I have several questions about a bankruptcy involving 2 LLCs with 2 members declaring

[jarrado]

Hello and thanks in advance for any help you can give me. Im an avid forumer and like to write. Hopefully I dont need write here that often, LOL, but I will stick around and let everyone knows what happened. Sorry for my sentence and paragraph structure and grammer, im tired from all the moving and preparation for bankruptcy.

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First, Im grateful that there are places like this for info. I also understand that the info may not be right for my situtation, so I am ultimately relying on my attorney. I also understand that this is far too complicated lol. That said, I would like some other opinions on this.

Currently I am a managing member of LLC 2 and I am no way in debt to anyone (I guess I will refer to my self as member "3"). There is also another member like myself who is not in debt either, who I will refer to as member "4".

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So these are the LLC's in question. We are trying figure out how to come up with operational and bankruptcy costs and trying to avoid fraud or even a hint of fraud.

LLC 1 owns the building and the land it sits on. It was formed in 06. The building was built in 08 and is tied by a "personal guarantee" to members 1 and 2. It is currently for sale. The building payments are currently behind by two months, as LLC 2 is unable to pay because there is not enough cash flow. The bank has already sent out a bank hired appraiser, but we have received no notice or contact at all from the bank.

The problem is that members 1 and 2 are tied personally to LLC 1's bank loan on the building and land (there are no other ties other than the loan). They have decided to file and, since myself and member 4 are relatives of member 1 and 2 (sons to be precise), they decided to place 4 vehicles(one car, one truck, two motorcycles which we purchased with our money and we pay the insurance) in our name-valuing right at 8k. They have a van(paid off) and a motorcycle(this was payed off using a cc and they still owe on the cc) in their name.

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LLC 2 owns the contents, such as machinery, supplies and materials. it also owns two HIGH value land plots in TN (we are actively trying to sell-to settle debts and pay our salaries, if we are still working-or exempt these). Business has been stalled for nearly a year and a half, with no real increase in capital. We would most likely have filed a year ago, but we recieved and offer to become part of a nationally circulated catalog-which has produced no capital to date.

There are also two lots in LLC 2's name which are to be quick claimed to members 1 and 2, they will then be placed under the homestead exception with their home (which was appraised at 183K and has 52K equity). We're not sure if this will raise a red flag?

The only money in LLC 2's bank account is the remainder of borrowed money from two of the four members, which I will refer to as member "1" and "2", they are the main managing members with majority share holdings. They used credit cards and transferred that money to LLC 2 for operational costs.

The problem with them filing personally, is that the credit cards in their name were used, and are still being used, as operational costs for LLC 2. Im worried that this particular instance would constitute fraud of some kind, but im unsure. We discussed LLC 2 paying it back to avoid any difficulties in filing, but we are currently discussing our options with our attorney.

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Yes, unfortunately, there is more. The managing members 1 and 2 had the business borrow money to even start the bankruptcy process. We are not sure how money borrowed on credit cards will be viewed. Also, we had borrowed other money 6 - 8 months ago to try to "ride out the storm" so to speak. I had considered LLC 2 keeping the "borrowed" money from members 1 and 2. but if they file BK, then would that constitute BK fraud? Myself and member 4 have about 46% share in the business, but we are related, so i need to know if and how this effects that transfer. If the money is allowed or not allowed to stay, or if it is in our best interest to dissolve LLC 2 aswell, then should LLC 2 pay myself and member 4 our loans out of the borrowed money that is tied personally to members 1 and 2?

I just had another thought. Their cards have their (my parents, mebers 1 and 2) names on the accounts, its a personal card with a business name on it. So it would not be like a microsoft company card with a personal name on it. So that if the company goes out the person named would be liable, it would instead be the bank account holder microsoft. So if they file the company would in no way be held liable. Meaning that LLC 2 would be dept free and if its land sold would then have 60K in operation expense to try and start over, correct? Of course microsoft is just an example. lol.

