going after it.

  2. Malcolm Wallace Ruthven

    Contributor Level 15

    4

    Lawyers agree

    Answered . You've received two excellent answers. I'll add that yes, she would have to list her 10% interest on her filing papers. Is her interest in the LLC transferable by her? Could she sell it to someone else (not you) if she wanted to? If not, the trustee would have no more right to sell it that she has. If she could sell her interest, then the trustee would have that right. Of course, if she can exempt the full value of her share, then the trustee would have no interest in it. If she sells it before filing her bankruptcy, then the transaction needs to be clearly "at arms length" (not discounted to an "insider" buyer) for fair market value and there should be good documentation of that.

    This reply does not constitute legal advice or establish an attorney-client relationship.
  3. Walter C Oney Jr

    Contributor Level 17

    5

    Lawyers agree

    Answered . You need advice from a competent CA bankruptcy attorney, not from an Internet lawyer who doesn't have (and can't possibly obtain) full information about your situation. I tend to think that a pre-petition, arms-length sale or redemption of a member's interest for fair market value would not lead to complications in the member's subsequent bankruptcy, but an aggressive trustee can make everyone's life miserable if the redemption or sale isn't done exactly right.

  4. Michael Raymond Daymude

    Pro

    Contributor Level 20

    1

    Lawyer agrees

    Answered . The first documents you should look at and consult are the LLC’s operating and membership agreements. Those documents govern the nature and extent of her interest in the LLC and, perhaps, even how it is to be valuated. They may also contain non-default provisions in the event of her bankruptcy. You say she is "managing manager." I am not certain what that means. If she is the "mananging member" the LLC records certainly will be required viewing by the trustee. Hopefully, the LLC's records are up-to-snuff. I defer to my colleagues answers regarding the effect of her bankruptcy on her interest.

    I am licensed in California only and my answers on Avvo assume California law. Answers provided by me are for... more
  5. Janet Spiro Martin

    Pro

    Contributor Level 13

    1

    Lawyer agrees

    Answered . Her 10% "value" will be 10% the net Value of the real estate in the LLC, at the moment she files bk, so if she can not exempt that amount under applicable bankruptcy exemptions, then the other 90% partners (member owners of the LLC) need to find an unrelated person to buy that 10% in an arms length transaction to keep the LLC out of the bk, assuming the Operating Agreement allows for such a transfer. The Operating Agreement can be amended in this regard. What she does with proceeds don't have to be your concern. Just whether the value can be exempted in her bk...This requires a bk attorney analysis.

    The foregoing is for informational purposes only and may not be relied on as attorney-client advice.
  6. Douglass S Lodmell

    Pro

    Contributor Level 13

    2

    Lawyers agree

    Answered . My colleagues give sound advice. From an asset protection perspective, I would recommend you strongly to add a layer of protection to your existing LLC. An LLC is an excellent legal tool to hold and manage investment real estate but it will not protect you as a member neither your personal assets. A plaintiff may always try to pierce the corporate veil using theories such as negligence or gross negligence.
    Depending on the net worth held by the LLC, the revenue it generates and your personal net worth (primary residence, bank and brokerage, other investments) you may consider combining (your stake in) the LLC with a legal that was specifically designed for asset protection purposes such as a Family Limited Partnership filed in state with strong charging order rules such as AZ.
    You should schedule a consultation with an attorney with proven expertise in the area of asset protection planning, and for this particular issue, a bankruptcy attorney.

    Douglass Lodmell is the nations #1 Asset Protection attorney and has clients in all 50 states, protecting over $4... more

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