Gencanna Acquisition Corp. v. 101 Enters. (In re Oggusa, Inc.)
| Docket Number | 20-50133,ADV. 23-5036 |
| Decision Date | 31 August 2023 |
| Parties | IN RE OGGUSA, INC. DEBTOR v. 101 ENTERPRISES, LLC, ET AL. DEFENDANTS GENCANNA ACQUISITION CORP. PLAINTIFF |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Kentucky |
1
IN RE OGGUSA, INC. DEBTOR
GENCANNA ACQUISITION CORP. PLAINTIFF
v.
101 ENTERPRISES, LLC, ET AL. DEFENDANTS
No. 20-50133
ADV. No. 23-5036
United States Bankruptcy Court, E.D. Kentucky, Lexington Division
August 31, 2023
MEMORANDUM OPINION
The Debtor GenCanna Global, USA owned a 50% interest in 4274 Colby, LLC, a Kentucky limited liability company (the "Company"). The Plaintiff GenCanna Acquisition Corp. acquired the Debtor's interest in the Company in a bankruptcy sale of substantially all the Debtor's assets. Defendant 101 Enterprises, LLC owns the other 50% interest in the Company. Defendant William Hilliard was a co-manager of the Company and Defendants Kevin Murray and Gregory F. Martini own some or all of 101 Enterprises.
The Plaintiff initiated this adversary proceeding seeking, among other things, a declaratory judgment that it acquired a Member's governance and economic rights when it purchased the Debtor's interest in the Company. [ECF No. 1 (Count 1).] The Defendants concede the Plaintiff purchased an economic right to profits. But they argue the Plaintiff did not acquire the Debtor's governance rights based on application of Kentucky law and the terms of the Company's Operating Agreement.
The Plaintiff and Defendants filed cross-motions for summary judgment on Count 1. [ECF Nos. 10, 29, 31, 32.] A hearing was held on August 8, 2023, and the matter was submitted.
[ECF Nos. 36, 37.] The Plaintiff acquired the Debtor's Interest in the Company subject to the terms of the Operating Agreement, which limits transfers without the consent of the other Member. 101 Enterprises has not consented to admit the Plaintiff as Member, so the Defendants' motion for summary judgment is granted and the Plaintiff's motion for summary judgment is denied.
I. Background.
A. Formation of 4274 Colby, LLC.
The Debtor and 101 Enterprises formed the Company to own real property and improvements at 4274 and 4330 Colby Road, Winchester, Kentucky. The Company leased the land and a building to the Debtor for use in its business (the "Lease").
The relationship between the Debtor and 101 Enterprises is described in the Company's Operating Agreement dated May 30, 2015. [ECF No. 10-2.] The Operating Agreement defines a "Member" as "each Person who initially acquired a Company Interest from the Company pursuant to this Agreement and each Person hereafter admitted to the Company as a Member as provided in this Agreement, but does not include any Person who has ceased to be a Member." A "Company Interest" or "Interest"
means the interests of a Member or an assignee who is not admitted as a Member in the Company, including the right to any and all benefits to which such Member or assignee may be entitled in accordance with this Agreement and the Act [K.R.S. § 275.001 et seq.], and the obligations as provided in this Agreement and the Act
The Operating Agreement refers to "Interest Holders" as Members and assignees of Interests in the Company who are not admitted as Members.
The Operating Agreement recognizes the Debtor and 101 Enterprises as initial Members. The various provisions of the Operating Agreement give the Members the right to manage the
Company and share in its profits. [See id., § 6.1, Art. 4.] The Operating Agreement does not, however, allow the Members to freely transfer their Company Interests.
Section 5.3 of the Operating Agreement is titled Restriction on Transfer of Interests. Section 5.3 begins, "The parties have agreed that it is not desirable that any of the Company Interests be sold or transferred because the Members desire to provide for continuity of management of the Company." The section then provides that "no third-party becomes a Member or the holder of a Company Interest without consent of the Members holding at least seventy-five percent (75%) of the Interests". If consent is not given, the transfer is deemed void.
But an Interest Holder that receives an offer to purchase may sell its Company Interest pursuant to Section 5.3(b), provided the Company and other Interest Holders do not exercise their right of first refusal. Transfer of the Debtor's Company Interest was not an issue because 101 Enterprises acknowledged it did not object to the transfer of the Company Interest; the Plaintiff could become an Interest Holder but not a Member. [Id., ECF No. 809.]
Admission of a new Member is governed by Section 5.5 of the Operating Agreement. Section 5.5(b) requires compliance with the consent requirement in Section 5.3(a). 101 Enterprises has not consented to Plaintiff's admission as a Member and has claimed the role of sole Member since the sale. [See ECF No. 1 (Complaint), Ex. E (December 2, 2020 resolution of members executed only by 101 Enterprises and claiming it is the sole member in the recitals); Ex. G (the signature line of the marketing agreement refers only to 101 Enterprises as a Member); Ex. P (October 10, 2022, resolution of members appointing new two managers claiming 101 Enterprises is the sole Member).]
