Michigan Bankruptcy Blog

Bankruptcy court clarifies trustee's ability to liquidate LLC property in sole member's Chapter 7 case

In re Hopkins, Bankr. W.D. Mich., Case No. 10-13592, Hon. Scott W. Dales (Feb. 2, 2012). 

When the sole member of a limited liability company files Chapter 7 bankruptcy, the membership interest is property of the bankruptcy estate that the trustee may liquidate, subject to claimed exemptions and liens.  But if the LLC owns property, can the trustee also liquidate that property for the benefit of the sole member's creditors?

In In re Hopkins, the debtor was the sole member of an LLC, and the trustee filed a motion for approval to sell real property owned by the LLC.  The Bankruptcy Court for the Western District of Michigan denied the motion to sell the property.  The court reasoned that under Michigan law, a member has no specific interest in LLC property and that the LLC's real property was therefore not property of the member's bankruptcy estate. 

The court did, however, authorize the trustee to "act as the sole member" of the LLC and, to the extent allowed by applicable law, cause the LLC to sell the real property.  The court further authorized the trustee to use the sale proceeds to pay closing costs, distribute proceeds to the LLC's creditors, and cause the LLC to distribute remaining proceeds to the trustee for administration in the member's bankruptcy.  Thus, to the extent that the LLC would be permitted to sell the property, the court likewise authorized the trustee to cause such a sale.

This case provides guidance for Chapter 7 trustees who are administering LLC members' cases and serves to remind debtors' counsel that a trustee may be able to indirectly reach LLC property, even if the LLC itself does not file bankruptcy.

Categories: Chapter 7, Western District of Michigan