In re Albright Case Analysis

In In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003), the bankruptcy court held that when the sole member and manager of a Colorado LLC filed bankruptcy, her entire membership interest passed to the bankruptcy estate. The trustee became the LLC’s only member, with the power to cause it to sell its real property and pay the proceeds to the estate.

Colorado’s LLC statute let a transferee take management rights only with the unanimous written consent of the “other members,” and a single-member LLC has no other member to withhold it. In a footnote, the court said the result would differ if a non-debtor member declined to consent, even one holding an infinitesimal interest, although a nominal co-member added to hinder creditors stays exposed to fraudulent transfer law.

What Happened in In re Albright

Ashley Albright was the sole member and manager of Western Blue Sky LLC, a Colorado limited liability company that owned real property in Saguache County, Colorado. She filed a Chapter 13 bankruptcy case in February 2001 and converted it to Chapter 7 that July. The LLC itself was not a debtor in bankruptcy.

The Chapter 7 trustee moved for authority to run the LLC, sell the real property, and pay the bankruptcy estate the net proceeds, and he asked that a real estate broker be appointed. He asserted no alter-ego theory and made no attempt to pierce the LLC’s veil. He argued that Albright was the only member and manager when she filed, so he now held whatever she had held.

Albright answered that the trustee stood in her creditors’ shoes and could, at most, obtain a charging order against the distributions on her membership interest. He could not take over management or force a sale. She also argued that because her operating agreement described the LLC as non-profit, it would never distribute profits and her interest was worth nothing. The court rejected that second argument outright: a Colorado membership interest includes the right to distributions of the company’s assets as well as its profits.

What the Bankruptcy Court Held

The court held that Albright’s bankruptcy filing transferred her entire membership interest to the bankruptcy estate, and that the trustee took it with full management rights. Federal bankruptcy law and Colorado’s LLC statute combined to produce that result.

Federal law put the interest in the estate. Filing a bankruptcy case creates an estate made up of all the debtor’s legal and equitable interests in property. Colorado’s LLC statute makes a membership interest the member’s personal property, so the interest passed to the estate the moment she filed. Because no one else held an interest in Western Blue Sky, the entire interest passed, and the trustee became what the statute called a substituted member.

Colorado law decided what came with it. The statute allowed a member to transfer her interest, but a transferee could take part in management, or become a member, only if all of the “other members” approved the transfer by unanimous written consent. Otherwise the transferee received only the member’s share of profits, other income, and returned contributions.

In a one-member LLC there are no other members, so no consent was required and nothing was withheld. The filing therefore assigned Albright’s entire interest to the estate, and the trustee “obtained all her rights, including the right to control the management of the LLC.”

Under Colorado’s statute, the members of an LLC, including the sole member of a single-member LLC, have the power to elect and change its managers. The trustee was now the sole member, so he controlled “all governance of that entity, including decisions regarding liquidation of the entity’s assets,” the court wrote. It ordered that he could have the LLC sell its property and pay the estate the net proceeds, or could instead distribute the property out of the LLC and sell it himself. It also appointed the broker the trustee had requested.

Colorado has since rewritten the transfer section. A transferee’s right to manage now turns on whether the transferee is admitted as a member, and the sentence about the unanimous consent of “other members” that the court construed is gone.

Why the Charging Order Did Not Stop the Trustee

Albright’s remaining argument was the charging order, and the court disposed of it in one paragraph. A charging order is the remedy a judgment creditor of an LLC member ordinarily gets: a court charges the member’s interest with the debt, and the creditor receives the distributions the member would have received, with no vote and no management role. Colorado’s charging-order statute applies by its terms to any judgment creditor of a member and gives that creditor only the rights of an assignee. It draws no distinction between single-member and multi-member companies.

The court quoted that statute in a footnote and answered the argument from its purpose. A charging order, the court reasoned, exists so that an LLC’s other members need not share governance with someone they did not choose, or accept another member’s creditor as a co-manager. “In a single-member entity, there are no non-debtor members to protect,” it wrote, and the charging-order limitation “serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.”

That passage has drawn criticism that starts with the statute’s text: the charging-order statute carves out no single-member exception, and the court never construed its words. A judgment creditor outside bankruptcy holds a judgment, and the statute tells a court what that creditor may have. A bankruptcy trustee stands differently: the debtor’s own interest, with everything attached to it, passes to the estate by federal law, and the trustee takes it as the debtor held it.

In In re First Protection, Inc., 440 B.R. 821 (B.A.P. 9th Cir. 2010), the Ninth Circuit’s Bankruptcy Appellate Panel agreed with Albright‘s outcome by that route. The Bankruptcy Code, it held, overrides state-law and contractual limits on transferring a debtor’s interest, so the trustee steps into the member’s shoes instead of taking a creditor’s remedy.

