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ALBANY � A bankruptcy trustee is powerless to go after money allegedly stolen from a limited liability corporation in which a debtor was a member, a Northern District bankruptcy judge has said in a recommendation to the district court. Chief Bankruptcy Judge Stephen D. Gerling suggested that property of an LLC does not become property of a bankruptcy estate when one partner allegedly steals assets. In re: Ferraro , 00-63241, turned on whether a Chapter 7 trustee could seize for creditors money allegedly stolen from the limited liability corporation by the debtor’s partner. The matter arose in the context of a Chapter 7 petition filed by Daniel P. and Celeste H. Ferraro. According to court records, Mr. Ferraro was a member of Balfer Acquisition Co. LLC and Integrated Office Technologies LLC at the time he and his wife filed for bankruptcy. Also according to court records, Alan Balcourt, Mr. Ferraro’s partner, stole $400,000 from the limited liability companies. According to Judge Gerling, Mr. Balcourt conceded that the LLC might have a claim against him, but not the debtors or creditors. Chapter 7 bankruptcy trustee Lee E. Woodard of Syracuse brought an adversary proceeding attempting to seize for the benefit of creditors the $400,000 that Mr. Balcourt allegedly stole from the LLCs and, indirectly, from the debtor. But Judge Gerling found that the supposedly stolen assets were property of the limited liability corporations, and not property of the bankruptcy estate. Under New York Limited Liability Corporation Law, a membership interest in an LLC does constitute personal property. However, the law also says that members do not have an interest in the specific property of the LLC. “The Trustee contends that Balcourt committed various torts against the LLCs when he allegedly took $400,000 from them,” Judge Gerling wrote. “The $400,000, however, belonged to the LLCs, not to the Debtor. Therefore, only the LLCs can pursue the tort claims against Balcourt. The Trustee cannot pursue his claims against Balcourt on the bankruptcy estate’s behalf because the $400,000 claim did not belong to the Debtor.” Judge Gerling, citing principles of judicial restraint, declined to rule on whether the trustee could file a shareholder derivative suit. The court also said its jurisdiction is limited in that the dispute does not involve a substantive right under the U.S. Bankruptcy Code. Thus, his decision was limited to proposed findings of fact, conclusions of law and a recommendation to Northern District Judge Lawrence E. Kahn. Still, Thomas P. Hughes, counsel for Mr. Balcourt, said the holding is a significant development as the law on limited liability companies remains sparse. “Under the bankruptcy code, property of the estate encompasses just about anything you can think of that the debtor has a claim or a right to,” Mr. Hughes said. “In this case, he has distinguished between the property of the bankrupt debtor, who does actually own an interest in the LLC, and the LLC, which owns the claim for defalcation against the other member. The trustee can’t assert a claim that belongs to the company.” In any case, Mr. Hughes denied that his client had appropriated LLC funds. He said the funds at issue were used for business expenses. Kevin P. Ryan of Harris Beach in Syracuse argued for the trustee. Neither Mr. Ryan nor Mr. Woodard was immediately available for comment. � John Caher can be reached at [email protected] .

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