Individual debtor filing non-consumer chapter 7; question about "20. Inventories"

[frogger]

the Trustee would not have a majority vote, so he could not win a vote to dissolve the corporation.

HHM and Justbroke have already given you excellent advice, and I totally agree with them.

One thought for you to consider.... never underestimate the power of a bk trustee.

[GIn]

The Trustee couldn't care less that the "business" owes creditors! The Trustee will make money liquidating the business.

Can you explain this? This is a C-Corp. An entity separate from the debtors. The company has $130k in assets and $389 in liabilities. In order to liquidate the business the Trustee would have to sell the assets and pay off the creditors of the C Corp. Then, if there is money left over (which in this case there clearly will not be) any funds would go to the creditors of the debtor. How would the trustee make money liquidating the business? He only earns a percentage of assets he collects for the creditors of the debtor. In this case, it would be nothing.

[HHM]

C-Corp, S-Corp, LLC, it doesn't matter. The only business creditors the trustee needs to worry about are secured creditors of the business. Keep in mind, in 99% of these cases, the individual is equally responsible for the debt, so in that sense, there really are no business creditors that are not also personal creditors of the debtor. But in any event, the assets of the business are liquidated for the benefit of ALL creditors. The only business creditors that receive priority are secured creditors because they are secured against the assets of the business (the assets the trustee would be selling).

But again, you are making a flawed assumption about what it "really" means to have a separate entity. Having a corp. is not the end all be all of having your cake and eat it too. All it does is prevent "certain" liabilities of the business from reaching the personal assets of the owners and there are sometimes tax benefits. So, for example, if you own a store and someone slips and falls, the financial liability (assuming no direct negligence or wrongdoing of the owner) stops at the corporation. However, if you get a loan or a credit card in for the "corp" odds are, the owner will be required to personally guarantee the loan, so that debt is a liability of both the business and the owner.

Also, specifically with a C-Corp, the shares of that corp are the personal asset of the individual, if the individual files BK, those shares become an asset of the BK estate. The trustee takes control of those assets. Thus, if the shares give the individual the right to sell corporate assets, then the trustee inherits that right as well when the individual files BK.

[despritfreya]

C-Corp, S-Corp, LLC, it doesn't matter. The only business creditors the trustee needs to worry about are secured creditors of the business. . .Also, specifically with a C-Corp, the shares of that corp are the personal asset of the individual, if the individual files BK, those shares become an asset of the BK estate. The trustee takes control of those assets. Thus, if the shares give the individual the right to sell corporate assets, then the trustee inherits that right as well when the individual files BK.

While it is true that the stock of the entity is what becomes an asset of your personal bk, I must respectfully disagree with HMM. A Trustee is not going to shut down the entity and sell its assets. The Trustee has no authority to do so since the assets belong to the entity and are not assets of the bk estate. The only thing the Trustee should do (if there is a market) is sell the stock.

If a debtor (or debtor's counsel) allows the sale of anything but the stock the debtor has not stood up for his/her rights and the attny has committed malpractice. I currently represent a person who 1st (through other counsel) tried to buy the assets of the LLC. The debtor's counsel correctly objected to the sale Motion and, in the end, the investor purchased the LLC membership and is now fighting (through our office) to take control of the assets of the LLC.

I had another case where the Trustee stupidly sold a domain name owned by a single member LLC. The purchaser of the domain name contacted me wanting all of the "paperwork" that went with it. I told him I have no authority to give such info since the info belonged to the LLC and I represented the individual. I then told him he bought nothing since the Trustee had no authority to sell an asset belonging to a non-debtor. Got a nasty call from the Trustee's attorney. Told the attny to either contact the malpractice carrier or return the investor's money. I don't know what the outcome was.

In addition, if the Trustee does sell the assets of the entity (no one opposes this wrongful conduct) he/she must first use the proceeds to pay entity debt (secured and unsecured). An equity holder has no right to raid the corporate coffers at the expense of entity creditors (personal guarantees do not change this fact). If the Trustee raids the coffers he can and will be sued by the creditors of the entity (I've seen this more than once.)

