Friday, November 1, 2019

The Member of the LLC Does Not Own the LLC’s Property

The Member of the LLC Does Not Own the LLC’s Property

In a recent decision from the Bankruptcy Court in Wisconsin, there was applied the rule that an LLC is a legal entity distinct from its members to the effect that the members have no ownership interest in the LLC’s property. As applied in this case, the bankruptcy estate of the sole member of an LLC did not include the property owned by that LLC. In Re Gialamas, ___ B.R. ___, 2019 WL 4201548 (W.D. Wisc. Sept. 4, 2019).

Erick Hallick held a judgment against Thomas Gialamas for almost $17,000,000. Gialamas was, in turn, the sole owner of Blackhawk Junction, LLC, a limited liability company that owned a strip mall. When Gialamas filed for personal bankruptcy protection, Hallick sought an order of abandonment of the property owned by Blackhawk Junction. Both Gialamas and the Creditors Committee objected, arguing that Hallick did not have a lien or other protectable property rights in that property.

After disposing of the argument that a supplemental proceeding in support of collection of the judgment does not create a lien in the judgment debtor's personal property, the court went on to find that there was no protectable interest in the strip mall. Rather:

[T]his court must conclude for purposes of this motion that the movant has not met his burden of demonstrating that the real estate is now property of Mr. Gialamas’ bankruptcy estate. The parties stipulate that at all relevant times the Debtor has owned a membership interest in Blackhawk Junction, LLC. But that simply means his membership interest in Blackhawk Junction, LLC was property of the bankruptcy estate. The underlying assets owned by the LLC are not. 2019 WL 4201548, *3.

In support of this language, one authority cited by the court was In Re Conan, 487 B.R. 539, 541 (Bankr. W.D. Wisc. 2012) which is cited for the proposition that “although the estate includes the membership and ownership of the LLC, it does not include the assets owned by the LLC. Those assets do not become property of the debtor’s bankruptcy estate.”

As the bankruptcy estate did not own the strip mall property, there existed no basis by which it could be ordered to abandon it.

Not addressed by this opinion was a charging order that Hallick had received against Gialamas, which charging order was supported by the appointment of a receiver.

In a footnote, the court noted that there existed an unresolved question as to whether the charging order provisions of the Wisconsin Limited Liability Company Act are the exclusive remedy for a claim against a member’s interest in an LLC. That determination will obviously await another dispute.

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