LLC Law Monitor : Northwest Limited Liability Corporation Lawyer & Attorney : Doug Batey : Stoel Rives Law Firm : LLC Formation, Tax Liability

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The debtor corporation, Aldape Telford Glazier, Inc. (ATG), was the sole member and manager of two Idaho LLCs. ATG filed a Chapter 7 bankruptcy case, listed a number of assets of its two subsidiary LLCs in the schedule of ATG’s personal property, and did not list its member interests in the two LLCs. The two LLCs had been previously dissolved, and each had filed articles of dissolution which recited that “[a]ll assets revert to sole member.” In re Aldape Telford Glazier, Inc., No. 09-00834-TLM, slip op. at 3, 2009 WL 2216594 (Bankr. D. Idaho July 23, 2009).

The trustee sought dismissal of the bankruptcy case on the grounds that ATG was attempting to impermissibly combine the financial affairs of separate legal entities, thus creating in effect a “joint petition” of ATG and the two LLCs. (Joint filings of a bankruptcy case are not allowed except in the case of spouses. Fitzgerald v. Hudson (In re Clem), 29 B.R. 3 (Bankr. D. Idaho 1982).)

The bankruptcy court applied Idaho state LLC law and determined that LLC property belongs to the LLC and not its members (Idaho Code § 53-633(1)), that on dissolution an Idaho LLC continues to exist and to own its property until it has wound up its business and affairs and distributed its property (Idaho Code §§ 53-644, 53-646), and that the statements in the articles of dissolution that the LLCs’ assets reverted to their members were ineffective. In re Aldape, slip op. at 7-9.

ATG argued that the trustee could “handle the process of identifying and segregating the physical assets and accomplishing the wind up process for both LLCs,” or that the trustee could file Chapter 7 petitions for the LLCs. The court rejected those suggestions as unreasonable and inconsistent with the Bankruptcy Code. Id. at 11-12.

ATG’s approach, i.e., the statements in the LLCs’ articles of dissolution about assets reverting to the sole member and the inclusion of the LLCs’ assets in ATG’s asset schedule in the Chapter 7 filing, shows some confusion over the effects of dissolution. Under Idaho’s LLC Act, dissolution of an LLC is simply a change of its status, not a termination of its existence. ATG attempted unsuccessfully to treat the dissolution as a termination of the LLCs’ existence and as a conveyance of the LLCs’ assets to their member.

The approach of the Idaho statute—LLC dissolution as a change of status requiring that the business be wound up, debts paid and liabilities provided for, and any remaining assets distributed to members—is widely used by the states. E.g., Washington, Delaware. The Revised Uniform Limited Liability Company Act uses the same approach.