People own businesses: corporations, LLCs or other types of formal or informal business entities. When those people need to file bankruptcy, does the automatic stay that takes effect immediately upon filing also extend to those wholly-owned companies? The Bankruptcy Court in the Southern District of New York ruled on that issue on February 8, 2008.
That debtor filed for relief under Chapter 13 and was self-employed as a general contractor. He was the sole member of an LLC. Under Chapter 13, there exists a co-debtor stay, and this debtor wanted to ensure that the co-debtor stay extended to his LLC.
The Court noted that the LLC was not eligible to be a Chapter 13 debtor since it was a business entity, and not an individual. Chapter 13 is limited to individuals only. In addition, the co-debtor stay applies specifically to consumer debts, not commercial or business debtors. On his petition, the debtor noted that the debts were primarily consumer debts. And finally, there was nothing in the Bankruptcy Code allowing an individual and a business to be joint debtors. The request to extend the stay to the LLC was denied.
It is important to note that this is the bright line rule. There are circumstances that might permit a court to extend the stay to a non-debtor business entity in Chapter 13, but whether that can occur is really determined on a case by case basis. For example, if there is a claim against a non-debtor, and the debtor is a guarantor, not extending the stay could have an adverse economic consequence on the debtor’s ability to reorganize. The extension of the stay to non-debtors has been limited to those claims that “threaten serious risk to a reorganization of debtor’s estate in the form of immediate adverse consequences.”
The case is In re McCormick, 381 BR 594 (Bankr.S.D.N.Y. 2008).
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It seems there would be more law on this issue. If a creditor is suing the guarantor of a closely held company and the company, then an adverse result in the action against the company will seriously impact the debtor’s estate, especially if the income used to fund a 13 plan is derived from the company.
Well, yes, this is is problem faced by any debtor in this situation. However, each case is different, and each case brings with it unique circumstances and facts that may dictate a different result.
–Bill McLeod