Chapter 11 Bankruptcy: What Businesses Can File for Bankruptcy?

The United States Bankruptcy code that deals with Chapter 11 Business Bankruptcy is one of the most complicated statutes in American history. Not surprisingly, there are few attorneys that handle these types of cases. Often times our business bankruptcy lawyers receive calls from clients in dire financial straits asking whether a Limited Liability Company (LLC) can file for Chapter 11 Bankruptcy here in Arizona.

Is an LLC eligible for a Business Bankruptcy under Chapter 11 Bankruptcy laws?

With a business bankruptcy, there are a number of considerations including whether an LLC bankruptcy of just one member affects the LLC as a whole; how an LLC is to be managed or wound up during an LLC business bankruptcy; and whether the LLC can continue to do business after filing for Chapter 11 Bankruptcy. First and foremost, an LLC is similar to both a partnership and a corporation but is still a very different animal. It is, however, normally treated the same as a corporation for Chapter 11 Bankruptcy purposes as long as the LLC declaring Chapter 11 Bankruptcy has not already dissolved.

The Chapter 11 Bankruptcy, or sometimes called a reorganization, gives the business bankruptcy debtor the rights, powers, and obligations of a trustee. While there are some exceptions, most of the time the business filing for bankruptcy steps in the shoes of the trustee to propose a schedule. This can be difficult when dealing with an LLC bankruptcy, as this type of business bankruptcy also affects the extent to which each member can participate in the bankruptcy based on equity holdings.

What role does the member play in an Chapter 11 Bankruptcy for an LLC business bankruptcy?

Interestingly enough, in cases where a trustee has been appointed by the bankruptcy court to handle the business bankruptcy, the operating agreement of the LLC in bankruptcy becomes null. This is because in those rare cases, individual members of the LLC in bankruptcy may be facing investigation or threat of litigation. Sometimes a business can fail because of unscrupulous dealings by individual members, and thus the individual member may be liable to the LLC for a breach of his or her fiduciary duty. Since an individual member of an LLC would be reluctant to sue themselves, the trustee must step into their shoes and act accordingly.

Often times, if there is a squabble, then an evidentiary hearing must be held in order to determine the status of the member. Generally, the outcome of this is dependent upon the role they played in the LLC. Those that played an integral role in the LLC may be treated differently than those that sat on the sidelines and passively invested money.

Aaron M. Kelly is an attorney based in Scottsdale, AZ that focuses on Internet Law, Business Law, and Bankruptcy. Aaron is an experienced Internet lawyer and regularly speaks on topics involving Internet law.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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