Now, if they file personally, can the creditors come after LLC 2 or its members? I would assume not as it an LLC

This last question is of the most concern for me, because I owe no man. haha. Also, sorry for the reallly long post. I thought it better to get all of it on the table at the same time.

Im aware that we need to consult an attorney, we consulting serveral... I'd just like a view of those here as best they can. Thanks for input.

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[justbroke]

I didn't read but 90% of that and I see all types of issues. Mostly around moving property around in an apparent attempt to shield the property from creditors. That is fraud, by definition. Now, as to the extent that the Trustee can get to the assets, remember, that a Trustee stands in the shoes of the LLC Member who is filing.

The Trustee can force the LLC to buy our the member and/or cause the LLC to liquidate in order to purchase the Member's "share". Since you're now talking about members of the various LLCs being family members, you have all sorts of other issues with "insider" preferences which are avoidable as well. I don't think you, personally, will avoid the "insider" preference either because you are all business partners and Member 1 and 2, are related, and then Members 3 and 4 are related. There are preference issues all throughout this.

If it smells like fraud, looks like fraud and quacks like fraud...

The Trustee would definitely (100%) hire an attorney and forensic accountant to rip the LLCs apart and to determine what's really going on. The worse case, is that the case is dismissed for fraud and you can never file again. The best case, the Trustee steps into the shows as the LLC Member and only forces the other members to buy the debtor-member's shares from the Trustee.

You need an attorney, not a forum. (But you knew that.) I would look to attorneys specializing in closely-held corporations, bankruptcy and asset protection. I don't see any way out except with the passage of time between these transactions (at least a year, maybe more).

[jarrado]

We already have several lawyers looking into it. Aside from the credit cards, most of them have said to file personally, switch over the vehicles into my and my brothers name, sell or keep the properties (as they cant be touched or taken, because of the way the LLC's are setup). Im just trying to bring out any other issues. As of now, as long as the credit cards are taken care of, no fraud should be present. Also the insider bit wont be an issue, or attorneys have worked around it so far.

Also, all of the cars, bikes, property were purchased with debt free money more than a year and a half ago. And all the major credit card debt came from this time frame as well. As far as in the last year or so, I dont believe we have any debt from that period. And today we closed all our credit cards. I was on here because they (parents) were waiting for a 30k transfer from a credit card so we could still eat, but this is no longer needed, so cancelling in effect nullified the pending transfer.

Ah, I forgot that all the cars/bikes are owned by my parents personally and that we will, evidently, not have to file on LLC 2. LLC 1 doesnt own anything except a large loan.

Basically, the last 3 attorneys we talked to all said about the same thing, with a few saying we needed to spend 9k (alot for us, considering the whole of debt we owe is only the building plus less than 40k-not much for a business) dollars and file on both LLCs and personal, which doesnt even make sense.

I'll edit my above post. Its a little too much to remember. lol

EDIT: we owe less than 40k on top of the building.

[justbroke]

I don't think anything that you stated will stop a Trustee or the Office of the United States Trustee (OUST/UST) from hiring an attorney and forensic accountant and looking more carefully at the LLC and its organization. There's just too much there and too mujch back and forth. While you may ultimately win any move by the panel Trustee of the UST to otherwise seek to recover property or monies, I don't think there is any hiding from actually going through the motions.

Sure there are attorneys who will fight, and this is going to cost you. This will probably be one of the most expensive Chapter 7 cases I've ever read about. I think $7K is the highest so far.

[jarrado]

Thanks for the help. The case isnt as back and forth as it looks, but I'll ask about what you said. I dont think they will ahve a problem though since there filing a non-consumer and its almost all business debt(the loan) as far as cars and such, them being personal they fall under exemption and wont be considered. LLC 1 will dissolve with the building, so no problem there.

