This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Tuesday, January 6, 2015
Both Yes and No to an LLC's Petition for Bankruptcy Protection
and No to an LLC's Petition for Bankruptcy Protection
In a recent decision from the bankruptcy court for New
Jersey, the ability of a particular LLC to file for bankruptcy protection was
affirmed. At the same time, it was determined that the application lacked a
legitimate basis. In re: Crest By The Sea,
LLC, No.: 14-31681-ABA, 2014 WL 7366200 (Bankr.. N.J. December 23, 2014).
Initially , it should be noted that this decision, while
making clear that the debtor was a limited liability company, the several times
to the LLC as being "incorporated."Clearly these statements are inaccurate.
The LLC originally had five members, but one of them
declared bankruptcy.At the time of
filing of the bankruptcy petition, only three of the members had approved
it.It was open to debate whether the
operating agreement allowed a simple majority of the members to approve the
filing of a petition for bankruptcy, or whether unanimity was required.The court indicated that a fair reading of
the operating agreement was that only a majority vote of the members was
required.However, the court found that
the post-filing approval of the bankruptcy petition by the last member was
sufficient to give rise to unanimous approval if that was required.Either way, the court did give effect to the
provision of the New Jersey LLC act providing, inter alia, that a member is
dissociated (i.e., lose of the right to participate in the LLC’s management)
by reason of bankruptcy.
Having determined that the bankruptcy petition was validly
filed, the court then turned its attention to its intrinsic legitimacy.In this instance, the court was able to
determine that the bankruptcy petition was filed for the purpose of delaying
certain state court actions and that no conceivable reorganization of the
entity could take place.Finding there
to have been bad faith in the filing as evidenced by numerous errors in the petition
and the related schedules, admission that it was filed in order to delay the
state court proceedings and the failure of the signatory of the petition to
appear at an evidenciary hearing:
[T]he court find that the Debtor abused the provisions,
purpose and spirit of bankruptcy law in filing its bankruptcy petition. As
such, the court has no choice but to dismiss the Debtor’s bankruptcy petition
for cause under Section 70 (a) of the Bankruptcy Code.