Charging Order Not Sole Remedy in Bankruptcy

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Charles and Ellerie Cleveland (“Debtors”) filed for Chapter 7 bankruptcy relief in 2013. In their bankruptcy schedules, Debtors disclosed their 100% …

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In the case of In re Cleveland, 2014 WL 4809924 (D. Nev. Sept. 29, 2014), the issue was whether a bankruptcy trustee succeeds to all of a debtor’s rights in a single-member limited liability company (including the right to control and manage such entity) rather than being limited to obtaining a charging order against a debtor’s membership interest in the limited liability company, which is the sole remedy available to a judgment creditor under the Nevada limited liability company statute.

Charles and Ellerie Cleveland (“Debtors”) filed for Chapter 7 bankruptcy relief in 2013. In their bankruptcy schedules, Debtors disclosed their 100% ownership interests in two separate Nevada limited liability companies. After Debtors filed amended schedules, the Chapter 7 Trustee (“Bankruptcy Trustee”) timely filed an Objection to Debtors’ Claim of Exemptions. After two hearings on the matter, the Bankruptcy Court held that although the Debtors’ interests in the single-member limited liability companies were otherwise property of the bankruptcy estate, the Bankruptcy Trustee had no right to sell or otherwise take ownership of any assets of those companies.

On appeal, the District Court cited precedent from numerous other bankruptcy courts which have held that where a debtor has a membership interest in a single-member limited liability company and files a Chapter 7 bankruptcy petition, the bankruptcy trustee succeeds to all of the debtor’s rights in such company, including the right to manage and control the company. Furthermore, the District Court indicated that state law does not control the administration of property interests that are part of the bankruptcy estate. Therefore, the District Court reversed the Bankruptcy Court’s holding and ruled that the Bankruptcy Trustee succeeds to all of Debtors’ rights in their single-member limited liability companies. This case is yet another example that in the bankruptcy setting, a bankruptcy trustee is not limited to solely obtaining a charging order under state law.

– Barry Engel and Jordan Cohen

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first published: 2015-02-04 17:55:32