LLC Albright Case
The Albright case shows that when you set up an LLC you need to mindful of the entity type and classification. This case gives us guidance as to how single member LLCs will be treated in the future but thats not really the whole story. It also gives hints about multi-member LLCs.
While a lot of people will tell you that you need to have more than one member in an LLC, consider that even a multi-member LLC could be attacked. In the Albright case, the judge said that the mere peppercorn of ownership by a 2nd member probably wouldn’t be sufficient. What is a mere peppercorn? Not sure anyone knows but that particular judge knows.
The section below spells out what the judge was thinking.
Section 9
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” comembers, bankruptcy avoidance provisions and fraudulent transfer law would provide creditors or a bankruptcy trustee with recourse. 11 U.S.C. §§ 544(b)(1) and 548(a).
