LLCs: The Uncola (Bankruptcy Edition)

The United States Bankruptcy Court for the Western District of Kentucky has opened my eyes to some bankruptcy law issues I hadn't previously seen. The court also committed what I consider to be a cardinal sin: the court refers to an LLC as a "limited liability corporation."  An LLC is a "limited liability company," which is a statutorily different entity than a corporation. 

The court states: "Sunnyview and TR are limited liability corporations. They are not individuals and do not meet the definition of insiders under 11U.S.C.§ 101(31)(B)[sic]." In re: Bullitt Utilities, Inc., No. 15-34000(1)(7), 2020 WL 547278, at *6 (Bankr. W.D. Ky. Jan. 24, 2020) (emphasis added). Other than being LLCs, and not corporations, this appears to be correct. The statute, 11 U.S.C.§ 101(31), provides: 

(31)The term “insider” includes—

. . . . 

(B)if the debtor is a corporation—

(i)

director of the debtor;

(ii)

officer of the debtor;

(iii)

person in control of the debtor;

(iv)

partnership in which the debtor is a general partner;

(v)

general partner of the debtor; or

(vi)

relative of a general partner, director, officer, or person in control of the debtor;

The court continues, "If considered to be corporations, none of the entities meet the definition of a [sic] 'insider'”. Id. The LLCs at issue are creditors, without any express control, so it is correct that they could not be insiders on their own. The court also determined there was "no evidence" that the individual in control of the two LLCs had used his power in a manner that resulted in "inequitable conduct," so the LLCs under his control could not be held liable under any theory of vicariously liability (e.g., entity veil piercing). 

 

Based on the court's factual determinations, this all appears to come out correctly, notwithstanding the mischaracterization of the LLC. 

 

More frustrating, for me, is my discovery that bankruptcy law does, in fact, characterize a "corporation" as follows: 

(9) The term “corporation”— (A) includes— (i) association having a power or privilege that a private corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association; (iii) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.

11 USC § 101(9). 

 

So, while I acknowledge the statute, I strenuously object. (We all know how effective that is.) Corporations are just not partnerships and they are really, really not unincorporated companies or associations. That would be like saying Coca-Cola or Pepsi are an "Uncola. (Yes, I am dating myself with that reference.) 

 

Couldn't we just use something like "Covered Entity" for the definition?  

 

Anyway, in closing, I will once again note that cases like this run the risk of creating bad law where an LLC is in control of a corporation. The court here states that the LLC is not and individual, but an LLC (I think) is a "person" under the definitions. The statute provides that "[t]he term 'person' includes individual, partnership, and corporation ...." 11 USC § 101(41). And as per 11 USC § 101(9), "corporation" includes unincorporated companies. Thus, I hope that the fact that LLCs in this case were not individuals, does not lead a potential future court to miss that they also need to consider whether an LLC might be a "person in control of the debtor."