Category: Bankruptcy

Imagine you are a limited partner in a real estate partnership. The general partner sells the building, keeps the proceeds, and files Chapter 11. The obvious instinct: call a meeting, vote the general partner out, take the wheel. In July 2026, the Ninth Circuit Bankruptcy Appellate Panel held that this exact move was a legal nullity, because the debtor’s management rights became estate property the moment it filed. In re LeFever Mattson, BAP No. NC-25-1238-BCN (9th Cir. BAP July 2026). The decision construes California statutes, but New Mexico’s partnership and LLC acts contain the same bankruptcy-dissociation triggers, and the Tenth Circuit’s stay rule is at least as strict. Investors in Albuquerque real estate partnerships, Permian Basin working-interest vehicles, and family LLCs should understand why self-help removal fails — and what works.

What happened in In re LeFever Mattson?

LeFever Mattson Inc. was general partner of Live Oak Investments LP, a California limited partnership holding an apartment complex for passive investors. After the property sold for roughly $10.8 million, the general partner took about $2.3 million for itself — its claimed ownership share plus a sale commission — and distributed nothing to the limited partners. It then filed Chapter 11 for itself and its affiliates, including the partnership. A year into the case, the limited partners voted to remove the debtor as general partner, install one of their own, and hire separate counsel.

The creditors’ committee obtained a bankruptcy court order declaring the removal void as a stay violation. The BAP affirmed on an issue of first impression: California’s statute automatically dissociating a general partner that “becomes a debtor in bankruptcy” is an unenforceable ipso facto provision, so the debtor’s management rights survived the filing, entered the estate, and could not be taken by a postpetition vote.

Why are a general partner’s management rights property of the bankruptcy estate?

The starting point is 11 U.S.C. § 541(a)(1), which sweeps into the estate “all legal or equitable interests of the debtor in property as of the commencement of the case” — language the Supreme Court reads expansively. United States v. Whiting Pools, Inc., 462 U.S. 198 (1983). State law defines the underlying interest, Butner v. United States, 440 U.S. 48 (1979), but federal law decides what enters the estate. A general partner’s right to manage is both a statutory entitlement and a contract right under the partnership agreement — and contract rights are property. The limited partners argued that only the “transferable interest” (the right to distributions) counts, but the BAP rejected the premise: a right does not stop being property because state law makes it non-transferable. And under In re Computer Communications, Inc., 824 F.2d 725 (9th Cir. 1987), even a non-assignable executory contract remains estate property protected by the stay.

What makes a state dissociation statute an unenforceable “ipso facto” provision?

Section 541(c)(1)(B) provides that a debtor’s interest becomes estate property “notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law” that is conditioned on insolvency or a bankruptcy filing and that “effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.” A parallel rule, 11 U.S.C. § 365(e)(1), invalidates bankruptcy-triggered termination clauses in executory contracts. The phrase “applicable nonbankruptcy law” dooms statutes like California’s: as the panel put it, parties “cannot contract around what becomes estate property, and states cannot legislate estate property away.” A statute stripping management rights the instant a partner “becomes a debtor in bankruptcy” is a forfeiture conditioned on filing, and the Supremacy Clause preempts it. Courts had already so held for LLC statutes, e.g., In re Envision Healthcare Corp., 655 B.R. 701 (Bankr. S.D. Tex. 2023); the BAP found the limited-partnership setting a distinction without a difference.

Do New Mexico’s partnership and LLC statutes have the same bankruptcy triggers?

Yes — and that is why LeFever Mattson matters here. Under New Mexico’s Uniform Revised Limited Partnership Act, NMSA 1978, § 54-2A-603 dissociates a general partner that becomes a debtor in bankruptcy, and NMSA 1978, § 54-2A-605 then terminates its “right to participate as a general partner in the management and conduct of the partnership’s activities.” The New Mexico Limited Liability Company Act works the same way: under NMSA 1978, § 53-19-38, a member is dissociated upon filing a voluntary bankruptcy petition unless the operating agreement provides otherwise or all members consent in writing to continued membership.

These are textbook statutory ipso facto clauses. Under the logic of LeFever Mattson and the LLC cases it followed, a New Mexico bankruptcy court would very likely hold them unenforceable against the estate — along with the mirror-image clauses lawyers routinely copy into partnership and operating agreements.

Is a removal vote void or merely voidable in the Tenth Circuit?

The stay question is where the federal overlay bites hardest. The vote in LeFever Mattson was an “act to exercise control over property of the estate,” prohibited by 11 U.S.C. § 362(a)(3). In the Ninth Circuit, stay violations are void, not voidable. In re Schwartz, 954 F.2d 569 (9th Cir. 1992). The Tenth Circuit — home of the District of New Mexico — took the same position even earlier: “it is well established that any action taken in violation of the stay is void and without effect.” Ellis v. Consol. Diesel Elec. Corp., 894 F.2d 371 (10th Cir. 1990). Some circuits treat violations as merely voidable; in this circuit the removal simply never happened.

Void is only half the problem. Under 11 U.S.C. § 362(k)(1), an individual injured by a willful stay violation recovers actual damages, costs, and attorney’s fees — sometimes punitive damages; courts can also hold entities in civil contempt. “Willful” does not require bad intent; knowing about the bankruptcy and acting anyway is generally enough. Partners who orchestrate a postpetition removal vote are volunteering to be sanctions respondents. The stay’s reach surprises non-debtors in other contexts too, as the firm has written about the automatic stay and non-debtor spouses in New Mexico.

What can investors lawfully do when their general partner files bankruptcy?

The Bankruptcy Code channels every investor grievance into court-supervised remedies. First, they can seek relief from the stay under 11 U.S.C. § 362(d) — permission to exercise removal rights, with “cause” including mismanagement or conflicts. Second, in Chapter 11 they can seek an independent trustee under 11 U.S.C. § 1104 for fraud, dishonesty, or gross mismanagement, or move to convert or dismiss under 11 U.S.C. § 1112(b). Third, misconduct claims — in LeFever Mattson, the allegation that the general partner pocketed sale proceeds in breach of fiduciary duty — belong in the bankruptcy court as estate claims, often prosecuted by a committee with derivative standing. Finally, investors can negotiate: debtors in possession routinely trade governance concessions for plan support. What they cannot do is act first and ask forgiveness later.

