In re First Protection, Inc., 2010 WL 5059589 (9Th Cir. BAP (Ariz.) November 22, 2010) is another case involving the attempt by a single member of an LLC to prevent a bankruptcy trustee from exercising management rights over the LLC. Debtors, David and Laura Fursman, transferred a 50% interest in Redux Development LLC to his mother after filing an individual Chapter 11 petition but before converting that petition a Chapter 7 case. Their contention was that the trustee could not avoid the transfer under Section 549 of the Bankruptcy Code because the management rights of the LLC were not property of the estate. In their view, only their membership interest, the right to profits and distributions, were transferred to the estate when they filed bankruptcy. The trustee was a mere assignee and had no right to participate in management or control it.
Joining the other courts that have considered this issue (Albright, Ehmann, Modanlo and Olmstead), the 9th Circuit concluded that in the case of a single member LLC a bankruptcy trustee is not a mere assignee but steps into the shoes of the debtor succeeding to all of the debtor’s rights. In this case that included the right to manage the LLC.
The point of these cases is that the bankruptcy courts will not permit a single member LLC to use the nuances and idiosyncrasies of a state’s LLC statute to override the powers of a trustee may assert over the assets of a debtor.