Stay Relief: What Happens to “Unreasonable” Fees?

Wells Fargo Bank, N.A. v. 804 Congress, L.L.C. (In re 804 Congress, L.L.C.), 756 F.3d 358 (5th Cir. 2014)

After an oversecured creditor obtained relief from the automatic stay and foreclosed on some property, the bankruptcy court asserted jurisdiction over disposition of the sale proceeds and denied in part the creditor’s claim for fees. The district court reversed and the case was appealed to the 5th Circuit. Continue reading

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LLP: When Is A Partnership Not a Partnership (And Who Cares)?

In re Beltway Law Group, LLP, 514 B.R. 341 (Bankr. D. D.C. 2014) –

A managing partner filed an involuntary chapter 7 petition against a professional limited liability partnership. The bankruptcy court denied the petition and dismissed the case based on its interpretation that the entity was a corporation and not a partnership for purposes of the Bankruptcy Code.

Under Section 303(b)(3) of the Bankruptcy Code, if an entity is a partnership then an involuntary petition may be filed by “fewer than all of the general partners in such partnership.” The key question for the court was whether a limited liability partnership (LLP) should be classified as a partnership or as a corporation.

Although the Bankruptcy Code does not define “partnership,” it does define “corporation;” and the definition of corporation includes “partnership associations organized under a law that makes only the capital subscribed responsible for the debts of such association.” The court found that under applicable state law only the capital contributed by an LLP partner is at risk and partners are not liable for debts of the LLP by reason of their status as a partner. Thus, the LLP came within the definition of corporation.

The court found support for this view from additional sections of the Bankruptcy Code. It noted Section 723(a) provides that in a chapter 7 bankruptcy, if a “partnership” is insolvent, the chapter 7 trustee has a claim against general partners for the deficiency to the extent that general partners are personally liable under non-bankruptcy law.  Since the partners were not liable for an LLP’s debts, this section would not be applicable.

Along the same lines, Section 502(a) provides that in the case of a partnership that is a debtor in a chapter 7 bankruptcy, the creditor of a general partner has standing to object to claims against the partnership. The court viewed this as recognition that those creditors have an interest since reducing claims against the partnership reduces the potential exposure of the general partner dollar for dollar (on account of the claims that can be made against the general partner if the partnership is insolvent).

The court contrasted an LLP to a limited partnership, which is expressly excluded from the definition of “corporation.” Under applicable state law, a limited partnership was required to have at least one limited partner and one general partner, and a general partner is liable for the debts of the limited partnership by virtue of its status as a general partner.

The court also considered the history of this debtor. In particular, it was originally formed as a limited liability company and then converted to a limited liability partnership. Since the converted entity was still liable for all liabilities of the converting entity, the court reviewed whether there were any carryover liabilities.

However, members of a limited liability company are not liable for the debts of the LLC by virtue of being a member. Thus even in the prior incarnation the debtor was a corporation. The court acknowledged that a member of a professional LLC can be liable for the negligent or wrongful acts and misconduct of individuals under the member’s supervision and control, but found that this liability was imposed by reason of the supervision and control, and was not based on status as a member.

Consequently, in this case the limited liability partnership was classified as a corporation, and thus the managing general partner could not file an involuntary petition under Section 303(b)(3).

Note that this case should not be read to mean that all limited liability partnerships will be classified as corporations. Under the original LLP statutes, partners were protected only from vicarious liability for the negligent or wrongful acts of other partners or employees of the LLP, and remained liable for the LLP’s contractual obligations. This type has been referred to as a “partial shield” LLP. Later some states gave broader protection, granting limited liability to LLP partners similar to that of a shareholder in a corporation. This type has been referred to as a “full shield” LLP.

Although there is a trend towards full shield LLP statutes, there are still states with partial shield statutes. Under the court’s reasoning, it seems likely that a “partial shield” LLP would not be considered a corporation.

Vicki R. Harding, Esq.

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Environmental Claims: The Gift That Keeps On Giving

Asarco LLC v. Goodwin, 756 F.3d 191 (2nd Cir. 2014)

A reorganized company (Asarco) sought contribution for payment of environmental claims from beneficiaries of trusts created under John D. Rockefeller’s will. The district court dismissed the claims, and Asarco appealed to the 2d Circuit. Continue reading

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Sales Free and Clear: What About Restrictive Covenants?

Heatherwood Holdings, LLC v. HGC, Inc. (In re Heatherwood Holdings, LLC), 746 F.3d 1206 (11th Cir. 2014)

A chapter 11 debtor owned property that had always been used as a golf course and club. When it requested that it be allowed to sell the property free and clear of encumbrances, an objection was filed on the basis that the property was subject to covenants that restricted the property to use as a golf course. The bankruptcy court found that the property was subject to the restrictive covenants; the district court affirmed; and the issue was appealed to the 11th Circuit. Continue reading

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Strong Arm Powers: What Can Be Done With An Avoided Lien?

DeGiacomo v. Traverse (In re Traverse), 753 F.3d 19 (1st Cir. 2014)

A chapter 7 trustee sought to avoid an unrecorded first mortgage and to preserve the lien for the benefit of the bankruptcy estate. In response, the debtor sought confirmation that if the trustee was successful, he would not be able to sell the mortgaged property without first foreclosing in accordance with state law. The bankruptcy court and bankruptcy appellate panel ruled in favor of the trustee and against the debtor, and the debtor appealed to the 1st Circuit. Continue reading

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Subcontractor Claims: What Can You Do Once Your General Contractor Files Bankruptcy?

Branch Banking & Trust Co. v Construction Supervision Services, Inc. (In re Construction Supervision Services, Inc.), 753 F.3d 124 (4th Cir. 2014)

After a general contractor filed bankruptcy, several of its subcontractors requested clarification from the court about whether they could file notices post-petition to perfect liens for construction materials and equipment supplied pre-petition. The bankruptcy court agreed that they could; the district court affirmed; and a lender appealed to the 4th Circuit. Continue reading

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LLC Operating Agreement: Is A Purchase Option Enforceable Against A Bankrupt Member?

In re Denman, 513 B.R. 720 (Bankr. W.D. Tenn. 2014)

A chapter 13 debtor was a member of a limited liability company. Another member sought relief from the automatic stay in order to exercise a right to acquire the debtor’s membership interests pursuant to the LLC operating agreement. Continue reading

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