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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38113
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I am going to file for Chapter 13 bankruptcy and want to remain

Customer Question

I am going to file for Chapter 13 bankruptcy and want to remain a member of the LLC. Under Arizona law, a person ceases to be a member of an LLC if they voluntarily file for bankruptcy under Arizona Statute 29-733(4)(b). I have also read that in the case of a Ch. 13, you shall retain an interest in the LLC but only to distributions payable to that interest. Therefore, I was wondering whether you can remain a member of the LLC if you file for Chapter 13 and what effect Chapter 13 will have on a 2 member LLC?
Submitted: 7 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 7 years ago.

ARS 29-733 is intended to prevent a bankruptcy trustee from stepping into the shoes of an LLC member who files for bankruptcy protection, under the theory that the trustee obtains control of the interest in all of the debtor's properties.

 

ARS 29-707 permits a creditor of the debtor member to receive regular distributions from the LLC, the same as the debtor member, without exercising any management control over the LLC.

 

The above statutes are "defaults. Each statute permits the LLC operating agreement to overrue the statute. So, if you want to remain a member of the LLC during your Chapter 13, then you can do so by modifying the operating agreement to permit the desired result.

 

Hope this helps.

 

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Customer: replied 7 years ago.
Thank you for your answer. That is very good advice for $15. I have one follow up question. If you are unwilling to answer it for free, I understand. If I file Chapter 7 bankruptcy, can I modify the operating agreement to say that bankruptcy will not cause an automatic withdrawal of a member, and can I prevent the bankruptcy trustee from getting at the debtor's interest in the LLC?
Expert:  socrateaser replied 7 years ago.

The bankruptcy trustee's powers are extremely broad, and the bankruptcy estate includes practically all of the debtor's legal and equitable interest in property.

 

That said, you can modify the agreement to simply stated that bankruptcy will not cause an automatic withdrawal of a member. However, I cannot think of any manner under which you could prevent the bankruptcy trustee from obtaining control over the member's interests.

 

This Az provision related to LLCs is unusual. As an example, neither California or Delaware LLCs have anything like this automatic withdrawal. There isn't any case law on the effect of the member's interest in bankruptcy that I've been able to find. It may, in fact be unlawful under federal law.

 

The general rule is that if an effect on a debtor's property is conditioned upon bankruptcy, then it is deemed invalid and unenforceable under 11 USC §541(c). So, whatever change to the operating agreement you may decide to make, you cannot create a "triggering" or "accelleration" clause that limits your interests in the LLC upon filing bankruptcy.

 

You may want to discuss this with local bankruptcy counsel to determine if there are any "customs" concerning this law in the AZ bankruptcy court.

 

For a BK lawyer referrral, see: http://www.abanet.org/legalservices/lris/directory/main.cfm?id=AZ and www.martindale.com.