NOT ALL ASSET PROTECTION
BE CAREFUL OF WHAT YOU USE!
UNITED STATES BANKRUPTCY
FOR THE DISTRICT OF COLORADO
In re: ASHELY ALBRIGHT
000-56-9118, Debtor, Case No. 01-11367
ABC, Chapter No. 7, 2003
Bankr. LEXIS 291
Trustee's Motion to
appoint Bob Karls as real estate broker for the Trustee granted.
Albright, Debtor: James H. Hahn, Greenwood Village, CO.
Harvey Sender, Trustee: Charles F. McVay, Denver, CO.
A. Bruce Campbell,
U.S. Bankruptcy Judge.
A. Bruce Campbell,
U.S. Bankruptcy Judge.
ORDER ON MOTION TO ALLOW TRUSTEE
TO TAKE ANY AND ALL
NECESSARY ACTIONS TO LIQUIDATE PROPERTY
OWNED BY WESTERN BLUE SKY
THIS MATTER is
before the Court on the (1) Motion to Allow Trustee to Take Any and
All Necessary Actions to Liquidate Property Owned by Western Blue
Sky LLC ("Motion to Liquidate"); (2) Motion to Appoint and
Compensate Bob Karls as Real Estate Broker to the Trustee; and (3)
Debtor's Response to Trustee's Motion to Retain Realtor and
Liquidate LLC Property. Following a hearing on February 4, 2003, the
parties agreed to submit the matter on briefs.
the debtor in this Chapter 7 case ("Debtor"), is the sole member and
manager of a Colorado limited liability company named Western Blue
Sky LLC. n1 The LLC owns certain real property located in Saguache
County, Colorado (the "Real Property"). The LLC is not a debtor in
n1 The Debtor
initiated this case on February 9, 2001, under Chapter 13. It was
converted to Chapter 7 by the Debtor on July 19, 2001.
The Chapter 7
Trustee contends that because the Debtor was the sole member and
manager of the LLC at the time she filed bankruptcy, he now controls
the LLC and he may cause the LLC to sell the Real Property and
distribute the net sales proceeds to his bankruptcy estate. n2 The
Debtor maintains that, at best, the Trustee is entitled to a
charging order n3 and cannot assume management of the LLC or cause
the LLC to sell the Real Property.
n2 If the
Trustee is entitled to control of the LLC, he could, presumably, as
an alternative, dissolve the LLC, distribute its property to his
bankruptcy estate, and then sell the property himself. The Trustee
has not asserted any alter ego theory and has not attempted to
pierce the veil of the LLC.
n3 The Debtor
further asserts that because the LLC is "non-profit" pursuant to its
operating agreement, no distribution of "profit" will ever be made
and thus the value of this interest is zero. This argument
erroneously assumes that a member of a Colorado limited liability
company's distribution rights are limited only to "profits." They
are not. Colo. Rev. Stat. § 7-80-102(10)("Membership interest means
a member's share of the profits and losses of a limited liability
company and the right to receive distributions of such company's
assets.") See also Colo. Rev. Stat. § 7-80-702(1).
Pursuant to the
Colorado limited liability company statute, the Debtor's membership
interest constitutes the personal property of the member. Upon the
Debtor's bankruptcy filing, she effectively transferred her
membership interest to the estate. See 11 U.S.C. § 541(a). n4
Because there are no other members in the LLC, the entire membership
interest passed to the bankruptcy estate, and the Trustee has become
a "substituted member." n5
n4 11 U.S.C. §
541(a)(1) provides, in relevant part: "The commencement of a case
... creates an estate. Such estate is comprised of ... all legal or
equitable interests of the debtor in property as of the commencement
of the case."
n5 Colo. Rev.
Stat. § 7-80-702 provides (emphasis added):
(1) The interest
of each member in a limited liability company constitutes the
personal property of the member and may be transferred or assigned.