B. The Bankruptcy and Sale.
Three petitioning creditors filed an involuntary chapter 11 bankruptcy petition for the Debtor on January 24, 2020. [Case No. 20-50133, ECF No. 1.] The Debtor consented to the filing and the order for relief was entered on February 6, 2020. [Id., ECF No. 94.] The Debtor then filed schedules that included its interest in, and dealings with, the Company. [Id., ECF No. 246 (Schedules A/B: Assets - Real and Personal Property included the 50% ownership stake in the Company and the Lease; Schedule G: Executory Contracts and Unexpired Leases disclosed the Lease).]
The Debtor quickly established a structured sale process for substantially all assets. [Id., ECF No. 304.] The Debtor listed the Operating Agreement and Lease as contracts it might assume and assign under 11 U.S.C. § 365. [Id., ECF No. 490.] The Debtor scheduled a cure amount of $0 for each. [Id.]
The sale procedures set April 14, 2020, as the deadline to object to the cure amounts and April 21, 2020, for other objections to the assumption and assignment of the agreements. [Id.] The Company objected to the cure amount on April 10, 2020. [Id., ECF No. 566.] 101 Enterprises also objected to the cure amount on April 10, but the objection was signed by Defendant Hilliard as Manager and not by legal counsel. [Id., ECF No. 561.] So, 101 Enterprises was ordered to obtain counsel, or the objection was overruled. [Id., ECF Nos. 561, 568.]
On April 27, 2020, the Debtor filed (i) a notice that MGG Investment Group, LP was the successful bidder and (ii) the assignment and assumption cure schedule for the draft Asset Purchase Agreement that still listed the Operating Agreement and Lease at $0. [Id., ECF Nos. 682-83.] Both the Company and 101 Enterprises filed objections to the proposed sale and
revised cure notice on April 28, 2020. [Id., ECF Nos. 696-97.] The Company reiterated its objection to the cure amount. [Id., ECF No. 697.] 101 Enterprises, now acting through counsel, renewed its cure amount objection and opposed the transfer of the Debtor's rights as a Member without its consent. [Id., ECF Nos. 696, 809 (collectively, the "101 Enterprises Objection").]
A sale hearing was held on May 6-7, 2020, and the sale was approved. [Id., ECF Nos. 806-808, 814-815.] The order approving the sale was entered on May 19, 2020. [Id., ECF No. 850 (the "Sale Order").] The closing of the sale to the Plaintiff, the designee of MGG Investments, occurred on May 29, 2020. [See id., ECF No. 889.] The Debtor confirmed a reorganization plan on November 11, 2020. [Id., ECF Nos. 1496, 1517.]
C. The Adversary Proceeding.
The Plaintiff filed the Complaint on March 29, 2023, and the Defendants timely answered. [ECF Nos. 1, 5.] Count 1 seeks a declaration that the Plaintiff is a Member of the Company pursuant to the bankruptcy sale (i.e., both membership and economic rights). [ECF No. 1.] Counts 2-5 assert breach of fiduciary duty claims against the individual Defendants and 101 Enterprises. [Id.] These counts allege the Defendants are acting solely for the benefit of the owners of 101 Enterprises, which impairs the profits of the Interest Holders. [Id.]
The Defendants moved for withdrawal of the reference, which was denied by the United States District Court for the Eastern District of Kentucky. [ECF Nos. 8, 28.] The Defendants' motion to abstain was denied without prejudice. [ECF Nos. 12, 27.] Counts 2-5 are stayed pending a decision on Count 1. [Id.]
II. Summary Judgment Standard.
Summary judgment is only appropriate if there is no genuine issue of material fact. Fed.R.Civ.P. 56 (incorporated by Fed.R.Bankr.P. 7056). Cross-motions for summary judgment
are considered separately on their merits. Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800-01 (B.A.P. 6th Cir. 2007). Each movant has the burden to show no genuine issue of material fact exists and they are entitled to judgment as a matter of law. Id.
The parties rely on the bankruptcy record, including the Sale Order and the sale documents, the Company's Operating Agreement, and state and federal law to support their cross-motions for summary judgment. There are no disputed facts and summary judgment on Count 1 is appropriate.
III. The Plaintiff is Not A Member in the Company.
A. The Debtor's Interest in the Company Was Property of the Debtor's Estate.
The Debtor's interest in the Company was property of the estate. 11 U.S.C. § 541(a) ("[A]ll legal and equitable interests" in prepetition property are assets of a debtor's estate.). This includes both the Debtor's governance rights and its economic right to profits as a Member of the Company.
101 Enterprises argues the Debtor only owned an economic interest because that is all Kentucky law recognizes as an asset for an interest in a limited liability company. 101 Enterprises arrives at this...
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