The reality is, if the entity is upside down, the Trustee is going to abandon the estate's interest in the stock or membership as there will be no buyer willing to take over such debt. This is the reason many folks are able to file Chapter 7 while owning entities and continue to operate those entities without interruption.

Des.

[justbroke]

I have seen the Trustees here try to go after assets of an LLC or other corporate entity when it was a single-member "shell" of a corporation. I think you're right Des, you have to know your rights and fight. Real corporations (C-corps), are probably more difficult to pierce the so-called corporate veil.

Des, what about In re Ehmann 2005 WL 78921 (Bankr.D.Ariz 01/13/2005)?

[despritfreya]

Des, what about In re Ehmann 2005 WL 78921 (Bankr.D.Ariz 01/13/2005)?

JB,

I looked at the case, read the order denying the Motion to Dismiss, the Opinion Granting Trustee’s Motion for Summary Judgment, the Notice of Appeal, the Motion to Approve Compromise and the Judge’s Order withdrawing the Opinion granting the summary judgment. I then sent a copy of the Opinion to a family member who is quite versed in the use of family partnerships/LLCs and here is his/her comments:

“Interesting...however this ruling should be appealed...and overturned as overreaching...The court is angry that the family was able to access the funds under the nose of the trustee...but this is the basic thrust of the family llc concept...you can borrow and pay back...(In most properly drafted LLCs) you will see that the managing member has the power to lend the funds out...with no recourse from the other members... It appears that this Judge did not like something about the Virginia courts decision...well tough...a decision is a decision unless overturned on appeal...it stands... On the other side of the coin...these people are stupid...all they had to do was abide by the letter of the LLC agreement...with the help of legal counsel...it appears that they acted in a fashion that dared the trustee to act...really dumb...always take the high road...that would have been sound advice for them to follow...”


I responded back. . .

"Funny you should say it should be appealed. Here's the rest of the story:

An appeal was filed. The firm that represented the LLC is a highly respected estate planning/asset protection firm, but it appears it was not the one that set up the LLC. The principal of the LLC did not want the ruling to stand. . . The amount of "allowed claims" that the debtor was trying to discharge was about $70,000.00. So here is what happened.

1. Appeal filed,
2. Settlement reached. The LLC agreed to pay the bankruptcy estate $85,000.00 which paid all allowed claims and administrative expenses. The settlement required the Court to "withdraw" its opinion. The Court agreed to withdraw the opinion. The Court noted that the request was made because the principal of the LLC is a tax lawyer who routinely advises clients in the use of LLCs for estate planning purposes. While the Court did not find good cause to withdraw the opinion it did so anyway since the settlement would result in payment of all claims,
3. Settlement paid and appeal dismissed.

However, if the principal of the LLC thought that a withdrawal of the opinion would remove it from all records he was wrong. I was asked to look at this 2005 decision by a member of the web based forum (bkforum) that I frequent. The poster who asked is, I believe, from Florida. Clearly, once an opinion is "published", it is there for all to see no matter what happens. When I respond to the inquiry I will quote some of your comments. "

Des.

[justbroke]

Des, thanks for the research! I just found that case very interesting and I did see that the opinion was "withdrawn". I thought it was interesting since it came from your neck of the woods in the 9th Circuit. Do you think the opinion was so overreaching (maybe) that the estate planners recommended that they "buy it back" so that it was removed? I'm not sure I've ever read where an opinion was withdrawn. I read lots of things that are "not for publication", but not a withdrawn opinion.

The "buy and bury" strategy worked in this case. But I found the case. LOL

[despritfreya]

Do you think the opinion was so overreaching (maybe) that the estate planners recommended that they "buy it back" so that it was removed?

I agree with my relative. My understanding of these types of family LLC's is that typically the limited member has no rights whatsoever. No voting, no control, no nothing. Further and any distribution is solely at the discretion of the managing member. A few years back I did have a client who was a limited member in such an LLC. I had no problem persuading the Trustee and his attny that the membership interest had no value since the debtor had no authority to do anything and, if the Trustee wished to step into the debtor's shoes I was sure that the manager would simply never make distributions but would shift the tax burden to the new member. Trustee backed off. However, there were no games being played inside the LLC and that may have been the key.

