In re E. End Dev., LLC

• Decision Date: 30 April 2013
• Docket Number: No. 812–76181–reg.,812–76181–reg.
• Citation: 491 B.R. 633
• Parties: In re EAST END DEVELOPMENT, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

491 B.R. 633

In re EAST END DEVELOPMENT, LLC, Debtor.

No. 812–76181–reg.

United States Bankruptcy Court,

E.D. New York.

April 30, 2013.

Joseph Charles Corneau, Tracy L. Klestadt, Klestadt & Winters, LLP, New York, NY, for Debtor.

Memorandum Decision

ROBERT E. GROSSMAN, Bankruptcy Judge.

Before the Court is a motion (“Motion”) by 21 West Water Street Holdings, Inc. (“21 West”) to dismiss the Chapter 11 petition filed by East End Development LLC (the “Debtor”). 21 West, a fifty percent interest holder of the Debtor, claims that MM Sag Harbor LLC (“MM Sag Harbor”), acting as the managing member of the Debtor, lacked the requisite authority to file a petition in bankruptcy without the consent of 21 West, and in the alternative that the petition should be dismissed as a bad faith filing pursuant to 11 U.S.C. § 1112(b). MM Sag Harbor takes the position that the petition was not filed in bad faith, and the Operating Agreement gives the managing member the authority to file a bankruptcy petition without the prior consent of 21 West. Several creditors claiming to have mechanic's liens on the Debtor's property have joined the request for dismissal of the Debtor's petition on the basis that the petition was filed without proper authority, and that this is a bad faith filing.

Based on a reading of the Operating Agreement and a review of applicable law, the Court concludes that as the managing member, MM Sag Harbor had full authority to file the subject petition. Although the Operating Agreement does contain some inconsistencies, it does not grant explicit authority to the managing member to file for bankruptcy relief, the Operating Agreement vests MM Sag Harbor with broad powers to manage the Debtor's operations. There are very few exceptions to this expansive grant of authority. These exceptions include commencing dissolution proceedings, winding up the Debtorand liquidating the Debtor. The act of filing for bankruptcy relief is not among the enumerated events requiring the consent of 21 West. The Court must decide whether to accept the Operating Agreement as drafted without grafting on additional restrictions or powers, or read the Operating Agreement in a manner to include a restriction on the filing of a bankruptcy petition as an additional event requiring the consent of the movant. This Court does not believe it is within its power to amend the language of the Operating Agreement, which provides a comprehensive recitation of the parties' rights and responsibilities. To do so would arbitrarily limit the full rights granted to the managing member and would be inconsistent with the express terms of the Operating Agreement. The Court also finds insufficient evidence of bad faith to dismiss the Debtor's petition. The failure to obtain the consent of 21 West prior to filing the petition did not violate the Operating Agreement, and although the members of MM Sag Harbor and the lender stand to benefit from the bankruptcy, this does not establish bad faith on the part of the Debtor as a matter of law. The Debtor was in financial distress at the time the petition was filed, and the Debtor has filed a proposed plan that attempts to satisfy the claims of the Debtor's creditors. The internecine disagreements between the members of the Debtor that arose prepetition are not relevant to this analysis and do not constitute cause to dismiss this case.

Facts

The Debtor is a New York Limited Liability Company comprised of two members; MM Sag Harbor (the “Managing Member”) which holds a 50% interest in the Debtor, and 21 West, which holds the other 50% interest. The Debtor's management and operations are governed by the Operating Agreement dated June 8, 2006, and effective as of October 17, 2005. The Debtor's business consists of owning and developing certain real property located in Sag Harbor, New York into a 19 unit luxury residential condominium building (the “Property”). Prepetition, Amalgamated Bank, as trustee of Longview Ultra Construction Loan Investment Fund (“Amalgamated”) extended loans in the aggregate approximate amount of $32,061,312.41. The loans are secured by three mortgages consisting of a project mortgage, a senior mortgage and a building mortgage. The Debtor defaulted under the loan obligations to Amalgamated, and Amalgamated commenced a foreclosure action against the Debtor on August 18, 2011. The Debtor and Amalgamated engaged in discussions to restructure the obligations, which were unsuccessful. Thereafter, by letter dated April 4, 2012, counsel for the Debtor advised counsel for 21 West that the Debtor intended to file for bankruptcy. On October 12, 2012, the Debtor filed the petition for relief under Chapter 11. The Corporate Resolution annexed to the petition indicates that a meeting of the managers of the Debtor was held on October 12, 2012, and that the Debtor authorized Emil Talel, as one of the managing members of MM Sag Harbor, to execute the documents and take any action necessary in connection with the filing. Nicola Tuosto and Paul Fiore, the two members of 21 West, were served with notice of the bankruptcy at their last known address according to the books and records of the Debtor.

