Can an LLC Member Interest Owned by a Debtor in Chapter 7 Bankruptcy be Sold by Bankruptcy Trustee?

 When we file a Chapter 7 bankruptcy petition for an individual, clients often ask which assets they will be able to keep after the bankruptcy case is closed.

Oftentimes, clients own interests in LLCs or partnerships and want to know if they will lose that interest in Chapter 7 bankruptcy.

Forbes recently published an article by Jay Adkisson titled “Can an LLC Interest Owned by a Debtor Be Sold by the Bankruptcy Trustee?” In this well-written article, Mr. Adkisson analyzes a recent case of first impression in the Eastern District of Kentucky, captioned Business Aircraft Leasing v. Ultra Energy Resources LLC (In re Addington).

The bankruptcy court held that in a Chapter 7 bankruptcy filing, a bankruptcy trustee can sell an economic right in an LLC member's interest. In the Addington case, Larry Addington filed for Chapter 11 bankruptcy, which was later converted to Chapter 7. He owned a 36% membership interest in a limited liability company called Ultra Energy Resources, LLC. 

The judge in the Addington case discusses that an LLC membership interest consists of a governance interest, which includes the right to manage the LLC, vote to admit members or dissolve the LLC, and the economic rights of an LLC, which are the rights to distributions of money or property from the LLC.

The dispute in the case was whether the creditor who purchased the LLC interest from the Chapter 7 Bankruptcy Trustee acquired governance interests or economic rights. The LLC's position was that the purchaser had simply acquired economic rights, and the bankruptcy court, in a declaratory judgment, held that the purchaser had indeed only acquired economic rights, not governance interests.

In reaching his decision, the Bankruptcy Judge analogized to a charging lien that a judgment creditor obtained on a debtor LLC member's interest. 

The Addington case is one of the first to involve the sale of a membership interest in an LLC by a Bankruptcy Trustee in a Chapter 7 proceeding.

Mr. Adkisson, in his article, notes that the managers of a closely held LLC are unlikely to admit the purchaser as a member unless they know the purchaser will be friendly. 

A few comments based on our experience:

1. If the LLC is a single-member LLC, the Bankruptcy Trustee will be able to sell the member's governance and economic interest.

2. Whether a governance or economic interest can be sold will often depend on the terms of the Operating Agreement and state LLC law.

Individuals or their advisors with questions pertaining to the sale of LLC member interests in a chapter 7 bankruptcy filing should contact Jim Shenwick, Esq.

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Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

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UPDATE OFFERS IN COMPROMISE (“OIC”) FOR SBA EIDL LOANS 04-22-2025

 OFFER IN COMPROMISE (“OIC”) FOR  SBA EIDL LOANS UPDATE

Is the SBA accepting OIC applications for SBA EIDL loans? If you search online, you'll find conflicting answers. Most results indicate no

Yesterday I (Jim Shenwick, Esq) called the SBA EIDL Customer Service and spoke with a representative who said the following:

The SBA were doing offers in compromise on a case-by-case basis on a loan-by-loan basis”.  

They would provide me with no further information and my take away from the telephone call was that under the right circumstances and the right fact pattern the SBA would consider an OIC, however the SBA is looking for full repayment of SBA EIDL loans and they would be reluctant to accept discounted or reduced payments. 

Clients or their advisors with questions about SBA EIDL loans are encouraged to contact Jim Shenwick, Esq.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

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SBA ENDS THE HARDSHIP ACCOMMODATION PLAN FOR SBA EIDL LOANS

SBA ENDS THE HARDSHIP ACCOMMODATION PLAN FOR SBA EIDL LOANS

Effective March 19, 2025 the SBA has ended the Hardship Accommodation Plan (“Hardship Plan”) for SBA EIDL Loans.

The Hardship Plan allowed SBA EIDL loan borrowers to repay the SBA 10% of the loan payment due for a period of 6 months (with no default) to give the borrower breathing room to restructure or reorganize. Under the Hardship Plan, if a borrower's monthly payment was $2,000, they could pay the SBA $200 for a 6-month period. After 6 months, the payments increased to 20%, then 50%, then 70%, and finally 90% for 6-month intervals until the loan was repaid.

Under the Hardship Plan, interest continued to accrue under the original loan payment terms, causing the balance due to pay off the loan to increase during the Hardship Plan.

As we noted in a prior post, the SBA also eliminated the Offer in Compromise plan  (https://shenwick.blogspot.com/2025/03/sba-does-not-allow-eidl-loans-to-be.html) 

Fewer options now exist for the struggling SBA EIDL loan borrower.

Those options appear to be:

1 Loan modification: Borrowers can request modified payment terms or extended repayment periods or negotiated repayment plans with the SBA.

