Adams v. Tavenner
| Decision Date | 04 January 2023 |
| Docket Number | Civil No. 3:22cv237 (DJN) |
| Parties | Rodney K. ADAMS, et al., Appellants, v. Lynn L. TAVENNER, as Chapter 7 Trustee, Appellee. |
| Court | U.S. District Court — Eastern District of Virginia |
Michael E. Hastings, Timothy James Lovett, Justin Ephraim Simmons, Woods Rogers Vandeventer Black PLC, Roanoke, VA, for Appellants.
Paula Steinhilber Beran, Tavenner & Beran PLC, Richmond, VA, for Appellee.
David J. Novak, United States District Judge This appeal from the United States Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court") challenges that court's denial of Appellants' request to amend the equity security holders list ("ESH List" or the "List") filed by the Liquidating Trustee in Bankruptcy Case No. 19-34574-KRH. Appellants, who were partners in the now-defunct law firm LeClairRyan, PLLC ("LeClairRyan" or the "Firm"), challenge the ESH List due to tax consequences flowing from their placement on the List. But those tax consequences have no influence here, as the sole issues before the Court are (1) whether the Bankruptcy Court erred in authorizing the Trustee's continued use of the ESH List and (2) whether the Bankruptcy Court erred by interpreting the Firm's Operating Agreement to find that Appellants were correctly included on the List.
Finding that the Bankruptcy Court acted properly in granting the Trustee's Motion to Authorize and denying the Appellants' Motion to Amend and the Motions for Joinder, the Court hereby AFFIRMS IN PART and REVERSES IN PART the Bankruptcy Court's rulings. The Court AFFIRMS the Bankruptcy Court's rulings on the motions at issues but REVERSES IN PART to the extent that the Bankruptcy Court improperly ruled that the Trustee may rely on future revisions of the ESH List, as that aspect of the Bankruptcy Court's ruling constituted an improper advisory opinion. In doing so, the Court REMANDS to the Bankruptcy Court with instructions to strike the offending language from its Order, as well as to correct the date of the ESH List to September 3, 2019. The Court AFFIRMS in all other aspects.
This case arises out of the bankruptcy case voluntarily commenced by LeClairRyan PLLC, initially under Chapter 11 of the Bankruptcy Code, on September 3, 2019, in the United States Bankruptcy Court for the Eastern District of Virginia. On September 17, 2019, LeClairRyan filed its List of Equity Security Holders Pursuant to Rule 1007(a)(3) of the Federal Rules of Bankruptcy Procedure. (Consolidated Joint Appellants' Appendix ("JA") (ECF Nos. 12, 13, 14) 146–51.) The List identified certain attorneys who were Members of the Firm as of July 29, 2019. The bankruptcy case was converted to a case under Chapter 7 of the Bankruptcy Code on October 4, 2019, and, as a result, the ESH List became part of the Chapter 7 proceeding. See infra Section IV.B.2. The United States Trustee appointed Lynn L. Tavenner (the "Trustee") as the Chapter 7 Trustee of the Firm's bankruptcy estate. (Trustee's Appendix ("TA") (ECF No. 17) 25.)
Immediately after her appointment, the Trustee began using the List to file taxation documents for the Estate. Due to the tax burdens imposed by membership on the List, Appellant Gary D. LeClair ("LeClair") and other List-members sought amendment of the List by the Trustee. When the Trustee declined, the Trustee sought authorization of her continued use of the List by the Bankruptcy Court; in response, LeClair sought amendment of the List by the court, requesting that he be removed from the List. Other Appellants later moved the Bankruptcy Court to join LeClair's Motion, also seeking removal of their names from the List to avoid List-membership's taxation consequences.
The Bankruptcy Court issued two orders on April 22, 2022 (JA 862) and April 28, 2022 (JA 865). The court first denied LeClair's Motion to Amend Debtor's Equity Security Holders List Pursuant to Bankruptcy Rule 1009(a) ("Motion to Amend") (JA 410).1 The second Order granted the Trustee's Motion for an Order Approving (I) The Trustee's Reliance on Debtor's List of Equity Security Holders and (II) Procedures for Obtaining Copies of Filed Tax Returns and Memorandum in Support Thereof ("Motion to Authorize") (JA 152). LeClair and certain former attorneys of the Firm2 (collectively, "Appellants") filed notices of appeal to this Court, challenging these two Orders, which the Court consolidated into this action.3 In these appeals, Appellants challenge the Bankruptcy Court's ability to grant the Motion to Authorize on jurisdictional grounds, as well as the Bankruptcy Court's interpretations of LeClairRyan's Operating Agreement (JA 211) and July 29, 2019 Resolution (JA 296).
