Court: District Court, D. Nevada; September 29, 2014; Federal District Court
Appellant Lenard Schwartzer has appealed the Bankruptcy Court's Exemption Order from January 3, 2014, concerning Bankruptcy Case No. 13-11315-LED. Appellees Charles and Ellerie Cleveland filed for Chapter 7 bankruptcy on February 21, 2013, disclosing full ownership of PFG Advisors, LLC and PFG Properties, LLC. Schwartzer, as the Chapter 7 Trustee, objected to the Debtors' claims of exemptions regarding these entities, which are involved in insurance and real estate, respectively. The Bankruptcy Court held hearings on October 25, 2013, and November 26, 2013, after which it denied most of the Trustee's objections but ruled that Schwartzer cannot sell or take ownership of the assets of the companies despite them being part of the bankruptcy estate. The legal standard for the appeal involves de novo review of the Bankruptcy Court’s interpretation of state exemption laws and the Bankruptcy Code, while factual findings are reviewed for clear error. Schwartzer's appeal focuses on two legal issues: the right to sell or take ownership of the assets of the limited liability companies and the exemption status of 75% of accounts receivable and commissions payable to a company solely owned by the Appellees.
Appellant has withdrawn the second issue on appeal, leaving only the first issue concerning the Bankruptcy Court's Exemption Order. Appellant contends that the court erred by ruling that Appellant cannot sell or take ownership of the assets of the limited liability companies (LLCs) fully owned and managed by Appellees. Appellant argues that bankruptcy law supersedes state law, indicating that Nevada’s exemption statutes do not provide separate exemptions for ownership interests in LLCs. When the Debtors filed for bankruptcy, the Trustee acquired their 100% membership interests and the right to control the LLCs.
While Appellees acknowledge that their membership interests are personal property included in the bankruptcy estate, they maintain that Appellant is restricted to a charging order under Nevada law. The court concurs with prevailing bankruptcy court decisions stating that a Chapter 7 trustee inherits all rights of the debtor regarding a single-member LLC upon filing for bankruptcy, including management rights, without needing to adhere to state law. Consequently, Appellant is not limited to a charging order and can exercise control over the LLCs.
Appellees argue that Appellant’s management rights should be restricted due to the nature of their LLC, which provides personal services requiring state licensing. Although the court acknowledges this argument, it notes that the relevant case law does not prevent a trustee from selling LLC assets. Ultimately, the court concludes that the Bankruptcy Court erred in asserting that Appellant lacks the right to sell or take ownership of the LLC assets. The Exemption Order is therefore reversed and remanded for further proceedings consistent with this ruling.
