Legal Question in Bankruptcy in Florida

Jim Boe (a fictional Florida resident) finds himself in the situation described below.

1. Jim is working hard to make a go of things, but personal bankuptcy may be necessary in a few months. Foreclosure proceedings on Jim's home have started and he has hired a foreclosure attorney.

2. Jim is the sole member of XYZ LLC that earns $10,000 per year. XYZ LLC owns and operates 10 websites and some inventory worth $1000.

3. Jim has been planning ExampleA.com LLC with his prospective partner Jack, and they are a few days away from beginning work on a new website. Before starting, Jim and Jack will form an LLC with equal ownership, and sign an operating agreement. ExampleA.com LLC will own only digital assets (the website at ExampleA.com).

4. Jim is a partner in ExampleB.com that has no legal nor formal organization. Jim and his partner Bill split the profits and costs for ExampleB.com that earns $20,000 per year. The ExampleB.com domain name is registered in Bill's name. Both Jim and Bill have invested a lot of time into ExampleB.com, so therefore Jim feels strongly that, at some point, he and Bill must transfer equal ownership of ExampleB.com into an LLC, and both partners sign an operating agreement.

5. Jim got a $9,000 loan from a relative 1.5 years ago.

Jim has read http://www.keytlaw.com/azllc/singlememberllc.htm, so he is concerned about losing his ownership interest in all three companies (in #2, 3 and 4) during bankruptcy. What do you recommend for Jim to protect his interest in the three companies?

Thank you for your information.


Asked on 3/01/10, 2:22 am

1 Answer from Attorneys
Robert Wilcox Wilcox Law Firm

If you file a personal bankruptcy, the issue becomes the value of your assets on the date you file. I always tell my clients that Chapter 7 is a "snapshot" of the debtor's financial situation on the filing date.

The question then becomes, what is the value of your LLC interests?

My guess is that it is very low, and is not likely to be property that a Chapter 7 trustee will have an interest in trying to liquidate.

Technically, the Trustee will succeed to your interest under the LLC's, although there is some authority that suggests that the LLC agreement is a contract that would be terminated under bankrupcty law.

If an LLC has little CURRENT positive cash value, then a trustee is unlikely to have much interest in it. It is an asset that would be very difficult to sell. Most probably the trustee would try to sell it bakc to you or to your partner.

After all, the trustee is not going to work at the business.

As to Example B, you may have a more difficult issue, because there may be some cash value. You could try to sign an operating agreement, but it may be hard to get the asset out of your name prior to filing.

The loan from the relatibve must be listed in the bankruptcy papers. There is nothing that prevents you, after the bankruptcy, from choosing to pay the relative. Do not pay the relative now, or the trustee will sue your relative to get the money back.

You have a complicated situation, and should seek experienced bankruptcy counsel who can understand all the facts and guide you, whether or not you file a bankruptcy case.

Robert Wilcox

(904) 281-0700

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Answered on 3/09/10, 8:29 am


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