QUESTION
Can the trustee take 100% of the proceeds if the business owner wins the tax lawsuit?
Asked on Feb 17th, 2014 on Bankruptcy - California
More details to this question:
I own a small CPA firm and have the following situation: The owner of a (now virtually defunct) Schedule C business (an LLC) declared bankruptcy in 2012. A lawsuit is in process against a former employee that "stole" the business by ignoring the non-compete and caused the bankruptcy. The lawsuit was initiated prior to bankruptcy. The bankruptcy was discharged in 2012 but the trustee will not close the bankruptcy until the lawsuit is complete. The potential proceeds are far less than amounts due creditors. If the owner wins lawsuit, can the trustee take 100% of the proceeds, and leave the owner (remember, schedule C so in this case proceeds would be subject to self-employment tax, too) with no funds to pay the income and self-employment taxes due on the proceeds? Otherwise, the owner cannot afford the taxes and should drop the lawsuit meaning no money for creditors, either.
6 ANSWERS
The trustee is entitled to keep a bankruptcy case open virtually forever to collect any nonexempt assets and distribute these assets to creditors. A lawsuit for money damages would be the type of situation which would justify doing just that. When a person fileds bankruptcy, every asset that isn't protected by an exemption under state or federal law belongs to the bankruptcy trustee on behalf of the bankruptcy estate. Your client should be consulting with his/her own attorney for legal advice, and not be asking you to engage in unauthorized practice of law by answering his/her legal questions. After all, you have your own professional license you need to protect.
Answered on Feb 21st, 2014 at 6:38 PM
Bankruptcy Attorney serving Bloomfield Hills, MI
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Bredow Law PLC
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More information is required. You do not mention which entity filed the bankruptcy, the owner, or the business. If the owner filed a personal bankruptcy, then his interest in the LLC is limited to the value of his ownership shares. If the LLC filed the bankruptcy, then the Trustee would control the business and would be responsible for filing any tax returns and payment of any corporate taxes. The shareholder should be discussing these issues with the Trustee to ensure the taxes are paid, and if necessary, bring the issue before the Court to ensure that the proceeds pay the expenses.
Answered on Feb 21st, 2014 at 6:14 PM
Creditor's Rights Attorney serving Clayton, MO
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Fluhr & Moore, LLC
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The trustee is entitled to all proceeds of non-exempt property. However, the trustee will have to file a tax return for the estate and may wish to avoid doing so. You need to have your bankruptcy attorney talk to the trustee so that this matter will be worked out.
Answered on Feb 20th, 2014 at 5:52 PM
Appellate Attorney serving Grosse Pointe Farms, MI
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Musilli Brennan Associates, PLLC
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This should be discussed with the trustee and the bankruptcy attorney.
Answered on Feb 20th, 2014 at 5:49 PM
Deborah F. Bowinski
What state are you located in and what exemptions are you entitled to and were they properly claimed? Was it the owner or the LLC that filed the bankruptcy case? Was the lawsuit listed as an asset? The jurisdiction will control what portion, if any, of the lawsuit proceeds may be exempt from the trustee's claim. Hopefully this business owner retained an attorney to file the bankruptcy case. These questions should be addresses to his lawyer. If he did not hire a lawyer to file, I have a feeling he will wish he had.
Answered on Feb 20th, 2014 at 5:40 PM
2 Awards
If it was an llc that filed bankruptcy, there is no discharge. The case most likely remained open to see what, if anything, would happen with the lawsuit. If the suit results in payout to the llc then the proceeds belong to the bankruptcy estate. The trustee will take his/her % recovery and disburse the rest to the creditors pro rata. The trustee is required to pay any taxes incurred during the bk case.
Answered on Feb 20th, 2014 at 5:26 PM