However, if all of the other members of the limited liability
company other than the member proposing to dispose of his or its
interest do not approve of the proposed transfer or assignment by
unanimous written consent, the transferee of the member's interest
shall have no right to participate in the management of the business
and affairs of the limited liability company or to become a member.
The transferee shall only be entitled to receive the share of
profits or other compensation by way of income and the return of
contributions to which that member would otherwise be entitled.
substituted member is a person admitted to all the rights of a
member who has died or has assigned his interest in a limited
liability company with the approval of all the members of the
limited liability company by unanimous written consent. The
substituted member has all the rights and powers and is subject to
all the restrictions and liabilities of his assignor; except that
the substitution of the assignee does not release the assignor from
liability to the limited liability company under section 7-80-502.
of the Limited Liability Company Act requires the unanimous consent
of "other members" in order to allow a transferee to participate in
the management of the LLC. n6 Because there are no other members in
the LLC, no written unanimous approval of the transfer was
necessary. Consequently, the Debtor's bankruptcy filing effectively
assigned her entire membership interest in the LLC to the bankruptcy
estate, and the Trustee obtained all her rights, including the right
to control the management of the LLC. n7
n6 This reading
of § 7-80-702 is reinforced in Colo. Rev. Stat. § 7-80-108(3)(a).
Section 108 sets forth the effect of an operating agreement and what
provisions are non-waivable. Section 108(3) states that "unless
contained in a written operating agreement or other writing approved
in accordance with a written operating agreement, no operating
agreement may [...] vary the requirement under section 7-80-702(1)
that, if all of the other members of the limited liability company
other than the member proposing to dispose of the member's interest
do not approve of the proposed transfer or assignment by unanimous
written consent, the transferee of the member's interest shall have
no right to participate in the management of the business and
affairs of the limited liability company or to become a member."
Colo. Rev. Stat. § 7-80-108(3)(a). The clause "other than the member
proposing to dispose of the member's interest" confirms that the
"other members" identified in § 7-80-702 does not include the
n7 Under Colo.
Rev. Stat. § 7-80-702, supra, the result would be different if there
were other non-debtor members in the LLC. Where a single member
files bankruptcy while the other members of a multi-member LLC do
not, and where the non-debtor members do not consent to a substitute
member status for a member interest transferee, the bankruptcy
estate is only entitled to receive the share of profits or other
compensation by way of income and the return of the contributions to
which that member would otherwise be entitled. Thus, Mountain States
Bank v. Irwin, 809 P.2d 1113 (Colo. App. 1991); Union Colony Bank v.
United Bank of Greeley National Association, 832 P.2d 1112 (Colo.
App. 1992) and Prefer v. Pharmnetrx LLC, 18 P.3d 844 (Colo.. App.
2000), cited by the parties, are distinguishable as they relate to
multi-partner or member entities.
argues that the Trustee acts merely for her creditors and is only
entitled to a charging order against distributions made on account
of her LLC member interest. n8 However, the charging order, as set
forth in Section 703 of the Colorado Limited Liability Company Act,
exists to protect other members of an LLC from having involuntarily
to share governance responsibilities with someone they did not
choose, or from having to accept a creditor of another member as a
co-manager. A charging order protects the autonomy of the original
members, and their ability to manage their own enterprise. In a
single-member entity, there are no non-debtor members to protect.
The charging order limitation serves no purpose in a single member
limited liability company, because there are no other parties'
interests affected. n9
n8 Colo. Rev.