How would this play out for an Albuquerque real estate partnership?

Picture a Northeast Heights apartment portfolio held by an Albuquerque limited partnership: one corporate general partner, eighteen limited partners, and a recent building sale whose proceeds never reached the investors. The general partner files Chapter 11 in the District of New Mexico. Week one, counsel reads the petition, calendars the section 341 meeting — and tells the clients not to schedule a removal vote. Week two, counsel demands an accounting of the sale proceeds. By weeks three and four, the investors choose a track: a section 1104 trustee motion if the accounting suggests diversion, or a section 362(d) motion to exercise removal rights if the problem is drift rather than dishonesty. Meanwhile they press for creditors’ committee formation, since a committee can seek standing to sue insiders. Within ninety days, most such cases settle into a negotiated framework — a chief restructuring officer, reporting covenants, or a consensual plan — because the investors kept sanctions risk off the table.

Investor option	Statutory basis	Who decides	Practical effect
Postpetition removal vote	State dissociation statute / agreement	No one — void ab initio	No effect; § 362(k) sanctions exposure
Motion for relief from stay	§ 362(d)	Bankruptcy judge	Court may authorize exercising removal rights
Motion to appoint Chapter 11 trustee	§ 1104(a)	Bankruptcy judge	Independent fiduciary displaces debtor management
Motion to convert or dismiss	§ 1112(b)	Bankruptcy judge	Case converts to Chapter 7 or ends for cause
Estate claims for fiduciary breach	§§ 541, 1109; derivative standing	Bankruptcy judge	Money recovery for diverted proceeds through the case

Frequently Asked Questions

Does a bankruptcy filing automatically remove a general partner under New Mexico law?

Outside bankruptcy, NMSA 1978, § 54-2A-603 says yes — becoming a debtor in bankruptcy is a dissociation event. But under In re LeFever Mattson and 11 U.S.C. § 541(c)(1)(B), that statutory forfeiture is an unenforceable ipso facto provision, so the debtor’s management rights survive the filing as estate property.

Can limited partners vote out a general partner that is in Chapter 11?

Not without court permission. A postpetition removal vote is an act to exercise control over estate property under 11 U.S.C. § 362(a)(3), and such acts are void in the Tenth Circuit. The lawful routes are stay relief, a trustee motion, or negotiation.

What is an ipso facto clause in bankruptcy?

An ipso facto provision is a contract term — or, as LeFever Mattson confirms, a state statute — that forfeits or terminates a debtor’s rights solely because of insolvency or a bankruptcy filing. Bankruptcy Code sections 541(c)(1)(B) and 365(e)(1) make such provisions generally unenforceable.

Are actions that violate the automatic stay void in New Mexico?

Yes. The District of New Mexico sits in the Tenth Circuit, which held in Ellis v. Consolidated Diesel Electric Corp. that any action violating the stay is void and without effect. Willful violations can also draw damages, fees, and punitive damages under 11 U.S.C. § 362(k)(1).

Does the LeFever Mattson rule apply to New Mexico LLCs?

Its logic almost certainly does. Courts nationwide have held that LLC statutes stripping a bankrupt member’s rights are preempted, and the BAP called the LLC-versus-partnership distinction meaningless. New Mexico’s LLC Act, NMSA 1978, § 53-19-38, contains the same bankruptcy-dissociation trigger.

How North Star Law Firm Can Help

North Star Law Firm counsels New Mexico clients statewide — Albuquerque, Santa Fe, Las Cruces, and beyond — on both sides of these disputes: investors confronting a general partner or LLC manager in bankruptcy, and business debtors preserving control through a Chapter 11 reorganization. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state, pairing legal strategy with a CPA’s read of partnership accounting. To discuss a partnership or LLC caught in a bankruptcy, contact the firm for a free consultation.

Imagine your Albuquerque company gets a demand letter from a chapter 7 trustee: payments a customer made before its bankruptcy are allegedly recoverable as preferences. You open settlement talks, and a deal seems close. Then the trustee moves to sell the claims against you — not settle them — to another creditor: perhaps a rival with its own litigation budget, a grudge, and no interest in a cheap resolution.

That is what happened in In re Law Enforcement Officers Security Union (“LEOSU“), No. 24-70277-JAD, 2026 WL 560452 (Bankr. W.D. Pa. Feb. 27, 2026), where the court approved a trustee’s sale of avoidance actions to a creditor — and held the targets had no standing to object. For New Mexico businesses and insiders facing clawback claims, the decision is both warning and roadmap.

What Did the Bankruptcy Court Decide in In re LEOSU?

The debtor, a labor union, filed a chapter 7 petition in July 2024. The trustee identified preference and fraudulent transfer claims against several related unions, mediated with those targets, and reached a proposed $140,000 settlement. Before approval, a litigation creditor asserting claims of at least $2.4 million objected, valued the avoidance claims at roughly $1.8 million, and offered to buy them for $145,000, subject to higher bids.

The targets objected that avoidance claims are nontransferable statutory “powers” of the trustee, not saleable property, and urged approval of their settlement. The court rejected every piece of that argument: the targets lacked standing, avoidance actions are estate property saleable under 11 U.S.C. § 363(b), and the sale — not the settlement — best served the estate. The claims now belong to the targets’ adversary.

Are Preference and Fraudulent Transfer Claims Really Property of the Estate?

A bankruptcy filing creates an estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case” and any interest the estate acquires afterward. 11 U.S.C. § 541(a)(1), (a)(7). The LEOSU court reasoned that avoidance claims — preference claims under 11 U.S.C. § 547, fraudulent transfer claims under § 548, and state-law claims imported through § 544 — either exist at filing or spring into existence upon it, landing in the estate under one prong of § 541(a) or the other.

