Catalyst Lifestyles Sport Resort, LLC v. Sherrard

Decision Date22 May 2019
Docket NumberCAUSE NO. 2:18-CV-302-HAB
PartiesCATALYST LIFESTYLES SPORT RESORT, LLC, Appellant, v. JOSH SHERRARD, TODD THOMAE, And CITY OF PORTAGE DEPARTMENT OF REDEVELOPMENT, Appellees.
CourtU.S. District Court — Northern District of Indiana

Appeal from the United States Bankruptcy Court Northern District of Indiana Hammond Division

Case No. 17-23131

Hon. James R. Ahler

OPINION AND ORDER

This matter comes as an appeal from the United States Bankruptcy Court for the Northern District of Indiana's Order Dismissing Case (ECF No. 4 at 365) entered on July 26, 2018 (the "Order"). Appellant Catalyst Lifestyles Sport Resort, LLC ("Catalyst") filed its Appellant's Brief (ECF No. 8) on October 16, 2018. Appellees Josh Sherrard ("Sherrard") and Todd Thomae ("Thomae") filed their Appellee's [sic] Brief (ECF No. 9) on November 16, 2018. Appellee City of Portage Department of Redevelopment ("Portage") filed its Brief of Appellee (ECF No. 11) on November 16, 2018.

The issue before the Court is whether Catalyst's operating agreement required the approval of 75% of the membership interests before bankruptcy could be filed on behalf of the LLC. For the reasons set forth below, the Order will be affirmed.

FACTUAL BACKGROUND

Catalyst is an Indiana limited liability company formed on May 5, 2015. Catalyst is a member-managed LLC, and at all relevant times had three managers: Tony Czapla ("Czapla"), Thomae, and Sherrard. The managers were also the members of the LLC. Czalpa held fifty percent of the membership interests, with Thomae and Sherrard holding the remaining fifty percent. As part of the formation of the LLC, the members executed the Operating Agreement of Catalyst Lifestyles Sport Resort, LLC (ECF No. 10-4 at 6-37) on May 12, 2015 (the "Operating Agreement").

Several provisions of the Operating Agreement have become the focus of this appeal. Those provisions are:

5.1 Management. The business and affairs of the Company shall be managed by its Managers. The Managers shall direct, manage and control the business of the Company. Except for situations in which the approval of the Members is expressly required by this Operating Agreement or by non-waivable provisions of the Act1, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business. At any time when there is more than one Manager, any one Manager may take any action permitted to be taken by the Managers, unless the approval of more than one of the Mangers is expressly required pursuant to this Operating Agreement or the Act.

* * *

5.3 Certain Powers of Managers. Without limiting the generality of Section 5.012, the Managers shall have power and authority, on behalf of the Company:

* * *

(f) Upon the affirmative vote of the members holding at least 75% of all Percentage Interests3, to sell or otherwise dispose of all or substantially all of the assets of the Company as part of a single transaction or plan as long as such disposition is not in violation of or a cause of a default under any other agreement to which the Company may be bound;

* * *

(h) To employ accountants, legal counsel, managing agents or other experts to perform services for the Company;
(i) To enter into any and all other agreements on behalf of the Company, in such forms as the Managers may approve;

* * *

6.4 Approval of Sale of All Assets. The Members shall have the right, by the affirmative vote of the members holding at least 75% of all Percentage Interests, to approve the sale, exchange or other disposition of all, or substantially all, of the Company's assets which is to occur as part of a single transaction or plan.

(Operating Agreement at 5, 6, 9; ECF No. 10-4 at 13, 14, 17). The Operating Agreement was drafted by Attorney Ben Hughes ("Hughes") as part of a "LLC kit," which included checking name availability, filing, and other services. It is unclear what, if any, involvement Czalpa, Thomae, and Sherrard had in the drafting of the Operating Agreement. Czalpa testified that he only had a "brief conversation" with Hughes in which Czalpa shared his address and the proper spelling of his last name. (ECF No. 4 at 305). There is no evidence from Thomae or Sherrard regarding their interactions with Hughes.

Catalyst was not a successful business. This appears to be due, at least in part, to conflict between and among Czalpa, Thomae, and Sherrard. This conflict would eventually result in a flurry of court filings. On April 20, 2017, Czalpa filed a Petition for Emergency Injunction to Enforce Operating Agreement Under Indiana Code § 23-18-4-7 (the "Injunction Petition") in the Porter Circuit Court. The main issue in the Injunction Petition was Czalpa's allegation that he was improperly removed from Catalyst's bank accounts. On August 31, 2017, Thomae filed a Petition for Judicial Dissolution of Limited Liability Company and Appointment of a Receiver (the "Dissolution Petition") in the same Porter Circuit Court action. The Dissolution Petition alleged, generally, that Catalyst was insolvent and could no longer operate because Czalpa refused to work with Catalyst's other managers.