Stat. § 7-80-703 provides:
Rights of creditor against a member. On application to a court of
competent jurisdiction by any judgment creditor of a member, the
court may charge the membership interest of the member with payment
of the unsatisfied amount of the judgment with interest thereon and
may then or later appoint a receiver of the member's share of the
profits and of any other money due or to become due to the member in
respect of the limited liability company and make all other orders,
directions, accounts, and inquiries which the debtor member might
have made, or which the circumstances of the case may require. To
the extent so charged, except as provided in this section, the
judgment creditor has only the rights of an assignee of the
membership interest. The membership interest charged may be redeemed
at any time before foreclosure. If the sale is directed by the
court, the membership may be purchased without causing a dissolution
with separate property by any one or more of the members. With the
consent of all members whose membership interests are not being
charged or sold, the membership may be purchased without causing a
dissolution with property of the limited liability company. This
article shall not deprive any member of the benefit of any exemption
laws applicable to the member's membership interest.
n9 The harder
question would involve an LLC where one member effectively controls
and dominates the membership and management of an LLC that also
involves a passive member with a minimal interest. If the dominant
member files bankruptcy, would a trustee obtain the right to govern
the LLC? Pursuant to Colo. Rev. Stat. § 7-80-702, if the non-debtor
member did not consent, even if she held only an infinitesimal
interest, the answer would be no. The Trustee would only be entitled
to a share of distributions, and would have no role in the voting or
governance of the company. Notwithstanding this limitation, 7-80-702
does not create an asset shelter for clever debtors. To the extent a
debtor intends to hinder, delay or defraud creditors through a
multi-member LLC with "peppercorn" co-members, bankruptcy avoidance
provisions and fraudulent transfer law would provide creditors or a
bankruptcy trustee with recourse. 11 U.S.C. § § 544(b)(1) and
limited liability company statute provides that the members,
including the sole member of a single member limited liability
company, have the power to elect and change managers. n10 Because
the Trustee became the sole member of Western Blue Sky LLC upon the
Debtor's bankruptcy filing, the Trustee now controls, directly or
indirectly, all governance of that entity, including decisions
regarding liquidation of the entity's assets.
n10 See Colo.
Rev. Stat. § 7-80-402 and § 7-80-405.
Because of the
Court's ruling herein, the Debtor may be entitled to a claim for her
contributions made to preserve an asset of this bankruptcy estate
based on post-petition mortgage payments on the Real Property. The
parties were asked to brief the issue, but the Debtor has not
formally asserted such a claim. Therefore, the Court does not rule
on the issue at this time.
Based on the
foregoing, it is hereby:
ORDERED that the
Trustee, as sole member, controls the Western Blue Sky LLC and may
cause the LLC to sell its property and distribute net proceeds to
his estate. Alternatively, the Trustee may elect to distribute the
LLC's property to [*9] the bankruptcy estate, and, in turn,
liquidate that property himself; and it is
that the Trustee's Motion to appoint Bob Karls as real estate broker
for the Trustee is hereby granted; and it is
that the Debtor may file a claim, subject to objection in the
regular course of this case, for her expenditures made to preserve
an asset of this estate based on post-petition mortgage or other
payments made by the Debtor.
BY THE COURT:
U.S. Bankruptcy Judge
Federal Liens Now
Threaten Marital Property
by Raymond J. Bowie
Will Rogers reputedly
said of legislatures that no one's life or property is safe when
they are in session. The same, unfortunately, may sometimes also be
said about the nation's judiciary. Case in point: Even while the
nation's public policy focuses on bolstering the institution of
marriage, the U.S. Supreme Court has just take a judicial swipe at
the very legal foundations of marital property.
In a recent decision of
major import nationwide, the nation's highest court struck down
traditional common law protections afforded real estate owned
jointly by husband and wife.
In its decision April
17, 2002 in the case of United States v. Craft, the Supreme Court
ruled that even when spouses hold title to their own home as
'tenants by the entireties' an IRS tax lien against just the husband
would attach to the property they own jointly, giving the IRS power
to seize half the marital residence over the wife's objection.
This decision overturned
a venerable common law doctrine, cherished in many states, that when
a married couple hold title to real property, they may enjoy a
unique status called an 'estate by the entireties' in which the
property is absolutely beyond the reach of any of their individual
creditors including government agencies.