That tracks the majority appellate rule. The Fifth Circuit held in In re South Coast Supply Co., 91 F.4th 376, 385 (5th Cir. 2024), that preference actions may be sold under § 363(b) precisely because they are estate property; the Eighth Circuit agreed in In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023). Once a claim is estate property, the trustee can auction it, and the court reviews the sale only for benefit to the estate — not fairness to the people being sued.

Why Don’t Clawback Targets Get to Object to the Sale?

Bankruptcy standing generally belongs to “parties in interest” — entities “potentially concerned with or affected by a proceeding,” as the Supreme Court put it in Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268, 278 (2024), construing 11 U.S.C. § 1109(b). LEOSU shows the doctrine’s other edge: objections were limited to parties “whose pecuniary interests are directly and adversely affected by the order at issue,” and the targets flunked that test.

The targets owned no interest in the claims and were not creditors of the estate; the sale changed none of their legal rights — before it a trustee could sue them, after it an assignee can. Their real interest, the court said, was extinguishing the claims as cheaply as possible, which the sale-approval process does not protect. In short, you may have no formal voice in who ends up holding the lawsuit against you.

What Does a Sold Claim Mean for the New Mexico Business Defending It?

A trustee is an economically rational plaintiff: a certain $140,000 today often beats a speculative $1.8 million after years of litigation. A creditor-assignee can be a very different animal. If the buyer is a competitor or a creditor that believes you caused its losses, the claim stops being a mere asset and becomes an instrument. The assignee may value the litigation itself — discovery into your finances, leverage in related disputes, the satisfaction of a grudge — funded by its own budget.

The LEOSU targets learned a second lesson: settlement talks with a trustee protect nothing until court approval. Their mediated $140,000 settlement was undercut by a $145,000 sale offer, and the court chose the sale. A trustee owes fiduciary duties to the estate, not to you, and may take a better offer mid-negotiation. Assume the claims are on the market until an approval order is entered.

Facing a Clawback Claim? Get a Free Consultation

Can You Buy the Claims Against Your Own Business?

Here is the strategic flip side LEOSU itself validates: if avoidance claims are estate property anyone can buy, the target can bid too. Section 363 sales are generally subject to higher or better offers. A target that outbids the hostile creditor — structured as a purchase-and-release, or a settlement priced above the competing bid — gives the trustee an offer hard to refuse under the same best-interests review that doomed the targets’ cheaper deal.

Buying the claim against yourself can be dramatically cheaper than defending it: a purchase price is a known number paid once, while a defense means years of fees, discovery into your banking records, depositions of your principals, and judgment risk. The catch: the court will scrutinize whether your offer truly beats the alternative — insiders should expect heightened attention — and the move requires speed. Once a sale order is entered, your leverage with the estate is gone.

Do Your Section 547(c) Defenses Survive the Sale?

Yes — the most important point of comfort. An assignee buys the claim as it exists, subject to every statutory defense the target could raise against the trustee. Section 547(c) gives preference defendants three workhorses: the § 547(c)(1) defense for transfers that were “in fact a substantially contemporaneous exchange” for new value; the § 547(c)(2) defense for payments made in the ordinary course or “according to ordinary business terms”; and the § 547(c)(4) subsequent-new-value defense for creditors who kept extending credit after being paid.

A worked example shows the stakes. Suppose a Farmington oilfield vendor received $85,000 from a Permian Basin operator in the 90 days before its chapter 7 filing. After the first payment, the vendor delivered $22,000 in downhole tools on unpaid invoices; after the second, another $18,000 in services, also never paid. Under § 547(c)(4), that $40,000 of subsequent new value offsets exposure dollar for dollar, cutting the claim to $45,000 before the ordinary-course analysis begins; if the remaining payments matched pre-crisis invoice terms, § 547(c)(2) may shrink it toward zero. The math is identical whether the plaintiff is the trustee or a purchaser — and it frames a rational purchase price, which is why building the § 547(c) analysis early serves both defense and buyout strategies.

Where Do the Tenth Circuit and the District of New Mexico Stand?

New Mexico cases sit in the Tenth Circuit, which planted its flag early: Delgado Oil Co. v. Torres, 785 F.2d 857, 861 (10th Cir. 1986), held that a preferential transfer avoidance cause of action is property of the estate — the foundational premise for saleability. What the circuit and its Bankruptcy Appellate Panel have not squarely resolved is the second step: the mechanics and limits of selling avoidance actions under § 363(b), including whether state-law claims channeled through § 544(b) travel with the package. A District of New Mexico judge facing a LEOSU-style motion would find Delgado Oil pointing toward approval, reinforced by the Fifth and Eighth Circuits — so New Mexico targets should plan as though such sales are available here.

Option for the clawback target	How it works	Key risk
Settle with the trustee	Negotiate a release before any sale motion	Trustee can take a better offer any time before approval, as in LEOSU
Outbid the hostile creditor	Higher or better offer in the § 363 process, as purchase-and-release	Bidding war raises the price; scrutiny of insider offers
Buy the claims outright	Acquire and extinguish the claims at a fixed cost	Must move before the sale order; must beat alternatives under best-interests review
Defend against the assignee	Litigate § 547(c) and other defenses, which survive the sale	Years of fees and discovery against an adversary who may never settle cheaply

Frequently Asked Questions

Can a bankruptcy trustee really sell a preference claim against my business to another creditor?

Under the majority rule, yes. The Fifth and Eighth Circuits treat avoidance actions as estate property saleable under 11 U.S.C. § 363(b), and In re LEOSU approved such a sale over the targets’ objection.

Do I get to object if the trustee sells the claims against me?

Probably not. LEOSU held that targets’ pecuniary interests are not directly affected by the sale order — it merely changes who sues them — so they lacked standing. Your leverage lies in bidding or settling, not objecting.

Do my preference defenses change when a creditor buys the claim?

No. The buyer takes the claim subject to every defense you had against the trustee, including the § 547(c) defenses. What changes is the adversary’s motivation and budget, not the law.

Can I buy the avoidance claims against my own business?

