Wednesday, March 14, 2012
Automatic Stay Not Violated by Bank's Action Against Non-Debtor LLC
Banks Actions to Collect on LLC’s Debt Did Not
Violate Automatic Stay in Favor of LLC’s Members
A decision of the Bankruptcy Court has (correctly) held that the lender to the LLC did not violate the automatic stays that arose when each member filed for bankruptcy protection, but its discussion of substantive LLC law was at best muddled. In re Jorgensen, 2011 WL 6000871 (Bankr. D.
Nov. 30, 2011). Wyo.
Ted and Cynthia Jorgensen, debtors in bankruptcy, were the two members in Grand Interiors of Star Valley, LLC (“Grand Interiors”). It does not appear that Grand Interiors was a debtor in bankruptcy. Grand Interiors was indebted to the Bank of Jackson Hole (the “Bank”) under a secured promissory note. After the Jorgensens filed for bankruptcy the Bank sent them notice of Grand Interior’s default under the note and thereafter served Ted Jorgensen, the LLC’s registered agent, with the summons and complaint in the Bank’s action against the LLC. The Jorgensens asserted that these acts, as well as the Bank requesting to review and recover the collateral, violated the automatic stay in that the collateral was property of the bankruptcy estate.
The assertion that the automatic stay was violated was easily dismissed, it being noted that the Bank received, as to the collateral, relief from the automatic stay. While, it would seem, the story could have there ended, the Court continued with a stroll through the Wyoming LLC Act. Unfortunately that stroll involved, it would seem, a few skips and jumps that are not detailed in the opinion. Also, it would have been nice had the Court set out a rule (and here I assume this to be the correct rule) that advising the representatives of the LLC (it not being in bankruptcy) of action being taken against it is not a violation of the automatic stay even if that representative is themselves in bankruptcy.
The Court began by reviewing the statute addressing the events that affect an LLC’s dissolution. As this statute does not provide that the bankruptcy of either one or all members causes the LLC’s dissolution, why this is relevant to the discussion is not clear. While the Wyoming LLC Act does provide that a member’s bankrtupcy does affect their dissociation from the LLC (
§ 17-29-602(c)(vii)(A) (assuming the LLC is member-managed)), the Court never identified or applied this rule as the predicate of the discussion of the consequences of the LLC’s dissolution. Wyo.
Getting past that point, the Court recited the statutory language to the effect that an LLC continues to exist after its dissolution and the statutes governing notice to known and unknown creditors of the LLC and the order in which assets are to be distributed.
There was no evidence that Grand Interiors wound up and distributed its assets in the manner required by the statues. 2012 WL 6000871, *5. In an apparent typo, the Court wrote “The Bank, based on the Wyoming Statutes, cannot have received any distribution of assets from Grand Interiors, as assets must first be distributed to creditors, and only then to members.”
Working on the assumption the “The Bank” should read “The Debtors,” the following observations are helpful: Id.
In this case the Debtors gained possession of Grand Interiors’ assets, as they were the members, and should have been proceeding with the wind up of the dissolved LLC. However, their possession of the assets does not equate to ownership.
The dissolution of Grand Interiors triggered the winding up process. The members of the dissolved LLC, Grand Interiors, did not automatically retain its assets as their own. The Debtors’ holding and distribution of these assets is strictly controlled by the Wyoming Statutes. Grand Interiors was required to “apply its assets to discharge its obligations to creditors.”
How the Court thought “possession” of the LLC’s assets went to the members upon dissolution is unclear. Still, its conclusion that the LLC’s assets were not part of the members’ respective bankruptcy estates is accurate:
The court finds that the collateral that secured the promissory note signed by the members of Grand Interiors, as an LLC, in favor of the Bank, is not property of the estate. Therefore, the Bank did not violate the automatic stay.