LLC 2 will not have any debts, as the properties will be sold to pay debts. LLC 2 will also continue to stay open and pay myself and member 4 our salaries. Based on what you said, auditing may be an issue or the fact that we may need to borrow some to pay our bankruptcy fees. Basically this is my parents filling a personal non-consumer BK and they happen to be members in an LLC. I mean, they only owe like 200k on a building thats worth twice the loan amount. They haven't misappropriated any money.

If it werent for this economy we would be fine, we've been in business for more than 10 years and have used credit cards to pay bills, but we've paid them off. This is an exception, which happens to be a BK lol.

If you see a major issue please tell me exactly so I can pass it on to the lawyers. Thx.

[justbroke]

I dont think they will ahve a problem though since there filing a non-consumer and its almost all business debt(the loan) as far as cars and such, them being personal they fall under exemption and wont be considered.

The nice part about the non-consumer, it saves you from any of the inquiry under 11 USC 707(b) which includes the means test, abuse, bad faith, and totality of circumstances objections. (At least in Florida, it's found that a non-consumer Chapter 7 can't be dismissed on anything under 707(b).) However, for cause, they can dismiss but the threshhold is substantial abuse and much harder to prove.

I mean, they only owe like 200k on a building thats worth twice the loan amount. They haven't misappropriated any money.

Most of this is predicated on actually liquidating (selling) property... that's the big concern. I'm just worried, for you, that the Trustee will get their hands on assets through Member 1 and Member 2.

If it werent for this economy we would be fine, we've been in business for more than 10 years and have used credit cards to pay bills, but we've paid them off.

I hear ya, loud and clear on this end! I had invested in real estate and that took me down. Well, tenant issues and then using credit cards to stay afloat. If only I had let the investment properties go earlier.

If you see a major issue please tell me exactly so I can pass it on to the lawyers. Thx.

No issues, just "holes". While the organization of the LLCs seems okay, I'm just thinking that the smart panel Trustee is going to want to poke holes at it and see if they can... "penetrate the veil of corporation"... as they say in the business. It's just a strange organization where LLC 1 owns this, but uses equipment/property that's owned by LLC 2. If an attorney set that up and was an asset protection attorney, then I'm sure they know a lot more than I do!

Again, my only concern is that the debtor-members are likely to face scrutiny. You are not going to face it as you're not a filing debtor. Or, the Trustee just says... "too complex for me" and abandons the assets and goes away.

[jarrado]

The nice part about the non-consumer, it saves you from any of the inquiry under 11 USC 707(b) which includes the means test, abuse, bad faith, and totality of circumstances objections. (At least in Florida, it's found that a non-consumer Chapter 7 can't be dismissed on anything under 707(b).) However, for cause, they can dismiss but the threshhold is substantial abuse and much harder to prove.

well considering that they are only filing because of the building, thats why they did the non-con. MS is a little different I believe, but our lawyer said it will be fine and there isnt anything to ground a fraud/abuse situation.

Most of this is predicated on actually liquidating (selling) property... that's the big concern. I'm just worried, for you, that the Trustee will get their hands on assets through Member 1 and Member 2.

Im not sure what you mean. LLC 2 only pays rent to LLC 1(LLC 1 has absolutely no assets-equipment wise or other) LLC 1 was setup to protect LLC 2 the parent company. LLC 1 is going to dissolve, as member 1 and 2 the only members.

Also myself and member 4 are not in any way tied personally to either LLC, but we did "buy in" to LLC 2-not LLC 1 that owes debt-as partners over a year ago (unless that somehow puts us in a binding contract, even though we never signed anything, and member 4 is under 21, im not sure that he could be held liable for debts). Our shares are les than 50% combine, until we assume control after BK. If assuming control would cause a problem, we can always dissolve LLC 2 and pay back our shares plus loans we have given the business?

I hear ya, loud and clear on this end! I had invested in real estate and that took me down. Well, tenant issues and then using credit cards to stay afloat. If only I had let the investment properties go earlier.

Its the building for us.... in our business its normal to have long lulls or no business and then several months that equal most of our gross. We just didnt see it coming and after 6 months we began to plan an exit strategy.