Often, yes. Section 363 sales are typically subject to higher and better offers, so a target can outbid a hostile creditor or price a settlement above the competing bid. A purchase caps your cost and ends the litigation — but act before the sale is approved.

Does LEOSU apply in New Mexico bankruptcy cases?

It is persuasive, not binding — a Pennsylvania bankruptcy decision now on appeal. But the Tenth Circuit held in Delgado Oil Co. v. Torres that preference avoidance actions are estate property, so the foundation for LEOSU-style sales already exists in the circuit governing New Mexico.

How North Star Law Firm Can Help

North Star Law Firm defends businesses and individuals across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — against preference and clawback claims, whether the plaintiff is a trustee or a creditor that bought the claim. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state; his accounting background drives the transaction-level § 547(c) analyses behind both defense value and buyout pricing. If exposure threatens your own company’s footing, see the firm’s guide to choosing the right bankruptcy chapter for a New Mexico business. Timing determines leverage — contact the firm for a free consultation before the claims change hands.

On August 3, 2026, the U.S. Senate passed a bill that could reshape restructuring options for thousands of small and midsized businesses — including many in New Mexico. S. 3977, the Bankruptcy Threshold Adjustment Act of 2026, would permanently restore the $7.5 million debt limit for Subchapter V of Chapter 11, the streamlined small business reorganization track capped at roughly $3.4 million since the pandemic-era increase expired in June 2024. For an oilfield services company in Hobbs, a restaurant group in Albuquerque, or a hospitality operator in Santa Fe carrying debt between those numbers, the difference can separate a fast, affordable reorganization in which the owner keeps the business from a traditional Chapter 11 whose cost pushes many companies toward liquidation.

What did the Senate pass on August 3, 2026?

S. 3977 passed the Senate with bipartisan support and now sits with the House. Its core provision amends the eligibility definition in 11 U.S.C. § 1182(1) to restore a $7.5 million ceiling on the aggregate noncontingent, liquidated debt a business may carry and still elect Subchapter V — permanently this time. The bill also consolidates the Chapter 13 debt limits into a single $2.75 million figure, meaningful for owners who guaranteed company debt. A companion bill, H.R. 7730, introduced by Representative Ben Cline, was reported out of the House Judiciary Committee in March 2026, but as of this writing the full House has not voted. Until both chambers pass identical text and the President signs it, the lower cap controls. Reports indicate the Senate-passed version would apply retroactively to cases filed after June 21, 2024, though no one should plan around that until the enacted text is confirmed.

What is the Subchapter V debt limit right now?

Here the statutory mechanics matter. When the CARES Act’s temporary $7.5 million threshold sunset on June 21, 2024, § 1182(1) reverted to a one-line cross-reference: a Subchapter V “debtor” is simply a “small business debtor” as defined in 11 U.S.C. § 101(51D). That definition caps aggregate noncontingent, liquidated secured and unsecured debts at $3,424,000 — set by the Judicial Conference’s triennial inflation adjustment effective April 1, 2025, which raised Code dollar amounts by just over 13 percent. The next automatic adjustment will not arrive until April 1, 2028. So a New Mexico business evaluating Subchapter V today must fit under $3,424,000 unless and until S. 3977 becomes law.

Which New Mexico businesses fall into the $3.4 million to $7.5 million gap?

The gap swallows the kind of companies that anchor New Mexico’s economy. Consider a Permian Basin oilfield services company in Hobbs carrying $5 million in equipment financing and vendor debt after a soft year in Lea and Eddy counties — too large for Subchapter V under the current cap, yet far too small to absorb the professional fee burn of a conventional Chapter 11. An Albuquerque restaurant group might hold $4.2 million in SBA loans, landlord claims, and supplier debt spread across affiliated entities; because § 101(51D)(B) aggregates the debts of affiliated debtors, the group cannot simply file one entity to duck under the ceiling. A Santa Fe hospitality operator that borrowed to renovate ahead of the tourism rebound could sit at $6 million with healthy operations but an unserviceable balance sheet. Under today’s law, each is forced into traditional Chapter 11 — or, too often, into a fire sale or closure because Chapter 11 does not pencil out at their size.

How different is traditional Chapter 11 from Subchapter V in practice?

The differences are structural and compound. In a traditional Chapter 11, an official committee of unsecured creditors may be appointed, and the debtor’s estate pays the committee’s lawyers and advisors. The debtor must win approval of a separate disclosure statement before soliciting votes, adding months and drafting expense, and pays U.S. Trustee quarterly fees under 28 U.S.C. § 1930(a)(6) that scale with disbursements — often tens of thousands of dollars for an operating company. And the absolute priority rule of § 1129(b) means owners generally cannot keep their equity over the objection of unpaid creditors without contributing new value. Subchapter V eliminates each of those burdens: no committee absent a court order, no disclosure statement, no quarterly fees, a plan due within 90 days of the order for relief under 11 U.S.C. § 1189(b), and a trustee appointed under 11 U.S.C. § 1183 whose job is to facilitate a consensual plan, not to displace management. Most importantly, 11 U.S.C. § 1191(b) lets the court confirm a plan over creditor objection without the absolute priority rule, so long as the plan commits the debtor’s projected disposable income for three to five years. The owner keeps the company.

Feature	Traditional Chapter 11	Subchapter V
Creditors’ committee	Typically appointed; estate pays its professionals	None unless court orders one
Disclosure statement	Required before solicitation	Eliminated
U.S. Trustee quarterly fees	Owed quarterly, scaled to disbursements	None
Plan deadline	Often a year or more	90 days (§ 1189(b))
Owner keeps equity over objection	Absolute priority rule applies	Yes, via § 1191(b) cramdown
Who may vote plan through	Needs an accepting impaired class	Confirmable with no accepting class
Current debt ceiling	None	$3,424,000 now; $7.5 million under S. 3977

What counts toward the Subchapter V debt cap?

