Protection of Partnership or LLC Interest in Bankruptcy

Family partnership and limited liability companies provide asset protection in state court collection proceedings because creditor’s collection tools are limited by Florida statute to a charging lien on distributions. Less clear is how a debtor’s partnership interest or LLC interest would be treated if the debtor filed bankruptcy. The bankruptcy trustee is not necessarily limited to collection tools set forth in Florida’s partnership and LLC statutes.

In a case where a bankruptcy debtor own a minority LLC or partnership interest, could the trustee force the partnership/LLC to sell all of its assets at a “fire sale” after which the trustee would take that part of the net sales proceeds allocated to the debtor’s minority interest, or could the trustee sell only the debtor’s interest subject to the provisions of the partnership/LLC agreement without disturbing partnership assets. The value of a minority interest in a partnership/LLC subject to the provisions of the agreement and rights of other partners would most likely be much less then cash proceeds from a liquidation sale. Also, a partnership/LLC agreement may give other partners the right to purchase the debtor’s interest for cash at the fair market value of the minority interest, thereby preserving partners’ interest in the entity and the assets.

The 11th Circuit Court of Appeals issued a decision on this issue in April, 2005. The court decided that a bankruptcy trustee may not force partition of a partnership and a liquidation of partnership property in order to convert to cash the interest of a minority partner who filed bankruptcy. The court found that the trustee’s right to partition is governed by state law, and that the state statutes did not provide for forced partition. The bankruptcy trustee was not allowed to force sale of partnership property, and the trustee’s remedy was limited to sale or recovery of fair market value of the debtor’s minority interest subject to the terms of the partnership agreement. The case is: Leo v. Powell (In re Powell), 2005 W.L. 1155176 (Bankr. N.D. Ala., April 20, 2005)

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Last updated on May 22, 2020

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