Bankruptcy Law And Charging Order Law Collide Again In Pettine

In just a relatively short 25 years, the limited liability company (LLC) has become the entity-of-choice for nearly all purposes, with the almost singular significant exception of publicly-traded companies. The more popular the LLC has become, the more likely that a debtor who commences a case in bankruptcy will hold an LLC interest as an asset. A problem with this is that the current Bankruptcy Code dates back to several acts in the 1980s, with revisions in 1994 and 2005 — all of which were before LLCs really became popular. The result is the Bankruptcy Code has no specific provisions for dealing with a debtor’s LLC interests, meaning that debtors, creditors, the trustee, and the bankruptcy courts have to cobble together other parts of the bankruptcy law in particular cases to deal with LLC interests. Inevitably, this has lead to substantial confusion, contradictory opinions, patently incorrect opinions, and opinions that have reached the correct result through flawed reasoning. Today, we consider one of the latter.

Direct Biologics LLC is a Wyoming entity in which Dr. Kenneth Pettine held about a 2.5% membership interest. For whatever reason, Pettine filed for Chapter 7 bankruptcy, and a bankruptcy trustee was appointed. The trustee at first tried to sell the interest, but the LLC’s operating agreement had a provision which prevented that, so instead the trustee filed a motion for charging order and to liquidate (foreclose) the charged interest, which Pettine opposed, and the trustee then held an auction for the charged interest. Pettine then appealed to the Bankruptcy Appellate Panel of the U.S. Tenth Circuit Court of Appeals, which then published the opinion in Pettine v. Direct Biologics, LLC (In re Pettine), 2023 WL 7648619 (BAP 10th Cir., Nov. 15, 2023), which I shall next relate.