Only noncontingent, liquidated debts count. A guaranty that has not been called, an unliquidated tort claim, or a disputed exposure not yet reduced to a fixed amount generally stays out of the calculation. Debts owed to affiliates and insiders are excluded as well — a loan from the owner or a sister company does not push the business over the line. But the aggregation rule cuts the other way: when affiliated debtors file, their debts are combined. And at least 50 percent of the counted debt must arise from commercial or business activities, a test owners with mixed personal and business debt must run carefully. These mechanics currently live in § 101(51D); S. 3977 would restore the standalone definition in § 1182(1) at the higher dollar level. Getting the math right on the petition date is critical: a successful eligibility objection can strip the Subchapter V election weeks into the case.

Should a New Mexico business file now, wait for enactment, or restructure to qualify?

Eligibility is measured as of the petition date, making timing a genuine strategic decision. A business already under $3,424,000 that needs relief now — a foreclosure, a judgment, an IRS levy — has little reason to wait. A business in the gap has a harder call. If creditor pressure can be managed for a season, waiting for enactment may unlock the far cheaper track. But waiting carries risk: collateral erodes, defaults accumulate, and Congress has missed deadlines on this exact issue before: the temporary cap lapsed in 2024 because an extension stalled. What a debtor should not do is manipulate the numbers. Paying down select debts on the eve of filing or splitting operations among entities to duck under the cap invites an eligibility objection, a bad-faith challenge, and potential dismissal under § 1112(b). Courts examine eligibility as of the petition date, but they also examine how the debtor got there. The better course is an honest balance-sheet analysis with counsel before anything is filed — the decision tree in the firm’s guide to choosing a bankruptcy chapter for a New Mexico business is a useful starting point.

How do tax claims and D.N.M. practice fit into a Subchapter V case?

New Mexico has a single federal judicial district, so every business bankruptcy in the state — from Farmington to Las Cruces — is filed in the U.S. Bankruptcy Court for the District of New Mexico, which sits in Albuquerque and routinely accommodates remote appearances, a practical point for a Hobbs or Roswell operator worried about traveling for hearings. Tax claims deserve special attention in any Subchapter V plan. Priority tax claims — recent income taxes and trust fund employment taxes under § 507(a)(8) — must be paid in full through the plan, and New Mexico gross receipts tax assessments frequently ride alongside the federal claims. Subchapter V offers a quiet advantage here: in a nonconsensual confirmation under § 1191(b), administrative and priority claims can be stretched across the plan term rather than paid on the effective date, easing the early cash crunch. Because tax debt often drives the insolvency in the first place, integrating bankruptcy strategy with IRS collection defense is where combined legal and accounting analysis earns its keep.

Frequently Asked Questions

What is the current Subchapter V debt limit in 2026?

The cap is $3,424,000 in aggregate noncontingent, liquidated debt, set by the Judicial Conference inflation adjustment effective April 1, 2025. S. 3977 would raise it to $7.5 million, but the bill has not yet become law.

When would the $7.5 million Subchapter V limit take effect?

Only after the House passes S. 3977 in identical form and the President signs it. The Senate acted on August 3, 2026, and companion bill H.R. 7730 cleared the House Judiciary Committee in March, but no House floor vote has occurred yet.

Can owners keep their equity in a Subchapter V case?

Generally yes. Under 11 U.S.C. § 1191(b), a court can confirm a plan over creditor objection without the absolute priority rule, so owners can retain their interests if the plan devotes projected disposable income to creditors for three to five years.

Does debt owed to insiders count toward the Subchapter V cap?

No. Debts owed to affiliates and insiders are excluded from the eligibility calculation, so owner loans do not count against the cap. But debts of affiliated entities filing together are aggregated, which can push a corporate family over the limit.

Can IRS and New Mexico tax debts be handled in a Subchapter V plan?

Yes. Priority tax claims must be paid in full through the plan, and in a § 1191(b) confirmation they can be paid over the plan term rather than up front. Older income taxes that miss priority status may be treated as general unsecured claims.

How North Star Law Firm Can Help

North Star Law Firm counsels New Mexico businesses statewide — Albuquerque, Santa Fe, Las Cruces, and beyond — on Subchapter V reorganizations, traditional Chapter 11 cases, and the full range of bankruptcy strategy, with particular depth where tax debt drives the filing. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state, bringing legal and accounting analysis to eligibility, feasibility, and tax claim treatment. With S. 3977 pending, a business weighing whether to file now or wait benefits from a clear-eyed balance-sheet review before the petition date locks in its options. To discuss where your company stands, contact the firm for a free consultation.

Estate plans rarely fail at the signing table. They fail in the follow-through: the deed that never got recorded, the promissory note that never got endorsed, the mortgage assignment that sat in a drawer. A July 2026 decision from the Eleventh Circuit shows how expensive that gap can be: a family-owned company watched three secured claims evaporate — not because anyone doubted the underlying debts, but because the notes and mortgages behind the claims were never actually transferred into the company before the owner died.

The case is Bay United Holdings, LLC v. INXS 7, LLC (In re Aegis Asset Management, LLC), No. 25-10331, 2026 WL 2131679 (11th Cir. July 24, 2026). It arose in Florida, but the rule it applies comes straight out of the Bankruptcy Code, and it should prompt every New Mexico family that holds seller-financed real estate notes “for the LLC” or “for the trust” to pull the file and check whose name is actually on the paper.

What happened in Bay United Holdings v. INXS VII?

Margaret Mitchell owned two entities, Bob Mitchell Associates and a company called Cloud 9. In 2015, she moved a portfolio of promissory notes, along with the mortgages securing them, into Cloud 9. Most of them, anyway. At least three notes — some in Ms. Mitchell’s own name, some in Bob Mitchell Associates’ — never made the trip. She died in 2022 with that paperwork unfinished.

Meanwhile, a borrower-side bankruptcy was unfolding. Aegis Asset Management, LLC filed Chapter 11 in 2019, the case converted to Chapter 7, and the trustee recovered several parcels of real estate that Aegis had shuffled off to related entities for nothing. The bankruptcy court approved a sale of those parcels, free and clear of liens, to a buyer, INXS VII, and set a thirty-day deadline for claims against the sale proceeds.

