In Re Ehmann: Bankruptcy Court Decision Portends Problems for Manager-Managed LLCs

Abstract:     
The LLC has been touted for its many advantages, one of which is the ability of an LLC to protect the assets from claims of creditors of persons that are members in the LLC. In the case of In re Ehmann, [1] however, the Bankruptcy Court for the District of Arizona held that a trustee in bankruptcy had the power to exercise all of the management rights held by a debtor who was a member of an LLC. The court indicated that the trustee's rights might include such broad powers as the right to redeem the LLC interest, seek appointment of a receiver to operate the LLC in accordance with the LLC's purposes and the members' rights or to seek the dissolution, winding up, and liquidation of the LLC. The result in Ehmann raises concerns that bankruptcy courts may be willing to allow trustees in bankruptcy to interfere with the management of an LLC for the benefit of a debtor's creditors and to the detriment of the nondebtor members of the LLC. This column discusses the Ehmann case and its relevance to persons who own interests in an LLC.

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