I think in Ehmann it was simply cheaper to pay off all of the claims - both in the sense that it would be bad to have an appellate court agree with Judge Haines and in the sense that the cost of litigating would be very high. Paying off the claims approach probably should have been looked at long before the parties got deep into the litigation but, my guess is that the principal of the LLC figured he couldn’t lose. One should never make that assumption.


Des.

[justbroke]

I think that the Trustee, good or bad, earned his/her fees in Ehmann! Whether it was coercive or the Trustee just wanted some sort of declaratory ruling on whether it was executory or not... it was an interesting read.

[Lalalink]

In addition, if the Trustee does sell the assets of the entity (no one opposes this wrongful conduct) he/she must first use the proceeds to pay entity debt (secured and unsecured). An equity holder has no right to raid the corporate coffers at the expense of entity creditors (personal guarantees do not change this fact). If the Trustee raids the coffers he can and will be sued by the creditors of the entity (I've seen this more than once.)

The reality is, if the entity is upside down, the Trustee is going to abandon the estate's interest in the stock or membership as there will be no buyer willing to take over such debt. This is the reason many folks are able to file Chapter 7 while owning entities and continue to operate those entities without interruption.

Des.

This was what our original thinking was and why we felt we could handle filing pro-se. We just weren't sure what to put on some of the lines and schedules.

Have been wanting to post an update (but didn't want to jinx anything by posting, lol). But here goes anyway, since there are some who may need this information.

We filed pro-se with the info provided in this thread (inventories were $99506.84 for the c-corp, and our total ownership percentage was %50 (25% me and 25% husband); I also included a snapshot of the balance sheet as an explanation under the revelation of our ownership percent.).

The Trustee did question us about our furniture store and made it known that he was not happy that it was still running; We stated that we were not happy about it either, but we had our hands tied until someone decided to take on our ownership interest. This was our bil's (brother's) only way of making a living and he was holding on until the company hit the bottom of the ocean; we on the other hand could no longer hold on.

Bottom line? We were a true non-consumer case with no assets to distribute. This never changed on PACER. We received the Trustee's report of No Distribution AND best of all... he also reported that the assets (ownership interests) were abandoned.

We are set to discharge in a couple of weeks.

Lala

[justbroke]

Lala, that is great news to read about! Trustees are never happen when they "think" there are assets within their reach, but discover, later, that they can't get to them!

[HHM]

However, keep in mind, business creditors CAN still come after the business notwithstanding the bankruptcy. So, if a business is wholly encumbered with business creditors such that the business is not worth the trustees effort to liquidate, for the debtor/owners of the business to receive the benefit of their individual bankruptcy discharge, some sort of self-liquidation and business flip is necessary.

[GIn]

So, if a business is wholly encumbered with business creditors such that the business is not worth the trustees effort to liquidate, for the debtor/owners of the business to receive the benefit of their individual bankruptcy discharge, some sort of self-liquidation and business flip is necessary.

Can you explain this in more detail? My LLC owns a car that is worth about $4k. There are two creditors. My father, who loaned money to me and put a lien on the car over a year ago, and a CC debt of approx $20k. My plan was to stop paying on the CC this month and to file in 90 days. This understandably is going to PO the CC bank. However realistically, what can they do once the debt is discharged against me? Can they attempt to touch a lien that is over a year old? Also note, I don't necessarily want to keep this LLC in business, but I need to keep the car for my future business.

[frogger]

If the corporation owns the vehicle, then you are going to most likely need to buy it back from the trustee. As to the lien from your father on the vehicle, if it's not perfected, the trustee will void it. Trustees do not like family as lienholders...

[HHM]

All it means is that LLC still owes the money and the creditor can take whatever action it legally can to collect that debt (i.e. sue the LLC, garnish bank accounts, contact Account Receivables, go after assets etc).