On the final day of that window, Cloud 9 filed three proofs of claim — one per property — attaching the mortgages. The problem was visible on the face of the attachments: the mortgagee on one was Ms. Mitchell, and on the other two it was Bob Mitchell Associates. Cloud 9’s name appeared nowhere. The buyer objected, and the evidence showed that two of the mortgages were not assigned to Cloud 9 until March 2023 — nearly two years after the deadline — while the third had passed into Ms. Mitchell’s probate estate at her death.

The family answered with intent: affidavits swearing Ms. Mitchell had meant to include these notes in the 2015 transfer, and that they had never left family hands. It did not matter. All three claims were disallowed, and both the district court and the Eleventh Circuit affirmed.

Why must a creditor own its claim on the day it files?

The court’s reasoning starts with the mechanics of claims allowance. When a claim is based on a written instrument, Federal Rule of Bankruptcy Procedure 3001(c) requires that the instrument be attached to the proof of claim. A properly documented claim enjoys a presumption of validity, but once a party in interest lodges a substantive objection, the claimant must prove it holds an enforceable right to payment. Under 11 U.S.C. § 502(b), the court then determines whether and in what amount the claim is allowed, and the substance of that right is measured by state law — the principle the Supreme Court laid down in Butner v. United States, 440 U.S. 48 (1979).

Florida law, like New Mexico law, lets only a note’s owner or holder enforce it. An entity that has not yet acquired the note therefore has nothing to assert — and assignments executed after the filing deadline cannot reach back to validate a claim that was hollow when filed.

Fairness arguments fared no better. Disallowance did mean the buyer took the properties free of mortgages securing real debts, but bankruptcy courts, though courts of equity, cannot rewrite the state-law rules of ownership. However tight the family ties, the mother and her two companies were three distinct legal persons, and the wrong one showed up to claim the money.

What does this mean for New Mexico families and family LLCs?

New Mexico runs on exactly the kind of paper that sank the Mitchell family. Owner-carried financing is everywhere here: a seller carries back a note on a tract in Valencia County, or a family finances the sale of a small commercial building on Fourth Street in Albuquerque. Families then form an LLC “to hold the notes,” or a revocable trust “to avoid probate,” put the assets on a schedule, and stop. The endorsements never happen. The mortgage assignments never get recorded with the county clerk. The operating agreement says one thing; the county records say another.

That gap is fatal in any fight where ownership matters — a foreclosure, a payoff dispute, or, as in Bay United, a claims bar date that waits for no one. A signed intent to transfer is not a transfer. A schedule attached to a trust is not an endorsement. New Mexico families have more reason than ever to get the bankruptcy side of this right, because the state recently rebuilt its exemption law, including a homestead exemption of $150,000 — protections that matter only if the family’s assets and claims are documented well enough to assert.

What happens when a bar date arrives while probate is still pending?

Run the scenario at home. An Albuquerque family’s matriarch sold two commercial lots near the I-40/Coors interchange and a rental in the South Valley, carrying seller-financed notes in her own name. The family formed an LLC that was always “supposed to” hold the notes. She dies in the spring; no probate has been opened. In the fall, one of the borrowers files Chapter 11 in the United States Bankruptcy Court for the District of New Mexico, and the notice that arrives in the mail sets a claims bar date ninety days out.

What the family cannot do is have the LLC file the proof of claim. The LLC owns nothing; the notes sit in the decedent’s estate. What the family can do is move quickly under New Mexico’s Uniform Probate Code, NMSA 1978, Chapter 45, which allows informal probate and informal appointment of a personal representative by application — often a matter of weeks when the family is not fighting. Once letters issue, the personal representative files the proof of claim on the estate’s behalf, attaching the note, the recorded mortgage, and the letters. If the plan is still to move the notes into the LLC, the estate can assign them later and the LLC can step into the claim under Rule 3001(e)’s transfer procedure. The sequence matters: enforceable ownership first, proof of claim second, restructuring third. Filing in the LLC’s name and papering the gap with affidavits about intent is precisely what failed in Bay United.

How do you actually finish funding an LLC or trust?

Funding is a title exercise, not a drafting exercise. For each promissory note, that means an endorsement — on the note itself or on an allonge firmly attached to it — or a written assignment running to the LLC or trustee. For each mortgage or deed of trust, it means an assignment recorded with the clerk of the county where the land sits, whether that is Bernalillo, Santa Fe, or Doña Ana. Real property moves by recorded deed, LLC interests by written assignment reflected in the company’s records, accounts by retitling at the institution. And because portfolios drift, the discipline that saves families is an annual reconciliation: compare the trust or LLC asset schedule against county records and the originals in the fire safe, and fix every mismatch while everyone who signed is still alive to sign again.

What is the lesson for creditors facing a bar date?

For creditors of any kind, Bay United is a documentation case. Before filing a proof of claim, confirm that the filing entity owns the debt today — not an affiliate, and not after a cleanup assignment — and attach the paper that proves it. A bar date is among the least forgiving deadlines in American law, and a cure executed afterward does not relate back.

New Mexico sits in the Tenth Circuit, so the Eleventh Circuit’s decision is persuasive rather than binding here. But nothing in the opinion turns on circuit law: the claims-allowance framework of § 502(b), Rule 3001’s documentation requirements, and the Butner principle apply in Albuquerque exactly as they do in Atlanta, and a New Mexico bankruptcy court should be expected to reach the same result.

Asset the plan says the LLC or trust owns	What the plan or intent letter accomplishes	What actually completes the transfer
Promissory note	Nothing enforceable	Endorsement on the note or an allonge, or a written assignment, delivered to the new owner
Mortgage or deed of trust	Nothing of record	Written assignment recorded with the county clerk where the property sits
Real estate	Nothing of record	Deed to the LLC or trustee, signed and recorded
LLC membership interest	Intent only	Written assignment plus updated company records and operating agreement
Bank and brokerage accounts	Intent only	Retitling completed at the institution

Frequently Asked Questions

Can our family LLC file a bankruptcy claim on a note still titled in a deceased parent’s name?

