Florida Bankruptcy Law Blog

Article About Partnerships and LLCs in Bankruptcy

I read an interesting and important article in this months Florida Bar Journal about limited partnerships and limited liability companies in bankruptcy. The article was, "Asset protection Proofing Your Limited Partnership or LLC for the Bankruptcy of a Partner or Member", by Thomas O Wels and Jordi Guso. The LP and LLC have effective asset protection features outside of bankruptcy. If a debtor files bankruptcy, the bankruptcy trustee has greater powers to attack and liquidate the interest of the debtor partner or member, to the detriment of both the bankruptcy debtor and his other business associates. The Bar Journal article cited a bankruptcy decision in the case of In re Ehmann and certain sections of the bankruptcy code which provide powers to the trustees to attach partnerships and LLCs which powers are not available to normal judgment creditors.

The authors suggested several provisions be added to LLC and partnership agreements to help protect the debtor's interests in bankruptcy. The most important changes to the agreements are imposing obligations on members and partners to make future capital calls and to be involved in management. The agreement should state that its intent to be an "executory contract." As a side note, mandating partners' involvement in management does not expose limited partners to general liability given changes in Florida's limited partnership statute.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Can Chapter 7 Wipe Out IRS Lien on Homestead?

I received an e-mail from someone who had filed Chapter 7 bankruptcy after the IRS had placed a tax lien on his homestead. The person stated that the taxes due were discharged in the bankruptcy. The general rule is that income taxes due three years prior to filing Chapter 7 are dischargeable. After the bankruptcy was over the writer tried to sell his house and found that the IRS lien still encumbered the house and had to be paid from sale proceeds. He wants to know why his house was subject to an IRS lien if his income taxes were wiped out in the bankruptcy.

This situation is not uncommon. The IRS lien does still attach. When the IRS issues a tax lien that lien changes the income tax obligation to a secured debt. When he filed bankruptcy the IRS had already obtained a security interest in his homestead. Homestead property is not protected from IRS liens. Even if the income taxes were otherwise dischargeable, the IRS tax lien, just like other pre-petitions mortgages and security interest, cannot be wiped out in a bankruptcy. If the IRS gets a tax lien on your property before you file bankruptcy, the bankruptcy will not wipe out the tax lien.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida.

Responsibility For Maintenance of Non-Exempt Estate Property During Case Administration

A chapter 7 debtor has substantial non-exempt assets including two commercial rental properties in another state. The debtor and trustee entered into a money settlement under which the trustee would deed back to the debtor, or his designees, the commercial rental properties. Two months after approving the settlement in open court the bankruptcy court has not written and issued an order, so the parties have not implemented the transaction. In the meantime the trustee has collected rents from commercial tenants but the trustee has not paid mortgage payments, real estate taxes, or maintenance. The properties conditions has deteriorated and equity has evaporated. Taxes are past due. The City is citing building code violations. The City is levying fines against the property. The debtor is very concerned that after the order approving settlement is issued and the trustee conveys title back to the debtor he will be stepping into liability for taxes and fines incurred post filing. The debtor asks what he can do to protect himself against incurring personal obligations to the City.

I posed the question to some local attorneys, none of which is sure of the answer. Technically, I think the Debtor can refuse acceptance of the Trustee’s deed and effectively disclaim ownership. One attorney suggested that the City make a claim for administrative expenses incurred, yet that is beyond the debtor’s control. Someone suggested the debtor make an administrative claim on behalf of the City for taxes and repairs; such claims are more often part of Chapter 11 proceedings. The debtor does not want to get into a fight with the trustee given the pending settlement. The trustee may make an emergency motion to prompt the order because the trustee is concerned about its liability during its control of what have become radioactive estate assets.

I don’t know the answer to this interesting situation. I would appreciate thoughts from anyone who faced similar circumstances.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Trust Inheritance Within Six Months of Filing Bankruptcy

Someone called me and said he filed bankruptcy in September, 2005. In January 2006, five months after filing, his aunt died leaving money for the debtor in a discretionary spendthrift trust. A third party was the trustee. The trustee had total discretion over distributions. In September, 2006, the trustee distributed to the debtor all of his trust share which approached $100,000. The debtor/caller asked me if he had to turn the money over to the bankruptcy trustee. I think he can keep the money, but I’m not sure because I never before heard of this fact situation.

The bankruptcy law says, in general terms, that any money you inherit within 6 months after you file bankruptcy is captured by the trustee as part of the bankruptcy estate for the benefit of your creditors. Although this person’s relative died and left him money within that six month period, the debtor had no right to receive the money within six months. A beneficiary’s interest in a spendthrift trust is not part of a beneficiary/debtor’s bankruptcy estate. Because this beneficiary could not demand the money within six months, neither could the bankruptcy trustee. However, if the third party trustee distributed funds to other beneficiaries within the 6 month recapture period and selectively withheld the debtor’s money there may be a stronger argument for the trustee. Even then, in my opinion, if the trust document gave the trustee the discretion to make distributions to different beneficiaries in different amounts and at different times, or the document specifically prohibited the trustee from making distributions that could benefit a beneficiary’s creditors, I believe the debtor/beneficiary would still prevail.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida