Collecting From A Dissolved LLC

Question: An LLC borrowed a sum of money from me for equipment for their new business in 06. The LLC still owes me $15,000 and is going to dissolve without having paid me in full. I do have a written contract. What is my recourse for collection of the funds still due? Anroln, Virginia.

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Two remedies come to mind. First, have an attorney review the contract to see if it forms the basis for a direct collection action against the LLC members as guarantors or cosignors of the debt. I'm not sure if you had an attorney prepare the contract but, when extending credit to new LLCs, the wise course of action is to make the LLC members cosign the loan. Secondly, I would hope you got a security interest in the equipment. This is done by correctly executing and filing a UCC1 form. More info on UCC1. Thus, when the LLC ceases operation, you can at least get the equipment back.

The option of last resort is collection against the LLC. I'm not sure about Virginia but, in most states, the LLC must file a plan of dissolution with the Secretary of State's office. The plan should list you as a creditor of the LLC and state how they plan to pay you, if at all. Check with the Secretary of State's office (called the State Corporation Commission in VA) to see if such plan was filed for this LLC. See contact info for VA State Corporation Commission. If the LLC has assets that are not subject to lien and other remedies are not viable, the best course of action is to institute a collection action ASAP to get your judgment on file before the others that may be coming. Just because an LLC has filed a notice of dissolution does not mean it no longer exists. The voluntary notice of dissolution starts the winding up process. See VA statute on winding up LLC.

Collections are not my specialty so, as always, I encourage you to sit down with a local lawyer to review your options in this matter.

Oral LLC Operating Agreements

They are like putting the condom halfway on. Why in God's name would anyone do this? The reason oral operating agreements make no sense is that when they are violated it's very, very difficult for the wronged party to prevail. Remember that the plaintiff has the burden of proof in American civil cases. So when you sue the other LLC member for breach of an oral operating agreement, it is your word against his. Without some additional evidence such as course of dealing or emails / correspondence from the defendant acknowledging the terms of the oral agreement, the plaintiff loses for failing to carry his burden of proof.

Are oral operating agreements enforceable at all? To my knowledge, other than in the District of Columbia, oral operating agreements are enforceable; however, certain terms such as the agreement to make capital contributions must be in writing depending on the state. See state survey of LLC law.

Member Voluntary Bankruptcy

I'm a member of an Arizona LLC. What happens if I file for bankruptcy?

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Unless otherwise provided for in the operating agreement, a person ceases to be a member of an Arizona LLC upon filing a voluntary petition in bankruptcy. See AZ stat §29-733(4)(b). In Chapter 13 bankruptcies, the debtor retains possession of his or her assets, therefore, there cannot be a collection action by your creditors against the LLC interest unless the plan is not approved or your fail to complete it. In a Chapter 7, the bankruptcy trustee takes possession of your assets. However, Arizona law provides the following regarding the rights of a creditor against an LLC interest after withdrawal:

On any event of withdrawal of a member, except as otherwise provided in an operating agreement, the withdrawn member and the withdrawn member's personal representatives, successors and assigns do not have the right to receive any distribution by reason of the withdrawal but do have the rights of an assignee of the withdrawn member's interest in the limited liability company to receive distributions with respect to the member's interest during any continuation of the business of the limited liability company and during and on completion of winding up less any damages recoverable against the withdrawn member if the event of withdrawal violated an operating agreement. AZ stat. §29-707.

What this means is that the bankruptcy trustee (in the case of a Chapter 7) will receive a charging order against your LLC interest requiring the LLC to turn over any distributions payable on your interest.

To sum up, absent an operating agreement giving a different result, you shall cease to be an LLC member upon filing for bankruptcy. In the case of a Ch. 13, you shall retain an interest in the LLC but only to distributions payable to that interest. In the case of a Ch. 7, the bankruptcy trustee shall become the owner of your interest in the LLC and the bankruptcy estate shall receive distributions from the LLC.