Treatment of Limited Partnership (LP) and Limited Liability Company (LLC) Interests in Bankruptcy

When the shareholder of a corporation files bankruptcy, the shareholder’s stock becomes part of the debtor’s bankruptcy estate and will generally be subject to liquidation by the bankruptcy trustee for the benefit of the debtor’s creditors.

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However, when a limited partner in a limited partnership (LP) or a member of a limited liability company (LLC) files bankruptcy, the debtor’s ownership interest may well be treated differently because interests in LPs and LLCs are typically considered and treated as more contractual in nature.

 

Membership Interests in LLCs

Most LLCs have an operating agreement that each LLC member signs and agrees to be bound by as a condition of maintaining the member’s membership interest in the LLC. In many cases, an LLC’s operating agreement will impose conditions, such as unanimous consent, before a member can transfer any part of their membership interest. Many operating agreements also require that all other members consent before the assignee or transferee of a membership interest become a member in the LLC.  Even in the absence of such provisions, the applicable law of many states require a certain level of membership consent before an assignee or transferee of a member may be admitted as a member of the LLC. As a result of such restrictions, a bankruptcy trustee succeeding a bankrupt member’s interest does not automatically become a member of the LLC and is not automatically empowered to liquidate such member’s interest; in the same manner, the trustee might be able to if the debtor was a shareholder in a corporation.

 Limited Partnership Interests in LPs

Much like a member of an LLC, if a limited partner in an LP files for bankruptcy, the trustee is typically not as a matter of course entitled to liquidate the debtor’s interest in the LP.  This is because of conditions and restrictions that typically appear in limited partnership agreements that require other partners’ consent to transfers and the admission of new partners.  Thus, a question typically always exists regarding the trustee’s rights and interest, if any, in the limited partnership.

Regardless of whether you have a membership interest in an LLC or a partnership interest in an LP, the bankruptcy filing by a fellow member or partner will have far-ranging implications with both the entity and the individual members or partners. However, unlike typically in the case of a corporate shareholder, the debtor’s bankruptcy will not necessary result in a bankruptcy trustee succeeding to the debtor’s entire ownership interest.

Discuss the Legal Needs and Concerns with Our Silicon Valley Business Attorneys

Bankruptcy can be complex when it comes to business interests. If you have any questions or concerns about any legal matters involving a bankruptcy in a business, please contact the skilled Silicon Valley corporation lawyers at Structure Law Group, LLP today for assistance by phone at 408-441-7500 or by email.

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