Sunday, October 2, 2011

Morris Costumes, LLC v. Rouse and Creditor Claims upon Dissolution

Morris Costumes, LLC v. Rouse and Creditor Claims upon Dissolution
Morris Costumes, LLC v. Rouse, No. 2010-Ca-001150-MR (Ky. App. May 13, 2011) (Not to be Published) presents an interesting application of the rule that, upon dissolution, the assets must be applied first to the satisfaction of creditor claims.  As of this writing, there is pending before the Kentucky Supreme Court a motion for discretionary review in this case.
Lucy & Lu, LLC, apparently wholly owned by Rouse, operated a “Halloween Express” store.  In June, 1988, the LLC ordered $73,000 worth of merchandise from Morris Costumes.  While Morris Costumes procured from Rouse a personal guaranty of this open account, it appears that no security interest was filed against the merchandise.  In response to a March, 2009 petition for relief under Chapter 7, Rouse was granted a discharge from individual obligations in October of that same year.  The LLC did not itself file for bankruptcy protection.  Somewhat reading between the lines, it appears that the bankruptcy trustee abandoned the claim on the LLC.  Based on the opinion, it is not clear whether, during the pendency of Rouse’s bankruptcy, Morris Costumes sought to either collect proceeds or to recover assets from the LLC.  Shortly after Rouse’s Chapter 7 discharge, the LLC was administratively dissolved.
After the dissolution, Morris Costumes filed an action against Rouse, “individually and in his capacity as a member of the” LLC (slip op. at 2) for some $24,000 still owed on the merchandise.  The trial court granted a motion to dismiss, a determination the Court of Appeals would ultimately reverse.
Conceding that Rouse’s personal obligation on the account had been discharged, Morris Costumes sought to collect from those assets distributed by the LLC to Rouse.  Citing KRS § 275.325, the Court noted that upon dissolution, an LLC’s debts may be enforced against a member “to the extent of the assets of the company distributed in liquidation to that member.”  The Court cited as well Bear, Inc. v. Smith, 303 S.W.3d 137 (Ky. App. 2010).
As already noted, Rouse has petitioned the Kentucky Supreme Court for discretionary review.  I have not read the petition for review, but it is hard to see where the Court of Appeals was in error.  If the claim, inter alia, is that Rouse’s discharge eliminated the LLC’s debt, to apply Kentucky’s greatest legal adage, “that dog won’t hunt.”  It is abundantly clear that the bankruptcy filing of the LLC’s sole member is not a bankruptcy filing on behalf of the LLC.  See, e.g., A-Z Electronics, LLC, 350 B.R. 886 (Bankr. D. Idaho 2006).  Rouse and her LLC were legally distinct from one another.  KRS § 275.010(2).  Rouse, prior to distribution in liquidation, had no ownership interest in the LLC’s property.  KRS § 275.240(1); Baker v. Erpenbeck (In re Erpenbeck), 2004 Bankr. LEXIS 739 (Bankr. E.D. Ky. 2004).  An assertion that the discharge either extended to the LLC or encompassed “her” property as then titled to the LLC is without merit.

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