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Hear the one about the borrower, an LLC, owned and managed by a greedy principal? The borrower slow-payed its creditors for years while making handsome distributions to its owner, paying lavish salary, and even making assorted “loans” to its principal. The debtor then files chapter 11. The plan was to negotiate with its secured creditor to accept a reduced payoff amount and to conduct a section 363 sale that would result in sale proceeds that are just enough to pay the secured creditor, priority unsecured creditors, and administrative claimants. Approximately nothing would be paid to unsecured creditors. The principal surmised that the secured creditor would be very ready to accept the proposed haircut if faced with baldness from the collapsed value of a closed business. The chapter 11 plan would provide for a discharge of all of the LLC’s debts. Result: the principal member would sip a cuba libre in the shade, reclining atop the mountain of cash he distributed to himself, while thirsty creditors are left to seek water under a blazing sun in a strange desert-like neighborhood. Things didn’t go exactly as planned. Read more in There Ought to Be a Law, and There Is: When the Insolvent LLC’s Manager Distributes Cash But Does Not Pay Creditors, by Christopher Cahill.
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