2. Hardship deferment: Borrowers experiencing economic challenges may be eligible for temporary payment deferrals.

3 Full Loan Repayment from business or personal assets, if possible.

4 Liquidation of Business Assets: Close the business or sell business assets and pay off or pay down the SBA EIDL loan with the sales proceeds. The SBA loan documents require that any business assets sold and subject to an SBA loan must be paid to the SBA at the time of sale. However, the borrower will remain liable for any deficiency owing after the paydown.

5 Refinancing your existing SBA loan with a private lender and use the loan proceeds to pay down or payoff the SBA.

6 File for bankruptcy. If the SBA EIDL loan exceeded $200,000 and an individual or entity guaranteed the loan, both the SBA borrower and guarantor may need to file for bankruptcy to discharge the SBA loan

7 Default on the SBA loan and engage in Asset Protection Planning in case of legal action by the SBA or the Treasury Offset Program. 

At Shenwick & Associates, we can be retained to review the SBA Borrower & Guarantor financial information to determine the best course of action. 

Clients or their advisers with outstanding SBA EIDL loans who have questions about what they should do can contact Jim Shenwick, Esq to discuss their situation.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

Please click the link to schedule a telephone call with me.

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SBA DOES ALLOW EIDL LOANS TO BE COMPROMISED THROUGH AN OFFER IN COMPROMISE

 

SBA DOES ALLOW EIDL LOANS TO BE COMPROMISED THREW AN OFFER IN COMPROMISE

 

Many clients have contacted our law firm seeking assistance in settling their outstanding SBA EIDL loans through an offer in compromise (OIC).

The SBA's current position is that they do allow EIDL loans to be settled through an OIC on a case-by-case basis on a loan-by-loan basis.

The options to settle SBA loans are provided below.

0. Offer in Compromise

1. Hardship Accommodation Plan.  The hardship accommodation plan lowers monthly payments for 6 months, and then payments increase over a time.

 2. Loan modification: Borrowers can request modified payment terms or extended repayment periods or negotiated repayment plans with the SBA.

3. Hardship deferment: Borrowers experiencing economic challenges may be eligible for temporary payment deferrals.

4 Full Loan Repayment from business or personal assets, if possible.

5 Liquidation of Business Assets: Close the business or sell business assets and pay off or pay down the SBA EIDL loan with the sales proceeds. The SBA loan documents require that any business assets sold and subject to an SBA loan must be paid to the SBA at the time of sale. However, the borrower will remain liable for any deficiency owing after the paydown.

6 Refinancing your existing SBAloan with a private lender and use the loan proceeds to pay down or payoff the SBA.

7 File for bankruptcy. If the SBA EIDL loan exceeded $200,000 and an individual or entity guaranteed the loan, both the SBA borrower and guarantor may need to file for bankruptcy to discharge the SBA loan

8 Default on the SBA loan and engage in Asset Protection Planning in case of legal action by the SBA or the Treasury Offset Program. 

Clients or their advisers with outstanding SBA EIDL loans who have questions about what they should do can contact Jim Shenwick, Esq to discuss their situation.

 

Jim Shenwick/Shenwick & Associates

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

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How to Sell a Business Subject to an SBA EIDL Loan

Many clients have contacted our law firm asking how to sell a business subject to an SBA EIDL loan. There are two scenarios. In the first, the sales proceeds are sufficient to pay off the SBA loan (the easier scenario). In this case, one is required to contact the SBA and obtain prior approval, pursuant to SBA loan documents. In the second scenario, the sales proceeds are not sufficient to pay off the SBA loan (the more difficult and complex scenario), resulting in a shortfall ("Shortfall"). 

With respect to the Shortfall scenario, the Borrower/Seller must do the following: 1. Provide the SBA with information about the proposed sale (prior to closing), 2. Submit the required SBA documents for the sale to the SBA, 3. Send the SBA the proposed Sales Agreement, 4. Provide the SBA with a business valuation or appraisal of the business being sold, 5. Provide the SBA with financial statements for the business being sold, and 6. Provide the SBA with a proposal for handling the loan shortfall (an Offer in Compromise, payment by the Guarantor, Loan assumption by the Buyer, etc.).

The proposed Sales Agreement should include a contingency clause stating that the sale is subject to SBA approval. 

Obtaining SBA approval can take months and may require negotiations with the SBA.

Clients or their advisors having questions about the sale of a business subject to an SBA loan should contact Jim Shenwick, Esq.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

Please click the link to schedule a telephone call with me.

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Subchapter V debt limit will increase to $3,424,000

The National Law Review reports that the Subchapter V debt limit will increase to $3,424,000 on April 1, 2025. Currently, the Subchapter V debt limit is $3,024,725. 

