Bankruptcy Code Definition: Corporation

The Bankruptcy Code lists various types of entities which are defined as a “corporation.”  These include:

• association having a power or privilege that a private corporation, but not an individual or a partnership, possesses;
• partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association;
• joint-stock company;
• unincorporated company or association; or
• business trust;

but further expressly excluding a limited liability partnership.  11 U.S.C. § 101(9).

A quick perusal of the Code, however, reveals that none of the terms used in this definition, including “partnership” - of any sort - is otherwise defined.  Thus, although seeking to differentiate on the basis of what a corporation is not – limited or general partnerships or individual – the Code confusingly defines a corporation to include a “corporation” and also an “association” but in three different contexts.

This less than concise definition also prompts uncertainty or at least raises a question in the instance of a hybrid or other form of entity not enumerated within the definition.  Thus, one must turn to state law to determine which constitutes a corporation both within the list of “corporate” entities enumerated within the definition but also as to a hybrid entity as to what it most closely resembles.  A limited liability company (“llc”) is an example of a hybrid entity which has been deemed more akin to a corporation than a partnership, particularly in the context of whether the llc is an “affiliate” or “insider” of a corporation for purposes of preference liability.

A case which recently examined these definitions in this context arises from the relationship of a Kansas llc which received transfers from a debtor which was majority owned by a corporate entity which wholly owned another corporate entity which wholly owned the llc is Redmond v. CJD & Assocs., LLC  (In re Brooke Corp.), 506 B.R. 560 (Bankr. D. Kan. 2014).  Finding that an llc organized in Kansas is provided various rights and privileges that neither a partnership nor individuals are, an llc is a corporation for purposes of the definition (and ultimately as an affiliate and thus an insider of the debtor in order to expand the look back period to one year).  Another recent case similarly finding an llc organized under Washington law to be a corporation in connection with a preference analysis is Sherron Assocs. Loan Fund XX1 (Lacey) L.L.C. v. Thomas (In re Parks), 503 B.R. 820 (Bankr. W.D. Wash. 20 13).

A more atypical business entity which requires a case by case examination of its moving parts is a business trust.  Merely holding assets which may be operated at a profit does not necessarily mean that the entity is a business trust.  Instead, the analysis should focus on both the purpose and actual operations of the trust and only when both point to the primary purpose for which it was formed is to carry out a business purpose should the trust be deemed a business trust.  In In re Blanche Zwerding Revocable Living Trust, 531 B.R. 537 (Bankr. D.N.J. 2015), the court was confronted with deciding whether or not a revocable living trust was a business trust and thus a corporation, and thus eligible under Code § 109 to file a voluntary petition.  Finding that the trust was formed primarily to hold and preserve its assets (rental real properties) and to provide for the orderly transfer thereof to the beneficiaries, the court dismissed the case as filed by an ineligible debtor.

Michael B. Watkins
Barnes & Thornburg LLP