John Collen and a team of other experienced bankruptcy practitioners and professors will discuss the issues involved for Limited Liability Companies in business bankruptcy. LLCs developed as a way to minimize the personal liability of its members while preserving management flexibility and pass-through taxation, features similar to partnerships. Many LLCs have been formed as Special Purpose Entities (SPEs), subsidiaries designed for a narrow purpose, such as shielding the parent company from financial risk. Thus, those SPEs are frequently labeled “bankruptcy remote.” Judge Allan Gropper, U. S. Bankruptcy Court, Southern District of New York, in a reorganization case for General Growth Properties (GGP), recently ruled that various subsidiaries (SPEs) of the giant mall developer could be included in the company’s Chapter 11 reorganization, even though they were designed as bankruptcy-remote special purpose entities (SPEs).
John will discuss the following questions related to the reorganization case for GGP: Did the ruling in General Growth abolish the notion that SPEs can be “bankruptcy remote”? Has the concept of “substantive consolidation” grown in usage in recent business bankruptcy cases? What exactly are the duties of directors of SPEs relative to the operation of the parent company? Apart from issues of bankruptcy remoteness, what happens to the LLC and its members when either the LLC or one of the members files for bankruptcy? How is the operating agreement affected? How do the courts reconcile the member's rights on admission of new members with the goal of the bankruptcy process to maximize the value of estate assets that may be used to distribute to creditors?
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