Prior to the April 17
decision of the Supreme Court, both federal and state courts had
consistently ruled that real property owned jointly by spouses was
protected against government liens to the same extent as private
liens or judgments. Various court decisions have held such
'entireties' property to be beyond the reach of either private
judgments, federal or state tax liens, criminal fines or penalties,
or other government actions levied against only on e of the spouses
Then came the case of
U.S. vs. Craft before the Supreme Court. In this case, Don and
Sandra Craft owned property in Michigan as tenants by the
entireties. Mr. Craft failed to file income tax returns for seven
years, and the IRS assessed a lien against him for $482,446 in back
taxes. Mr. and Mrs. Craft then jointly deeded the entireties
property to Mrs. Craft, who was not liable for any of the taxes. But
when Mrs. Craft attempted to sell her property after her husband's
death, the IRS asserted that its lien had attached to the entireties
property at the time when both spouses owned it, and demanded half
of her sales proceeds to pay Mr. craft's tax liability. Mrs. Craft
had no income or inheritance from her husband other than the home,
and needed all the proceeds to secure her retirement.
In upholding the IRS
claim, the Supreme Court said that as a matter of federal law, each
individual spouse is deemed to own a separate 50% interest in
entireties property that can be separately reached by federal
government agencies with lien powers.
The tremors of this
precedent-shattering decisions are just now being felt throughout
To appreciate better the
consequences of the court's ruling, it helps to understand the
traditional legal doctrine of tenants by the entireties, at least as
it had been understood in this country prior to the Craft decision.
In many states, the law
automatically creates an estate by the entirety any time property is
conveyed to spouses jointly. The deed does not even have to recite
that they are husband and wife, or use the words 'tenants by the
entireties', although most deeds in fact do. The mere fact that they
are married to one another is sufficient.
Over the centuries, as
part of the social compact to protect the interests of wives and
children in the marital home , the common law developed a legal
doctrine called the 'estate by the entirety' to protect real
property conveyed jointly to a husband and wife. Entirety is the
concept that legally, the two spouses own the property as only one
entity holding one single indivisible interest in the property. In a
way, entireties ownership makes the two spouses into a single
entity, almost like a corporation, for purposes of holding title to
This means that neither
of the spouses acting alone, nor any of their individual creditors,
nor any court or government could divide entireties property into
two separate individual ownership interests. Only both of the
spouses acting together can do anything with or to the entireties
property. Neither one of the spouses alone can sell, mortgage,
lease, encumber or do anything with entireties property without the
joiner of the other spouse.
By the same token,
creditors to whom only one of the spouses might owe an obligation
have not traditionally been able to reach entireties property to
satisfy their judgments, claims or liens. Only if the married couple
were jointly obligated to the same creditor on the same obligation
might their common creditor reach their property.
It was this
centuries-old legal doctrine that was struck down by the Supreme
Court in holding that a federal lien against one individual spouse
can indeed attach to half of any property owned jointly by both
spouses as tenants by the entireties. In effect, what our highest
court did was, for the first time, split an entireties property into
two separate ownership interests for purposes of enforcing federal
In its ruling, the court
brushed aside "the state law fiction that a tenant by the entireties
has no separate interest in entireties property" and held that under
federal law, each spouse possessed "individual rights in the estate
sufficient to constitute property or rights to property for purposes
of the federal tax lien statute."
In the aftermath of the
Craft decision, entireties property will no longer be entitled to
absolute protection from any and all liens incurred by one spouse
but not the other. For liens arising under federal law in favor of
federal agencies, such liens will now attach to a spouse's interest
even in entireties property.
One needs to realize the
constantly increasing scope of federal government power in citizens'
lives and the lien rights afforded various federal agencies under
federal laws. The Supreme Court's ruling will subject entireties
property not only to IRS tax liens but also to myriad other liens
that can be imposed by other federal agencies for environmental
hazards, statutory restitution, improper business practices and
federal criminal fines and forfeitures.