Where a statute says in terms that the charging order is the exclusive remedy, one court has refused to follow Albright at all. In Pajooh v. Royal West Investments LLC, 518 S.W.3d 557 (Tex. App. 2017), a creditor sought a receiver over a partnership the judgment debtors owned entirely, relying on Albright and Olmstead to argue that no non-debtor partner needed protecting. The court held that an argument from the statute’s policy “does not justify a departure from the statute’s plain text” and declined to follow either decision.

Florida’s single-member LLC decision took a narrower path. In Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), the Florida Supreme Court cited Albright for one point only: that a creditor of an LLC’s sole owner cannot be left with fewer rights than the owner could freely assign. The majority wrote that the relevant question was not whether the charging order’s purpose implied a single-member exception, but whether the statute made the charging order an exclusive remedy, and it found no exclusive-remedy language.

The Olmstead dissent collected academic criticism of Albright‘s charging-order reasoning and argued that a bankruptcy trustee, who takes the debtor’s whole interest, stands apart from an ordinary judgment creditor. For a Florida owner, the governing decisions are Olmstead, decided under a statute the Legislature then amended, and the later Florida asset protection cases applying the amended law; Albright supplies the bankruptcy side.

What a Second Member Changes Under Albright

A second member changes the outcome under Albright, and the court said so twice. One footnote explained that where one member of a multi-member LLC files bankruptcy and the others do not consent to a substituted member, the estate receives only that member’s share of profits, income, and returned contributions, and no management role. Colorado appellate decisions involving multi-partner or multi-member entities were distinguished on that ground.

The second footnote addressed what the court called the harder question: an LLC with a dominant member who controls the company and a passive member holding a minimal interest. The question was whether a trustee of the dominant member takes governance. Under the statute, the court said, the answer is no if the non-debtor member withholds consent, “even if she held only an infinitesimal interest,” and the trustee would have no role in the voting or governance of the company. He would receive only a share of distributions.

The court then qualified that answer. The statute, it wrote, “does not create an asset shelter for clever debtors,” and a debtor who intends to hinder, delay, or defraud creditors through a multi-member LLC with “peppercorn” co-members faces the Bankruptcy Code’s avoidance powers and fraudulent transfer law. Those give creditors and trustees recourse against the arrangement.

The two footnotes define the second member’s job. A co-member who genuinely holds an interest and can refuse consent keeps the trustee out of governance, however small the stake. A co-member added to a one-owner company for no reason except to defeat creditors invites the fraudulent transfer claim the court named. Albright‘s footnote ties the exposure to the debtor’s intent to hinder, delay, or defraud creditors; the size of the co-member’s stake, by itself, does not defeat the protection.

What In re Albright Means for a Single-Member LLC in Florida

A single-member LLC in Florida gives its owner limited protection against a personal judgment, and In re Albright is the bankruptcy half of the reason. Outside bankruptcy, a Florida judgment creditor of a sole member can foreclose on the membership interest once charging-order distributions will not satisfy the judgment within a reasonable time. The buyer at the foreclosure sale takes the entire interest and becomes the member.

Florida added that rule in 2011, after Olmstead held that a sole member’s interest could be ordered surrendered to satisfy a judgment. In bankruptcy the analysis runs through federal law. Albright let the trustee take a sole member’s management rights and sell the LLC’s property under Colorado’s statute, and First Protection reached the same result under a Bankruptcy Code provision that overrides state-law transfer restrictions wherever the LLC is organized.

The fix is a second member, and for a Florida owner that member is typically an irrevocable trust. Florida’s statute makes the charging order the sole and exclusive remedy against a member’s interest in a multi-member LLC and bars foreclosure of that interest outright. The single-member LLC has neither protection, because the statute’s own exception and the trustee’s powers in bankruptcy both reach it.

Florida’s bar on foreclosing a multi-member interest is statutory and applies outside bankruptcy. Inside bankruptcy, First Protection read federal law to override state-law transfer limits for a sole member and said its decision did not involve a multi-member LLC, and Albright itself said a non-consenting co-member changes the result.

The second member must be real. Albright lets a co-member who can refuse consent keep the trustee out of governance however small the stake, but a co-member added only to hinder creditors invites the fraudulent transfer claim the court named. Florida’s statute itself preserves fraudulent transfer law and alter-ego claims against the charging order shield. The operating agreement should give the second member real rights to distributions and a vote, so the interest is more than a name on the company’s records.

Alongside the Florida charging order decisions, Albright shows what a bankruptcy trustee, rather than a judgment creditor, takes from a sole member: the interest, the vote, and the power to sell what the company owns.