In re:
ASHLEY ALBRIGHT
PF Shield's comments
This is a bankruptcy
case wherein a bankruptcy court ruled a Colorado single
member LLC has no charging order protection, which means the
company was forfeit to the bankruptcy trustee when its owner
declared bankruptcy. Note the following:
-
The fact pattern
indicates that the court’s decision could apply to
non-bankruptcy cases.
This ruling only applies to Colorado LLCs;
however, depending on the wording of other states’ LLC
Acts, it may apply in other states as well, and may
apply even if those states do not imply (as the Colorado
LLC Act does) that single member LLCs have no charging
order protection.
-
The court indicates
that a multi-member LLC would not be forfeit to
creditors in bankruptcy, therefore:
-
A
multi-member LLC or, even better, an LLC that utilizes
PF Shield’s Entanglement Theory would fare much better
from an asset protection standpoint than did Ashley’s
LLC.
Ands now the case...
In re: ASHLEY ALBRIGHT
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLORADO
In re: ASHLEY ALBRIGHT
SSN 358-56-9118, Debtor, Case No. 01-11367
ABC, Chapter No. 7, 2003 Bankr. LEXIS 291
April 4, 2003, Decided
DISPOSITION:
Trustee's Motion to appoint Bob Karls as real
estate broker for the Trustee granted.
COUNSEL: For Ashley Albright, Debtor: James
H. Hahn, Greenwood Village, CO. Harvey Sender, Trustee:
Charles F. McVay, Denver, CO.
JUDGES: A. Bruce Campbell, U.S. Bankruptcy Judge.
OPINION BY: Bruce Campbell, U.S. Bankruptcy Judge.
OPINION:
OPINION AND ORDER ON MOTION TO ALLOW TRUSTEE
TO TAKE ANY AND ALL NECESSARY ACTIONS TO LIQUIDATE PROPERTY
OWNED BY WESTERN BLUE SKY LLC
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. n1 The LLC owns certain real
property located in Saguache County, Colorado (the "Real
Property"). The LLC is not a debtor in bankruptcy.
n1 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.
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. n2 The
Debtor maintains that, at best, the Trustee is entitled to a
charging order n3 and cannot assume
management of the LLC or cause the LLC to sell the Real
Property.
n2 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. n3 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).
Pursuant to the Colorado limited liability company statute,
the Debtor's membership interest
constitutes the personal property of the member. Upon the
Debtor's bankruptcy filing, she
effectively transferred her membership interest to the
estate. See 11 U.S.C. § 541(a). n4 Because
there are no other members in the LLC, the entire membership
interest passed to the bankruptcy
estate, and the Trustee has become a "substituted member."
n5
n4 11 U.S.C. § 541(a)(1) provides, in relevant part: "The
commencement of a case ... creates an
estate. Such estate is comprised of ... all legal or
equitable interests of the debtor in property as
of the commencement of the case."
n5 Colo. Rev. Stat. § 7-80-702 provides (emphasis added):
(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.
(2) A substituted member is a person admitted to all the
rights of a member who has died or has
assigned his interest in a limited liability company with
the approval of all the members of the
limited liability company by unanimous written consent. The
substituted member has all the rights
and powers and is subject to all the restrictions and
liabilities of his assignor; except that the
substitution of the assignee does not release the assignor
from liability to the limited liability
company under section 7-80-502.
Section 7-80-702 of the Limited Liability Company Act
requires the unanimous consent of "other
members" in order to allow a transferee to participate in
the management of the LLC. n6 Because
there are no other members in the LLC, no written unanimous
approval of the transfer was
necessary. Consequently, the Debtor's bankruptcy filing
effectively assigned her entire
membership interest in the LLC to the bankruptcy estate, and
the Trustee obtained all her rights,
including the right to control the management of the LLC. n7
n6 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 "unless contained in a written operating
agreement or other writing approved in
accordance with a written operating agreement, no operating
agreement may [...] vary 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.
n7 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. Irwin, 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.
The Debtor argues that the Trustee acts merely for her
creditors and is only entitled to a charging
order against distributions made on account of her LLC
member interest. n8 However, the
charging order, as set forth in Section 703 of the Colorado
Limited Liability Company Act, exists
to protect other members of an LLC from having involuntarily
to share governance responsibilities
with someone they did not choose, or from having to accept a
creditor of another member as a
co-manager. A charging order protects the autonomy of the
original members, and their ability to
manage their own enterprise. In a single-member entity,
there are no non-debtor members to
protect. The charging order limitation serves no purpose in
a single member limited liability
company, because there are no other parties' interests
affected. n9
n8 Colo. Rev. Stat. § 7-80-703 provides:
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.
n9 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 nondebtor
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" comembers,
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).
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. n10 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.
n10 See Colo. Rev. Stat. § 7-80-402 and § 7-80-405.
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.
Based on the foregoing, it is hereby:
ORDERED that the Trustee, as sole member, controls the
Western Blue Sky LLC and may
cause the LLC to sell its property and distribute net
proceeds to his estate. Alternatively,
the Trustee may elect to distribute the LLC's property to
[*9] the bankruptcy estate, and, in
turn, liquidate that property himself; and it is
FURTHER ORDERED that the Trustee's Motion to appoint Bob
Karls as real estate broker
for the Trustee is hereby granted; and it is
FURTHER ORDERED that the Debtor may file a claim, subject to
objection in the regular
course of this case, for her expenditures made to preserve
an asset of this estate based
on post-petition mortgage or other payments made by the
Debtor.
DATED: 4-4-03
BY THE COURT:
A. Bruce Campbell
U.S. Bankruptcy Judge
