Corporation files ch. 7 but wholly-owned subsidiary LLC does not file - how does this happen?

Question

I have an interesting situation. I’m a customer of a US corporation through its wholly-owned LLC subsidiary (one of several). The entire corporation (including the subsidiarys) shut down operations and the parent corporation filed chapter 7 bankruptcy a few weeks ago. However, the subsidiary LLCs have not (yet) filed bankruptcy.

I am a small creditor of the subsidiary and I personally don’t expect to see any money in any case but I’m just trying to understand how this works. I know there are many creditors of the LLCs who are left hanging. The LLCs seem to have just disappeared. The US trustee for the parent corporation bankruptcy has announced that we are not creditors in that case.

Can anyone provide any insight into how this works or any speculation as to what will happen?

Answer 1

When an entity goes bankrupt, its affairs are subject to detailed court supervision and creditors rights with respect to the bankrupt entity are severely limited by an "automatic stay" that funnels all disputes between creditors and the entity to bankruptcy court.

This process, in the case of a medium to large sized business, is very expensive.

If lots of creditors of the consolidated group are creditors of an entity that doesn't have any assets, it may not be worth the trouble to go through that process, since those creditors will get nothing, or there may be other reasons that it needs to function as a non-bankrupt entity.

The creditors of the non-bankrupt LLC could force an involuntary bankruptcy, if they suspect that some creditors are being unduly favored or if they want more transparency, but they might prefer a non-bankrupt company if it allowed them to pursue their creditor's rights outside of bankruptcy and it had some assets.

There are some very tricky collective action problems involved in cases like these, that must be made with imperfect information.

It could be that the parent company is looking for a quick reorganization that is insulated from the day to day affairs of the company and involves a restructuring of only long term debt and a subsidiary bankruptcy would complicate a simple, pre-packaged plan.

Still, it is hard to know with limited information.