No issues, just "holes". While the organization of the LLCs seems okay, I'm just thinking that the smart panel Trustee is going to want to poke holes at it and see if they can... "penetrate the veil of corporation"... as they say in the business. It's just a strange organization where LLC 1 owns this, but uses equipment/property that's owned by LLC 2. If an attorney set that up and was an asset protection attorney, then I'm sure they know a lot more than I do!

Well about that, I must have not typed it exactly right or you mis-understood or something. Anyway, LLC 1 ONLY owns and takes care of the building, nothing else. It was setup that way with the help of an attorney that has done "asset protection" and " estate planning". Its probly ok.

Also, we set up our LLC's to be non-effected by "pierce the veil" practices.... we call them "shady dealings" here. I dont know all the specifics and I wouldnt go and write them here. Im sure you understand.

And our trustees in MS are all rather ..... I would say very practical. Or maybe cheap/lazy is a better word lol.

Again, my only concern is that the debtor-members are likely to face scrutiny. You are not going to face it as you're not a filing debtor. Or, the Trustee just says... "too complex for me" and abandons the assets and goes away.

I dont know why we would face scrutiny.... all we did really was buy in to the business to try and help our parents, we were employees before and filed w-2's. Just in case, myself and member 4 do not have to file BK as we are not personal guarantees on any loans. My parents have been in business for 20 years and we setup these LLCs to limit our risk and liability as mush as possible. Nothing wrong with that.... unless the uncle sam says so lol. Although you did bring up some things that I will have to pass on.

Ah, about the "selling" of assets. LLC 2 doesnt have to sell anything and LLC 1 doesnt have any assets to sell. LLC 2 was going to sell the property of its own volition to be able to pay my parents salaries, so in turn they could pay there bills, or their credit cards. thats what i meant, sorry for any confusion. Its very confusing for me too. I dont know everything about our situation, so im just exploring all avenues of information to help my parents as much as I can.

I have one major concern, if they have to borrow money to pay for the BK, they will still owe that amount, correct? Or can it be included in the BK filing?

[justbroke]

I have one major concern, if they have to borrow money to pay for the BK, they will still owe that amount, correct? Or can it be included in the BK filing?

They'd have to pay it back because it's probably thousands of dollars and if they use credit, the creditor is more than likely to file a complaint as to the dischargeability of the debt.

I never thought you personally would face scrutiny, only the LLC if the Trustee can wiggle through it. Since you say that an asset protection attorney help setup the structure, then I will certainly yield to that expert advice. Many people who come on to the Forum have LLCs created without the help of attorneys who specialize in protecting the members and assets. Not to say that's wrong, but if you have more than just one member (single-member LLC), the protection is more important to isolate members.

I probably got confused because the member's case (1 and 2) is complex. I'm just sure it will be poked at a little, and maybe they quickly go away without any fanfare.

[jarrado]

They'd have to pay it back because it's probably thousands of dollars and if they use credit, the creditor is more than likely to file a complaint as to the dischargeability of the debt.

Ok so they can use credit to pay for it. They fully intend on paying it back if it comes to it. They dont want to file BK, but they dont have another option. so... "what can you do right?"

I never thought you personally would face scrutiny, only the LLC if the Trustee can wiggle through it. Since you say that an asset protection attorney help setup the structure, then I will certainly yield to that expert advice. Many people who come on to the Forum have LLCs created without the help of attorneys who specialize in protecting the members and assets. Not to say that's wrong, but if you have more than just one member (single-member LLC), the protection is more important to isolate members.

Ok. I misunderstood then. We more had them look over it and they told us what to change/alter, rinse/repeat. Bottom line, we went back to the same attorney and asked him and he advised us to transfer vehicles, quick claim some property and homestead, sell some property to pay certain debts and then file BK and liquidate LLC 1, but keep LLC 2 open for a year before liquidating it aswell or keep it and start over.