And considering that
federal tax rules now comprise 45,662 incomprehensible pages,
increasing in size 74% over the last 16 years with some 7,000 tax
code changes over those years, few taxpayers can disregard entirely
the prospect of encountering an IRS tax lien sometime over the
course of their lives.
One of the interesting
questions the Supreme Court did NOT answer in the Craft decision
was, however, what does the IRS get for its lien on half of an
This issue was remanded
for determination in lower federal courts. Can the IRS force the
sale of the property and keep half the proceeds? Or does the tax
lien lie dormant until the spouses sell the property themselves? Or
until the innocent wife dies the husband owing the taxes becomes
sole owner of the property?
THE DOMESTIC SECURITY ENHANCEMENT
ACT OF 2003
A PLAIN ANALYSIS
By Greg Kay
I have broken the 33 page summary/analysis down, section by
section, addressing the parts that might pertain to us, in plain
English to make it easier to look up the parts of concern. This will
easier to evaluate the whole bill, which can be read at http://www.public-i.org/dtaweb/report.asp?
Please remember that the information here is ONLY from the analysis;
the language of the bill itself will undoubtedly contain more
There's some scary stuff here, folks! FISA, by the way, is another
federal alphabet an acronym for Foreign Intelligence Surveillance
SECTION 101: All persons, including unaffiliated groups or
individuals, who engage in "international terrorism", will be
designated "a foreign power" eliminating any rights that they might
SECTION 102: Any person who engages in the legal collection
(repealing the current requirement of the collection mode being
illegal) of information that may be used by another country,
including US reporters, could be deemed "agents of a foreign power",
even if the information was used or intended to be used as a
standard news media. What information gathered here is not used in
SECTION 103: This would extend the government's right to unfettered
(Without FISA court approval) searches and taps for a period of 15
days after a declaration of war by congress to also be invoked after
Congressional authorization of the use of force or an attack, while
SECTION 104 extends the term from 15 days to one year, and expands
the scope of the surveillance.
SECTION 105: This would make it easier for FISA collected
information to be made available to law enforcement.
SECTION 106: Gives immunity to agents who engage in searches without
SECTION 107: Eliminates the tighter restrictions on conducting
investigations against US citizens than against foreign nationals in
SECTION 109: Gives the FISA court the same powers as a regular court
to force cooperation.
SECTION 110: To prevent sun-setting of certain aspects of the USA
SECTION 111: Removing different rules between foreign nationals and
US citizens in terrorism investigations.
SECTION 122: Allows electronic surveillance and monitoring without a
court order in `emergencies' and makes it easier to allow foreign
law enforcement requests for investigations in the US to be carried
SECTION 123: Extends tapping and surveillance and further minimizes
judicial oversight and involvement.
SECTION 124: Extends a single search's legality over all functions
of multi-function devices.
SECTION 125: Expands the types of crimes for which a federal judge
in one district may issue a nationwide warrant valid in all areas.
SECTION 126: Allow Federal agents to obtain anyone's credit report,
consumer records, and other financial records on request, and
prevent the reporting agency from revealing to their customer that
their records had been accessed.
SECTION 128: Allow the Justice Department, independent of a judge,
to issue subpoenas.
SECTION 129: Would make compliance with the above subpoenas and
other requests for records mandatory, and would make refusal or
disclosure of the demand a felony punishable by 5 years in prison.
SECTION 201: Allows the government to hold people "detained in the
investigation of terrorism" secretly and, apparently, indefinitely.
SECTION 202: Limits the safety information presented to the public
on the potential hazards of chemical spills, releases, etc.
SECTION 203: Eliminates public release of the layout of government
SECTION 204: Makes it easier for the government to present secret,
classified information to the court alone.
SECTION 205: Eliminates tax assessments on the value of private
security systems and measures used by federal employees and
officials for their protection. No such exemption extends to anyone
SECTION 206: Would impose on counsel contacted by those subpoenaed
by a Grand Jury the same demand or secrecy that is imposed on those
are actually subpoenaed.