The Operating Agreement contains a series of provisions related to the Managing Member's authority to act on behalf of the Debtor. Section 4.1 provides:

Unless otherwise expressly provided in this Agreement or required by law, the Members shall not have the right to vote on any matter and agree that the Managing Member shall make all decisions on behalf of, and with respect to, the [Debtor] and its business; however, in its sole discretion, the Managing Member may submit any matter to the vote of all of the Members.

Section 5.4 provides that subject to Section 5.4 of the Operating Agreement and other provisions of the Operating Agreement, the Managing Member shall manage the “business and affairs” of the Debtor and shall “have all necessary powers to carry out the business of the [Debtor].” The Managing Member's powers include, but are not limited to, the power to cause the Debtor to acquire, own, operate, manage, develop, maintain, the Debtor's assets, to sell the condominium units “or otherwise sell all or any part of the Properties and other ... Assets of the [Debtor] ... upon such terms and conditions as the Managing Member from time to time may determine”, the power “to bring or defend, settle, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the [Debtor]”, and the power “to perform any and all acts it deems necessary or appropriate for the protection and preservation of the [Debtor's assets and property].”

Section 5.5 of the Operating Agreement provides that “[e]xcept as expressly provided in this Agreement, the consent of the Members shall not be required for any actions to be taken or decision to be made by the Managing Member, on behalf of the [Debtor].” The Operating Agreement does not specifically address bankruptcy but contains the following relevant language, which restricts the Managing Member's authority:

5.4(b) The [Debtor] shall have all powers necessary or advisable, convenient, incidental or appropriate for the accomplishment of the [Debtor's] purposes set forth above, including all powers which may be exercised by the Members on behalf of the [Debtor] pursuant to, and subject to the terms of, this Agreement.

Notwithstanding any of the foregoing, the consent of a Majority of the Membership Interests ¹ shall be required for any of the following actions by the [Debtor];

1. Any agreement to be entered into by the [Debtor] with the Managing Member or any person or entity affiliated in anyway [sic] with the Managing Member;

2. Any action to dissolve, wind-up, or liquidate the [Debtor], except as set forth in Article XII herein;

3. Any action to cause the [Debtor] to merge, consolidate or acquire substantially all the assets of another person or entity;

4. Any action to permit the [Debtor] to admit any new Member unless such action does not result in a dilution of the Member's Percentage Interest.

The Operating Agreement also provides that the consent of the majority of the members is required for incurring marketing expenses, or any borrowing after the initial construction loan. How 21 West's consent is to be manifested is not specified in the Operating Agreement.

Article XII concerns the termination and dissolution of the Debtor, and does not include any reference to the filing of a petition in bankruptcy by the Debtor. Pursuant to Article XII, termination and dissolution of the Debtor are triggered by certain enumerated events, or upon the consent of a majority in interest of the members. The Debtor is to be liquidated, and the proceeds are to be distributed pursuant to the scheme set forth in the Operating Agreement.

Section 15.2 of the Operating Agreement provides as follows:

In no event shall any Person dealing with the Managing Member or their representatives with respect to any property of the [Debtor] be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expediency of any act or action of the Managing Member or their representatives, and every contract, agreement, deed, mortgage, promissory note, or other instrument or document executed by the Managing Member with respect to any property of the [Debtor] shall be conclusive evidence in favor of any and every person relying thereon or claiming thereunder that (i) at the time of the execution and/or delivery thereof, this Agreement was in full force and effect; (ii) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement; and (iii) the Managing Member executing the same or his or her representative was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the [Debtor].

In the...