I probably got confused because the member's case (1 and 2) is complex. I'm just sure it will be poked at a little, and maybe they quickly go away without any fanfare.

If you could actually talk it out in person you would understand right away, its really hard to convey thoughts exactly on a forum.

Ultimately though, what I came here for was for other opinions and some insight. Theres a few things we need to look at now, we will be talking to our attorney again later this week. After this is over I'll post up what went down, as it is a rather special case.

Also, the bank has yet to even talk with us. I dont understand them at all. Its annoying that we have to go through this, its down right maddening that they wont even talk to us though. As a bank I expected more. Oh well. I'll check back on a regular basis to see whats going on.

fin~ for now....

[Mensa1]

Here are your two areas for the forrest fire to start, IMO. (and I just skimmed over the above chapters quickly and didn't follow everything).

You mentioned something about transferring property from one of the LLC's which will become homestead exemptions for ma and pa. When was/is the transfer to take place? When do you anticipate the filing of the Bk?

It appears to me that any transfer here due to closely held company assets would fall within the 12 month, not the 3 month look-back period. So Trustee could invalidate the transfer back the LLC and attempt to liquidate from there. Now if they did, what do that do to the price of tea in China; would it generate cash equivilent to Trustee?

Next, the personal credit cards used buy ma and pa to purchase goods for LLC also effectively fall into the close family member transfer (possibly). The fact that 46 cents out of every dollar that they transfered benefited their two sons, is close enough. (we aren't playing hoseshoes or hand grenades here, bk is another area where close enough works if the T'ee says it works). What you could find yourself in the position of is the LLC that received the benefit of those transfers could possibly owe the T'ee an equivilent amount of offset. Either pay in cash or they start liquidating to equal the cash.

Now, could the T'ee do all that.? I don't know, but I am just throwing the potential arguments on the proverbial wall to see if the stick. You decide.

[jarrado]

You mentioned something about transferring property from one of the LLC's which will become homestead exemptions for ma and pa. When was/is the transfer to take place? When do you anticipate the filing of the Bk?

the trasfer would be taking place immediatly prior to filing, but the LLC holding the assets is not filing, so there is no issue. They just want to homestead it now, in case that LLC doesnt in fact have to fold, more time between transfers is better after all. But the land to be homesteaded could be quick claimed before or after filing, but, since it takes 3 months to get "discharged" they would rather do it now, since it is right around our house.

Next, the personal credit cards used buy ma and pa to purchase goods for LLC also effectively fall into the close family member transfer (possibly). The fact that 46 cents out of every dollar that they transfered benefited their two sons, is close enough. (we aren't playing hoseshoes or hand grenades here, bk is another area where close enough works if the T'ee says it works). What you could find yourself in the position of is the LLC that received the benefit of those transfers could possibly owe the T'ee an equivilent amount of offset. Either pay in cash or they start liquidating to equal the cash.

Unless they can look-back more than a year, that isnt an issue either. Also we plan on paying those off, so its moot anyway. And even if it did fold out that way, we would just not file on those cards and continue to pay them off.... its the building note that is the problem.. not the credit cards.

[Mensa1]

the trasfer would be taking place immediatly prior to filing, but the LLC holding the assets is not filing, so there is no issue. They just want to homestead it now, in case that LLC doesnt in fact have to fold, more time between transfers is better after all. But the land to be homesteaded could be quick claimed before or after filing, but, since it takes 3 months to get "discharged" they would rather do it now, since it is right around our house.



Unless they can look-back more than a year, that isnt an issue either. Also we plan on paying those off, so its moot anyway. And even if it did fold out that way, we would just not file on those cards and continue to pay them off.... its the building note that is the problem.. not the credit cards.

I'm not so sure that the Bk will look at this property transfer from LLC, immediately before filing, quite the same way you are looking at it. Yes, I get that LLC isn't filing but to the extent of your parents ownership in the LLC, which becomes part of the Bk estate. Also the fact that two sons involved in owning the balance of the company, minority interest, I might add.