No. Until the note is validly assigned or distributed, it belongs to the decedent’s estate, and the personal representative — not the LLC — is the party with an enforceable right to payment. A claim filed by the LLC is vulnerable to disallowance no matter how genuine the underlying debt is.

Can a transfer completed after the bar date fix a defective claim?

Under the reasoning of Bay United, no. The claimant must already own an enforceable right to payment at the moment of filing, and an assignment signed after the deadline does not retroactively validate a claim the filer did not own. The time to fix ownership is before the claim goes in.

How quickly can a personal representative be appointed in New Mexico?

New Mexico’s Uniform Probate Code allows informal probate and informal appointment by application, without a court hearing in uncontested cases. When the family acts promptly and no one objects, letters can often issue within weeks — usually fast enough to beat a bankruptcy bar date if the family starts immediately.

Does the Eleventh Circuit’s decision bind New Mexico courts?

No. New Mexico is in the Tenth Circuit, so the decision is persuasive authority only. But the rule rests on the Bankruptcy Code’s claims-allowance provisions and on state-law ownership principles that New Mexico shares, so the practical takeaway is the same here.

What documents move a note and mortgage into an LLC or trust in New Mexico?

The note moves by endorsement, allonge, or written assignment; the mortgage or deed of trust moves by a written assignment recorded with the clerk of the county where the property is located. Both pieces should be completed, and the originals kept together, before anyone relies on the entity as the owner.

Does it matter that no one disputes the debt itself?

Not to the claims-allowance question. In Bay United, the mortgages were real and the debts were real, but the claims failed because the wrong entity asserted them. Bankruptcy claims practice punishes ownership defects even when the dollars are undisputed.

How North Star Law Firm Can Help

North Star Law Firm works both sides of this problem for New Mexico families and closely held businesses: pursuing and defending claims in bankruptcy cases, and cleaning up the entity-funding and titling gaps that create these disputes in the first place. Because the firm is led by an attorney-CPA, it can coordinate the bankruptcy, tax, and succession pieces as one project rather than three. Families holding seller-financed notes, and creditors staring down a bar date, can contact the firm for a free analysis by phone or video before the deadline makes the decision for them.

For a small business squeezed on cash, the merchant cash advance pitch is seductive: money wired tomorrow, no bank underwriting, just sign over a slice of your future receivables. Then the daily debits start, the math stops working, and a second advance gets taken to cover the first. Owners tend to assume that once they signed, they are stuck. A recent decision out of the bankruptcy court in Dallas says otherwise: MCA obligations can be attacked — and wiped out — as fraudulent transfers.

In Denali Construction Services, LLC v. Cloudfund, LLC, Adv. No. 24-3083 (Bankr. N.D. Tex. Mar. 20, 2026), the court avoided two merchant cash advance obligations as constructively fraudulent under the Bankruptcy Code. For New Mexico contractors, restaurants, and trucking outfits caught in the MCA cycle, the case is a reminder that these agreements are not untouchable — and that bankruptcy law gives a struggling business real offensive weapons.

What is a merchant cash advance, really?

On paper, an MCA is not a loan at all. The funder “purchases” a fixed dollar amount of the business’s future receivables at a discount — say, it pays $100,000 today for the right to collect $140,000 of tomorrow’s revenue — and collects through automatic daily or weekly debits from the business bank account. Because the transaction is styled as a sale rather than a loan, funders argue that interest-rate concepts do not apply, and the effective cost of the money routinely works out to triple-digit annual rates once you annualize a 40 percent fee collected over a few months.

The sale label is doing a lot of work, and courts increasingly look behind it. The tell is the reconciliation clause: a true receivables purchase adjusts the daily payment down when revenue drops, because the funder supposedly bought a percentage of receipts, not a fixed repayment stream. When the contract requires fixed daily payments no matter what the business collects, backstopped by a personal guaranty and a confession of judgment, the transaction starts to look like what it functionally is — a very expensive loan.

What did the bankruptcy court do in Denali Construction?

Denali, a construction company in Chapter 11 in the Northern District of Texas, sued its MCA funders in an adversary proceeding to eliminate two advances. According to the court’s findings as reported by practitioners, the first agreement obligated Denali to pay $309,500 on top of a $440,000 advance over a sixty-day term — an annualized rate the court computed at 427.9 percent — and the second required $649,000 on top of an $850,000 advance over eighty days, or 348.3 percent annualized. The court avoided both obligations under 11 U.S.C. § 548(a)(1)(B) as constructively fraudulent.

A candid caveat: the Denali adversary proceeding is verifiable on the court’s docket, but the judgment itself is not freely available online, so this description rests on the docket and on professional commentary rather than the opinion text. The statutory framework it applies, though, is not in doubt, and that framework is the point.

How can a debt obligation itself be avoided as a fraudulent transfer?

Most people hear “fraudulent transfer” and picture assets moving out the door. But § 548(a)(1) reaches two distinct things: transfers of the debtor’s property and obligations the debtor incurred. The constructive-fraud branch, § 548(a)(1)(B), lets a trustee or debtor in possession avoid an obligation incurred within two years of the petition if the debtor received less than reasonably equivalent value in exchange and was insolvent at the time, was left with unreasonably small capital, or intended to incur debts beyond its ability to pay. No bad intent is required — the statute measures the exchange, not the motives.

Apply that to a stacked MCA. A business promises to repay $749,500 in sixty days in exchange for $440,000 in hand. Was $440,000 reasonably equivalent value for a $749,500 obligation? When the debits begin the next morning and the business is already insolvent or hanging by a thread — which is usually why it turned to an MCA in the first place — the elements line up. And if the obligation is avoided, the consequences are powerful: the unpaid balance is wiped out, and payments already made on the avoided obligation can be recovered for the estate under 11 U.S.C. § 550.

What does New Mexico’s voidable transactions law add?

