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In Re Albright

United States Bankruptcy Court, D. Colorado
2003 WL 1848176, 291 B.R. 538 (2003)
ELI5:

Rule of Law:

When the sole member of a single-member Limited Liability Company (LLC) files for bankruptcy, the member's entire interest, including management rights, transfers to the bankruptcy estate. The trustee becomes a substituted member with full authority to control the LLC and liquidate its assets, as the charging order limitation is inapplicable where there are no other non-debtor members to protect.


Facts:

  • Ashley Albright was the sole member and manager of a Colorado limited liability company, Western Blue Sky LLC.
  • Western Blue Sky LLC owned certain real property in Saguache County, Colorado.
  • The LLC itself was not a debtor in bankruptcy.
  • Albright, in her individual capacity, filed for Chapter 7 bankruptcy.

Procedural Posture:

  • Ashley Albright initiated a bankruptcy case under Chapter 13 in the U.S. Bankruptcy Court.
  • The Debtor subsequently converted the case to a Chapter 7 bankruptcy.
  • The Chapter 7 Trustee filed a Motion to Allow Trustee to Take Any and All Necessary Actions to Liquidate Property Owned by Western Blue Sky LLC.
  • The Trustee also filed a motion to appoint and compensate a real estate broker.
  • The Debtor filed a response to the Trustee's motions, opposing the liquidation of the LLC's property.
  • After a hearing, the parties agreed to submit the matter to the U.S. Bankruptcy Court on briefs.

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Issue:

Does a Chapter 7 bankruptcy trustee, upon the bankruptcy filing of the sole member of a single-member LLC, acquire the full rights to manage and control the LLC, including the power to liquidate its assets, or is the trustee's remedy limited to a charging order against the member's interest?


Opinions:

Majority - Campbell, Bankruptcy Judge

Yes, a Chapter 7 bankruptcy trustee acquires the full rights to manage and control the LLC, including the power to liquidate its assets. Upon the debtor's bankruptcy filing, the debtor's entire membership interest in the LLC, which is personal property, becomes part of the bankruptcy estate pursuant to 11 U.S.C. § 541(a). Under Colorado law, a transferee of a membership interest may only participate in management with the unanimous consent of the 'other members.' In a single-member LLC, there are no 'other members' to provide or withhold consent, making this requirement inapplicable. Therefore, the trustee becomes a 'substituted member' with all of the debtor's rights, including full management control. The charging order remedy exists to protect non-debtor members from being forced to partner with a creditor, a purpose that is moot in the context of a single-member entity.



Analysis:

This case clarifies a critical vulnerability for single-member LLCs, establishing that the 'charging order' protection commonly associated with LLCs does not apply when there are no other members to protect. The decision confirms that a bankruptcy trustee can step directly into the shoes of the bankrupt sole member, thereby gaining complete control over the LLC and its assets. This ruling significantly impacts asset protection strategies, demonstrating that a single-member LLC offers little to no shield for its assets against the personal bankruptcy of its owner, unlike a multi-member LLC where the interests of other members are preserved.

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