On October 25, 2017, Czalpa executed "Certified Resolutions" for Catalyst "in accordance with the authority granted each member to bind the entity as granted in Article 5.1 of the Operating Agreement." (ECF No. 4 at 151). The Certified Resolutions appointed T. Clifford Fleming ("Fleming") as Chief Restructuring Officer of Catalyst. Fleming's sole purpose in his new role was to file Chapter 11 bankruptcy on behalf of Catalyst. Catalyst's Voluntary Petition for Non-Individuals Filing for Bankruptcy (the "Bankruptcy Petition") was filed the same day as Fleming's appointment.

On November 13, 2017, Thomae and Sherrard filed their Motion to Dismiss Chapter 11 Case. Essentially, the motion argued that Thomae and Sherrard had not authorized the filing of the Bankruptcy Petition and Czalpa had no authority to file it on his own. Therefore, Catalyst lacked "corporate authority" to file for bankruptcy, and the Bankruptcy Petition should be dismissed. Portage filed a Joinder in Motion to Dismiss Chapter 11 Case on November 17, 2017, adopting Thomae and Sherrard's arguments. Catalyst filed its Response and Objection to Motion to Dismiss Chapter 11 Case, also on November 17, 2017. The Court notes that Catalyst's Response and Objection is substantively identical to the Appellant's Brief filed in this Court, albeit the Appellant's Brief omits a section from the Response and Objection addressing the Rooker-Feldman doctrine and collateral estoppel. (ECF No. 4 at 54-59).

The Bankruptcy Court held an evidentiary hearing on the Motion to Dismiss on January 23, 2018. Czalpa, Thomae, and Sherrard all testified at the hearing, primarily addressing the dysfunction in Catalyst's management. The Bankruptcy Court held another hearing on July 26, 2018, where it read its opinion granting the Motion to Dismiss into the record. The Bankruptcy Court never committed its opinion to writing, leaving the transcript of that hearing as the onlymemorialization of the Bankruptcy Court's rationale. An Order Dismissing Case was entered by the Bankruptcy Court the same day.

LEGAL DISCUSSION

A. STANDARD OF REVIEW

In reviewing a bankruptcy court's decision pursuant to 28 U.S.C. § 158(a), the district court functions as an appellate court and is authorized to affirm, reverse, modify, or remand the bankruptcy court's ruling. Fed. R. Bankr. P. 8013. The standard for review of bankruptcy court decisions depends upon the issue being reviewed. Findings of fact are upheld unless clearly erroneous, but legal conclusions are reviewed de novo. Id.; In re Marrs-Winn, 103 F.3d 584, 589 (7th Cir. 1996). Dismissals of bankruptcy petitions are reviewed for an abuse of discretion. In re Hall, 304 F.3d 743, 746 (7th Cir. 2002).

In reviewing for abuse of discretion, the district court can only reverse where a bankruptcy court's "decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." In re KMart Corp., 381 F.3d 709, 713 (7th Cir. 2004); see also Corp. Assets, Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir. 2004). Whether this Court agrees with the bankruptcy judge's decision is beside the point as long as the decision is within the range of options from which one would expect a reasonable trial judge to select. Liu v. Price Waterhouse LLP, 302 F.3d 749, 754 (7th Cir. 2002). An abuse of discretion occurs only when no reasonable person could take the view adopted by the trial court. United States v. Torres, 807 F.3d 257, 261 (7th Cir. 2015).

B. THOMAE AND SHERRARD'S CLAIMS OF WAIVER

In Section V. of their Appellee's [sic] Brief, Thomae and Sherrard ask this Court to summarily affirm the Bankruptcy Court in light of Catalyst's failure to file an appendix in violationof Fed. R. Bank. P. 8018(b). Thomae and Sherrard further assert that Catalyst's arguments are "perfunctory, undeveloped and not supported by pertinent case authority," and thus claim all of Catalyst's arguments on appeal have been waived. (ECF No. 9 at 19-21). The Court rejects these arguments.

Addressing the appendix issue first, a district court has the authority to summarily affirm a bankruptcy court's judgment as a sanction for serious non-jurisdictional, procedural defects. See Telesphere Commc'ns, Inc. v. 900 Unlimited, Inc., 177 F.3d 612, 616-17 (7th Cir. 1999) (affirming summary dismissal of bankruptcy appeal where counsel failed to timely file appellate brief); In re Bulic, 997 F.2d 299, 301-03 (7th Cir. 1993) (upholding dismissal of bankruptcy appeal for failure to designate record within required deadline); In re Morrissey, 349 F.3d 1187, 1189-91 (9th...

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