Section 548 has a two-year reach-back. But 11 U.S.C. § 544(b) lets the estate borrow state fraudulent-transfer law, and New Mexico’s version — the Uniform Voidable Transactions Act, NMSA 1978, §§ 56-10-14 through 56-10-29, which the state adopted in its modern form in 2015 — contains parallel language allowing avoidance of obligations incurred without reasonably equivalent value, generally with a four-year window. An MCA signed three years before the petition, beyond § 548’s reach, may still be avoidable through § 544(b) and the state act.

The state-law angle matters in New Mexico for another reason: usury is a dead end here. New Mexico repealed its general interest-rate ceilings decades ago — the former usury sections of the money-and-interest statute, NMSA 1978, §§ 56-8-11 and 56-8-11.1, are repealed — so a commercial borrower generally cannot attack a 300 percent effective rate as illegal in itself. That makes the fraudulent-transfer theory, along with recharacterizing the “sale” as a loan, the main event for a New Mexico business rather than a sideshow.

What does MCA stacking look like for a Las Cruces contractor?

Put numbers on it. A Las Cruces excavation contractor grosses about $60,000 a month on commercial site work along the I-25 corridor. A slow spring leads to a first MCA; a payroll crunch leads to a second; a funder who saw the first two UCC filings cold-calls with a third. Each funder debits the operating account every business day, and together the debits total $2,800 a day. Over roughly twenty-one business days a month, that is $58,800 — 98 percent of gross revenue — taken off the top before payroll, fuel, materials, insurance, or gross receipts tax. The business is not merely unprofitable; it is arithmetically impossible. The only way to make Friday payroll is a fourth advance, which raises the daily debit again. That is the death spiral, and it is why the § 548 elements are usually easy to satisfy in these cases: a company in that position was insolvent or left with unreasonably small capital almost by definition, and no one can say with a straight face that a promise to repay $170,000 in seventy days was exchanged for reasonably equivalent value when $115,000 hit the account.

Which path fits: workout, Subchapter V, or Chapter 7?

The decision runs roughly like this. If the business is viable apart from the MCA debits — real customers, real margins, a product that sells — the first move is often a negotiated workout, because funders who know their contracts are vulnerable to avoidance and recharacterization have reasons to deal. If the funders will not deal, or there are too many of them, a Subchapter V reorganization lets a small business stop the debits with the automatic stay, keep the owner in control, and bring the avoidance action inside the case; the adversary proceeding lands in the debtor’s home bankruptcy court — for a New Mexico business, the District of New Mexico — regardless of the New York forum-selection clauses these agreements love. A larger company may need a full Chapter 11. And if the business is not viable even without the MCAs, Chapter 7 ends the bleeding, with a trustee who can still pursue the avoidance claims for creditors. Whether the avoidance action is worth bringing is a straightforward expected-value question: how much was already paid on the avoided obligations and is recoverable, how collectible is the funder, and what will the litigation cost. Which chapter fits a given company is its own analysis — the firm has written a guide to choosing the right bankruptcy chapter for a New Mexico business owner.

What should you look for before signing an MCA agreement?

Before signing anything, read for four things. First, the reconciliation clause: if there is no genuine right to adjust payments when revenue falls, you are taking a fixed-payment loan at a rate no bank could legally advertise as a purchase. Second, a confession of judgment or agreed-judgment provision, which can let the funder take a judgment against you with little or no notice. Third, the UCC-1 blanket lien — most funders file against all assets, which strangles future borrowing and trips defaults under existing loan covenants. Fourth, the personal guaranty, which converts a corporate cash-flow problem into a threat against your house. If the deal survives that reading and you still need the money, price it honestly: compute the total payback, divide by the days, and annualize it. Most owners who do that math walk away.

Advance received	Total promised back	Term	Annualized rate found by the court
$440,000	$749,500	60 days	427.9%
$850,000	$1,499,000	80 days	348.3%

Frequently Asked Questions

Is a merchant cash advance a loan or a sale of receivables?

It depends on how the agreement actually works. Courts look past the label to substance: fixed daily payments regardless of revenue, no meaningful reconciliation right, personal guaranties, and default-on-slowdown provisions all point toward a disguised loan rather than a true purchase of receivables.

Can MCA debt really be eliminated in bankruptcy?

Sometimes, yes. Section 548(a)(1)(B) permits avoidance of obligations — not just payments — incurred for less than reasonably equivalent value while the business was insolvent or undercapitalized. In the Denali Construction adversary proceeding, the court avoided two MCA obligations on exactly that theory.

What if the MCA was signed more than two years ago?

Section 548 reaches back two years, but § 544(b) imports state law, and New Mexico’s Uniform Voidable Transactions Act generally allows a four-year look-back. Older obligations may still be avoidable through the state-law route.

Does New Mexico usury law cap MCA rates?

Generally no. New Mexico repealed its general usury ceilings for commercial transactions, so a triple-digit effective rate is not automatically illegal. That is why fraudulent-transfer avoidance and loan recharacterization carry the load in New Mexico rather than a usury defense.

Can payments already made to the MCA funder be recovered?

If the obligation is avoided, § 550 allows recovery of transfers made on account of it, and payments within the preference or fraudulent-transfer windows may be recoverable on independent grounds. How much is realistically collectible from the funder is part of deciding whether the lawsuit is worth bringing.

Will the MCA’s New York forum-selection clause keep the fight out of New Mexico?

Usually not once a bankruptcy is filed. Avoidance claims are brought as an adversary proceeding in the debtor’s bankruptcy court, and the automatic stay halts the funder’s collection efforts, including confessed judgments, while the case proceeds.

How North Star Law Firm Can Help

North Star Law Firm helps New Mexico businesses evaluate whether MCA obligations can be restructured, recharacterized, or avoided outright, and which vehicle fits — from a negotiated workout to a Subchapter V reorganization to a traditional Chapter 11. Led by an attorney-CPA, the firm builds the insolvency and reasonably-equivalent-value analysis on real financial statements, not guesswork, across its bankruptcy practice. A business watching daily debits eat its payroll can contact the firm for a free analysis by phone or video before signing the next advance.