JV with a Bankrupt Seller - Question for Attorneys

June 12, 2024

by a searcher from University of Minnesota - Twin Cities Campus in Marysville, WA, USA

Hi all! I am looking at entering into a JV (LLC) with a sole prop seller who has filed for chapter 13 bankruptcy but has not yet had his plan approved. He would contribute the business assets, I would contribute some cash and services. I am OK with the ownership interest ultimately ending up with the trustee if the bankruptcy goes sideways, but is there any way that the trustee (or anyone else) could come after me personally because I know the seller/debtor is entering bankruptcy? It feels fast and loose, but is it fraudulent?

Reply by a searcher
from Harvard University in Boston, MA, USA

I'm not entirely sure exactly what you're trying to do. You need a bankruptcy attorney here, bankruptcy is a rules based system and the rules are not intuitive. A lot of the rules in bankruptcies feel weird/fraud-like. Tactically, if a bankruptcy attorney oks it, you disclose it to the court, and the judge oks it, then you're probably in the clear. This isn't to say that the proposed JV is a good idea. Like Michelle, I'd prefer a sale over a JV with an in-bankruptcy party.

Reply by a professional
from University of Notre Dame in New York, NY, USA

I may need some more color on this, but its not only the JV LLC Interests that could end up with the trustee, but if the bankrupt member is contributing assets to the LLC, those assets could be clawed back by the trustee as a fraudulent transfer. Such assets would divert back to the bankruptcy estate for the benefit of creditors. Then you essentially gave that bankrupt member interests in the JV for nothing.

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