SECTION 302: Would establish a DNA database, the identifying
information to be taken from the following people: persons SUSPECTED
of conspiring, attempting, or engaging in terrorism; enemy
combatants and POW's; persons suspected of being members of a
terrorist organization; aliens engaged in activity that endangers
SECTION 303: Would require all law enforcement agencies to provide
the above identifying data to the attorney general, would allow him
to establish a database and either use the information or share it
with other law enforcement agencies, specifically including foreign
SECTION 311: Allows the sharing of credit, consumer, and financial
information with foreign governments.
SECTION 312: Would make void most consent decrees issued by State
and local governments that protect against unreasonable search and
seizure, thus allowing State and local law enforcement to operate
under federal regulations rather than the restrictions of their own
localities, EXCEPT those consent decrees based on accusations of
racism or racial profiling.
SECTION 313: Protects businesses and personnel from civil liability
for voluntarily sharing information with federal law enforcement.
SECTION 321: Would eliminate the treaty clause and allow the federal
government to engage in an investigation in the US on the request of
any foreign power.
SECTION 322: Would allow, at the will of the attorney general and
secretary of state, the extradition of suspects to a foreign country
for crimes not covered by extradition treaties, or even to those
countries with whom we have no extradition treaty at all.
SECTION 401: Would make it a crime to "knowingly convey false or
misleading information, where such information may be believed" and
increases penalties for terrorism hoaxes.
SECTION 402: Provides definition for the material support of
terrorism to include materials, instruction or teaching, or
personnel to a terrorist organization.
SECTION 403: Extends federal jurisdiction over Weapons of Mass
Destruction laws to cover virtually everything, including property
within the US owned, leased or used by a foreign government; if any
form of interstate or foreign commerce is used in setting up the
attack, if the property attacked relates to or is used in any
activity that affects interstate or foreign commerce, or if the
perpetrator travels or causes another to travel in interstate or
foreign commerce in furtherance of the crime.
SECTION 404: Any person using encryption during or related to a
federal crime will be sentenced to an extra 5 years in prison.
SECTION 405: Automatically denies bail to anyone charged with
terrorism related activities.
SECTION 407: Extends interstate or foreign commerce jurisdiction
similar to that described in SECTION 403 to virtually all
SECTION 408: Allows for the placing of convicts on parole or
probation for life, and eliminates re-sentencing violators for
anything less than the original sentence. These provisions also
to computer virus makers and those who have donated money to
SECTION 409: Any person suspected (not necessarily charged) of being
a terrorist-related threat may have his pilot's license suspended or
SECTION 410: Provides no statute of limitations for terrorist
crimes, including cyber-terrorism or donating money to terrorist
SECTION 411: Increases number of acts subject to the death penalty.
SECTION 421: Increases penalties for "financing terrorism" or for
"trading with prohibited persons" to $50,000 per offence.
SECTION 422: Makes it easier to charge people with money laundering.
SECTION 423: Removes tax-exempt status from terrorist organizations
SECTION 424: Anyone convicted of terrorism may be denied federal
SECTION 425: Defines financing terrorism.
SECTION 426: Adds RICO procedure to terrorist financing.
SECTION 427: Allows for the seizure of assets of persons committing
or planning terrorism.
SECTION 428: More asset forfeiture.
SECTION 501: Americans can lose their citizenship if they serve in
or provide material support to any organization designated as a
terrorist group, and that the intent to relinquish nationality can
be inferred from conduct.
SECTION 502: Allows increased penalties for immigration related
SECTION 503: Allows the Attorney General to bar admittance to or
remove from the US "individuals" (aliens?) that he has reason to
believe would be a danger to national security.
SECTION 504: Allows for the attorney general to automatically remove
criminal aliens who have been convicted of certain crimes, expressly
included among which is draft evasion.
"When the government fears the people you have Liberty. When the
people fear the government you have Tyranny." -Thomas Jefferson