As discussed below, the Court holds that the Bankruptcy Court correctly granted the Trustee's Motion to Authorize and properly denied both Appellant's Motion to Amend and the Motions for Joinder. Accordingly, the Court AFFIRMS IN PART the Bankruptcy Court's Order granting the Trustee's Motion to Authorize, but REVERSES IN PART to the extent that the Bankruptcy Court improperly ruled that the Trustee may rely on future revisions of the ESH List, as that aspect of the Bankruptcy Court's ruling constituted an improper advisory opinion. The Court further AFFIRMS the Bankruptcy Court's Order denying LeClair's Motion to Amend and accompanying Motions for Joinder.
Founded in 1988, LeClairRyan PLLC was a national law firm with twenty-five offices around the country. (TA 3.) At its peak, the Firm employed approximately 385 attorneys, including around 160 shareholders, and represented thousands of clients. (TA 3.) In 2018, the Firm converted from a professional corporation to a Virginia professional limited liability company. (TA 42.) In doing so, it adopted the Fourth Amended and Restated Shareholders Agreement of LeClairRyan, A Professional Corporation and Operating Agreement of LeClairRyan PLLC ("Operating Agreement"). (JA 211.) This Agreement governed the Firm's operations thereafter.
The Operating Agreement, dated February 28, 2018, controls the present appeal, as it governed throughout the time period at issue. The Agreement defines who is a Member of LeClairRyan and when, if at all, this Membership terminates; when and how Members can vote, and on what; and how and when the Firm could be dissolved. The relevant Sections are as follows: Article I, Section 1.01 "Certain Definitions" and Section 1.02 "Interpretation"; Article II, Section 2.02 "Purchase of Section 2.02 Common and Section 2.02 Preferred Upon Termination of Employment"; Article V, Section 5.03 "No Withdrawal"; Article IX, Section 9.08 "Authority and Rights of Members; Member Meetings"; and Article XI, Section 11.01 "Events of Dissolution" and Section 11.02 "Effectiveness of Dissolution."4
On July 29, 2019, a meeting of the Members of LeClairRyan occurred. (JA 297.) Following a vote of the majority of the Members present and voting, the Members adopted the LeClairRyan PLLC Resolution of Members (the "Resolution" or the "Dissolution Resolution"), which "[resolved], that the Firm shall be dissolved, consistent with the provisions hereof and upon the Effective [D]ate established by the Dissolution Committee[.]" (JA 297.) The Resolution also established the Dissolution Committee5 and empowered them, on behalf of the Firm, to take actions to liquidate and dissolve the Firm. (JA 297.) Following the meeting, the Dissolution Committee managed the Firm and began to effectuate a wind-up of the Firm's business. (TA 3.) During this time, all Appellants terminated their employment with the Firm, either in July or August 2019.6
(Opening Brief of Appellants ("App. Brief 1") (ECF No. 10) at 3.) As of September 1, 2019, LeClairRyan employed none of the Appellants.
On September 3, 2019, Lori D. Thompson, as Chair of the Dissolution Committee on behalf of LeClairRyan PLLC, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which allows for reorganization of a bankruptcy estate. (JA 135.) On September 17, 2019, pursuant to Federal Rule of Bankruptcy Procedure 1007(a)(3), the Debtor-Firm filed a List of Equity Security Holders. (JA 146.) The ESH List contains the names of forty-three attorneys, including but not limited to Appellants, who "were the members of LeClairRyan PLLC as of July 29, 2019, which is the date the members resolved to dissolve the firm[.]" (JA 146.)
On October 4, 2019, the Debtor-Firm converted the case to a Chapter 7 liquidation case. (TA 25.) Since October 4, 2019, the Trustee has served as the Chapter 7 Trustee for the LeClairRyan bankruptcy estate (the "Estate"). (TA 25.) As of the conversion date, the Trustee became custodian of the Firm's books and records and received authorization to operate certain aspects of the Firm's business to effectuate an orderly liquidation. (Appellee's/Trustee's Brief ("Tr. Brief") (ECF No. 16) at 4.) These operations included computation and payment of the Estate's taxes, pursuant to 26 U.S.C. § 1398. (Tr. Brief at 4.)
Immediately following her appointment as the Chapter 7 Trustee, the Trustee assumed responsibility for "an IRS audit, a Form 550 filing deadline in 11 days (with no requisite 401(k) plan audit having been completed), a 401(k) plan that had to be otherwise addressed, and relevant books and records that needed to be identified and quickly compiled to address these (among other) items." (Tr. Brief at 5.) Additionally, the Trustee received inquiries from former Firm attorneys regarding their Schedule K-l's ("K-1") for 2019.7 (Tr. Brief at 5.) Following discussions with the Office of the United States Trustee and utilizing accounting firms Keiter, Stephens, Hurst, Gary & Shreaves, PC ("Keiter") — LeClairRyan's accountants for its 2018 tax reporting — and Strickland & Co., as well as independent contractors, the Trustee provided Keiter with the ESH List to file the Estate's...
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