Look-back more than a yr... You must be referring to when the purchases are made. I'm not so sure that is the relavent time frame. But I guess I can't grasp some of that w/o going back and re-reading the orig post and no time to do so now. Maybe later, but I don't think you are out of the woods here with your logic.

[StartingOver08]

Remember, when you have a small business involved in the BK the petition automatically gets more attention from the Trustee.

The lookback period for real estate transfers is up to TEN YEARS. I went through that myself in my own BK filing. When you have family members involved the lookback is one yr for insider transfers.

Just reviewing your initial post, the Trustee is going to give your parents extra scrutiny because the parties involve LLC's, asset transfers on the eve of BK (any transfer raises scrutiny), and family members. Make sure to lay out your plan with your BK attorney completely.

I ended up fine with my Ch 7 discharge, but I can tell you everything was documented (a la frogger style ) and I still had to go to two 341's.

[jarrado]

I'm not so sure that the Bk will look at this property transfer from LLC, immediately before filing, quite the same way you are looking at it. Yes, I get that LLC isn't filing but to the extent of your parents ownership in the LLC, which becomes part of the Bk estate. Also the fact that two sons involved in owning the balance of the company, minority interest, I might add.

Ok, our operating agreement is setup so that we dont own the LLC, we are "employees" that manage assets in the LLC's name and are allowed to invest (return investment is yearly/monthly in the form of bonuses or raises in salary) in the business-I have a limited grasp of this concept in our OA so im unsure as to the exact way it is setup. Also, in our operating agreement, when a "partner or managing member" leaves the LLC they do not receive any shares back from their initial-if any-investment. The OA was setup this way. Im not sure how this would effect it as a whole, but our lawyer will address these concerns.

Look-back more than a yr... You must be referring to when the purchases are made. I'm not so sure that is the relavent time frame. But I guess I can't grasp some of that w/o going back and re-reading the orig post and no time to do so now. Maybe later, but I don't think you are out of the woods here with your logic.

As far as credit cards go, we will do what is necessary to avoid issues in our BK, even if it means assuming the cards. Our lawyer is looking into this now.

Remember, when you have a small business involved in the BK the petition automatically gets more attention from the Trustee.

I am well aware, thats why we are working to minimizing red flags.

The lookback period for real estate transfers is up to TEN YEARS. I went through that myself in my own BK filing. When you have family members involved the lookback is one yr for insider transfers.

Just reviewing your initial post, the Trustee is going to give your parents extra scrutiny because the parties involve LLC's, asset transfers on the eve of BK (any transfer raises scrutiny), and family members. Make sure to lay out your plan with your BK attorney completely.

An asset protection/estate planning lawyer is the one that urged us to transfer the property, only because of the LLC's setup and our unique situation.

I know that the above posts are quite lengthy, but ALL the info is relevant. Our entire situation is laid out (except details that would identify the parties in question, of course

So, in short, our main problems are the credit card purchases(all of them being LLC building expenses) and the homestead land transfers. I will make sure to bring these up.

Thanks for all the input, it helped bring out a few important questions. If you have any more advice/concerns please drop a post thanks.

[Mensa1]

So, in short, our main problems are the credit card purchases(all of them being LLC building expenses) and the homestead land transfers. I will make sure to bring these up.

Thanks for all the input, it helped bring out a few important questions. If you have any more advice/concerns please drop a post thanks.

I agreed that those WERE your main problems until you posted above about NOT being a shareholder. Uh-Oh, that means Ma and Pa are sole members of the LLC with the RE that is being transferred to them 1 week before filing?

The T'ee will blow that transfer up BIG TIME. No way in the world that this transfer will be left to stand and have the parents claim 200K of homestead exemption... that one week before was owned by an entity that they controlled. I will never believe that one even is you show the property records 6 months after discharge, and title is still vested to the parents.

Good luck on it, but I think your are in for a rude awakening. hope not for your sake, but keep us posted.