The full article can be found at: https://natlawreview.com/article/bankruptcy-dollar-amounts-set-rise-significantly-april-1-2025  

Clients or their advisors with questions about Subchapter V Bankruptcy should contact Jim Shenwick, Esq. 

Jim Shenwick, Esq. 

917-363-3391

jshenwick@gmail.com

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SBA EIDL Loans & the Case of the “Missing Guarantee”

 

SBA EIDL Loans & the Case of the “Missing Guarantee”

Many clients have recently contacted us with a similar issue. They claim they never personally guaranteed their SBA loans. However, after their SBA loans defaulted, the SBA is reaching out to them, stating that they did personally guarantee their business's SBA EIDL loan and are requesting payment.

For context, federal law requires a personal guarantee when an SBA loan exceeds $200,000.

There appear to be two scenarios where the "Missing Guarantee" issue arises. First, the SBA made a loan to a business exceeding $200,000 and failed to require an individual to sign a guarantee. Second, the SBA initially loaned less than $200,000 to a business, then provided an additional amount exceeding $200,000 by amending the loan documents but did not require the borrower to sign a guarantee.

According to SBA records, since the loan exceeded $200,000, it should have been guaranteed.

What should one do in this situation?

Under New York law, a guaranty must be in writing to be enforceable. In Ashkir v. Wilson, No. 98 Civ. 2632, 1999 WL 710788, at *9 (S.D.N.Y. Sept. 13, 1999), it was stated that an agent is not personally liable for the obligations of his principal unless there is a written and signed personal guarantee.

In European American Bank & Trust Co. v. Boyd, 516 N.Y.S.2d 714, 716 (2d Dept 1987), it was affirmed that a guarantee is enforceable as long as it is signed by the guarantor.

While each state's law regarding guarantees may vary, most states require that a guarantee be in writing and executed to be enforceable.

Our advice to individuals in these situations is: 1. Check your SBA loan documentation to ensure you did not sign a guaranty. 2. Request that the SBA send you a copy of an executed guaranty. 3. If the SBA cannot produce the guaranty, your position should be that you are not personally liable to repay the loan upon default. If the SBA were to litigate this position, we believe you would prevail, especially in New York State.

We advise all SBA borrowers with a case involving a "Missing Guaranty" to discuss their case with an experienced attorney as soon as possible.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

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SBA EIDL Fraud & How It Is Discovered

SBA EIDL Fraud & How It Is Discovered

Every day, and often multiple times a day, we read stories about people or businesses being indicted for PPP or SBA EIDL loan fraud.

I have always wondered how these cases are discovered.

First, the SBA Inspector General has an online portal to submit loan fraud reports. The portal can be found at https://www.sba.gov/about-sba/oversight-advocacy/office-inspector-general/office-inspector-general-hotline#submit-a-complaint.

Second, the FBI has special agents and field offices throughout the country investigating SBA EIDL loan fraud and

Third, The New York Times recently published an article titled "They Investigated Pandemic Fraud, Then Earned Thousands," available at https://www.nytimes.com/2024/11/23/us/politics/pandemic-fraud-lawsuits.html. The article explains that under the False Claims Act, private citizens can file lawsuits on behalf of the federal government against those who may have defrauded the United States. If the government recovers funds, these citizens can typically earn between 15 and 30 percent of that amount. These lawsuits are known as "qui tam," or whistle-blower cases, and citizens have recovered hundreds of thousands of dollars by bringing these cases.

This story brings to mind the old adage that one person's misfortune is another person's fortune!

Jim Shenwick, Esq

917-363-3391

jshenwick@gmail.com

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Subchapter V Bankruptcy Updates

 

A Bloomberg article https://news.bloomberglaw.com/bankruptcy-law/senate-proposal-would-grow-small-business-bankruptcy-

eligibility  is reporting that a new Senate proposal aims to increase the debt limits for Subchapter V bankruptcy eligibility for

small businesses. This proposal would restore the higher debt limit of $7.5 million for Subchapter V filings, up from the current

limit of about $3 million. The expansion would allow more businesses to take advantage of Subchapter V's benefits, which

include a more streamlined and cost-effective restructuring process compared to traditional Chapter 11 bankruptcies.

The potential revival of the higher debt limit comes after a significant drop in small business bankruptcy filings following the

expiration of the previous $7.5 million threshold.

Subchapter V, introduced in 2019, initially applied to businesses with less than $2.7 million in debt but was expanded to $7.5

million in 2020 as part of COVID-era business relief. This expansion was extended in 2022 but eventually expired, reverting

the eligibility requirement to about $3 million.

We are monitoring these developments and will continue to report on updates to Subchapter V. 

We help individuals and businesses who have too much debt!

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 

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