Court Considers Chapter 7 Trustee’s Ability to Sell LLC Property in Sole Members Bankruptcy
A bankruptcy trustee has the right to liquidate any property of a Chapter 7 Debtor subject to claimed exemptions and liens. Does this right extend to a membership interest in an LLC where the sole member files bankruptcy? The Bankruptcy Court for the Western District of Michigan addressed this issue recently in In re Hopkins, Bankr. W.D. Mich. (Feb. 2, 2012). In Hopkins, the debtor was a sole member of an LLC. The Trustee sought to sell the real property owned by the LLC, not just the membership interest. The Court denied the Trustee’s request to sell the property on the basis that a member has no specific interest in LLC property and therefore was not property of the bankruptcy estate that the Trustee could liquidate for the benefit of creditors.
Nonetheless, the Court did authorize the Trustee to act as the sole member of the LLC and effectively cause the LLC to sell the real estate. The Court further allowed the Trustee to distribute the sale proceeds to the LLC’s creditors and any remaining proceeds to creditors of the individual debtor. This case provides a warning for an individual to think twice before filing a Chapter 7 bankruptcy because it might place any ownership interest in an LLC in jeopardy and in the hands of the Trustee.
FREQUENTLY ASKED QUESTIONS
Can I file a Chapter 7 Bankruptcy case and still keep my home?
Short Answer: Yes, if the Debtor is current on his/her mortgage payments and there is no significant equity in the home after deducting the mortgage debt and homestead exemption.