In re Nw. Co.

• Decision Date: 01 May 2020
• Docket Number: Case No. 20-10990 (MEW)
• Parties: In re: THE NORTHWEST COMPANY, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

In re: THE NORTHWEST COMPANY,¹ Debtor.

Case No. 20-10990 (MEW)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

May 1, 2020

Chapter 11

Jointly Administered

BENCH DECISION DENYING MOTION TO DISMISS

APPEARANCES:

SILLS CUMMIS & GROSS P.C.

One Riverfront Plaza

Newark, NJ, 07102

Attorneys for Debtors

By: Jason Teele

Gregory Kopacz

BROWN RUDNICK

Seven Times Square

New York, NY 10036

Attorneys for Movant Extreme Horse Limited

By: Robert Stark

Uriel Pinelo

Sigmund Wissner-Gross

OFFICE OF THE UNITED STATES TRUSTEE

201 Varick Street

New York, NY 10014

By: Shannon Scott

HONORABLE MICHAEL E. WILES UNITED STATES BANKRUPTCY JUDGE

This is the final version of the Court's decision with respect to a motion to dismiss filed by Extreme Horse Limited. It is based on a bench decision that I dictated in open court on April23, 2020. This official and final version of the decision has been edited to correct errors in transcription and some inadvertent errors that I made in the course of my dictation.

Debtor The Northwest Company, LLC is a limited liability company formed under the laws of the State of North Carolina. Extreme Horse Limited is listed in the Debtor's filings as an owner of the some of the Debtor's limited liability company interests. Extreme Horse contends that the bankruptcy filing for The Northwest Company, LLC was not properly authorized as a matter of North Carolina Law and that the case therefore should be dismissed.

Certain matters are not in dispute. The Articles of Organization for the Northwest Company LLC are available on the website maintained by the Secretary of State for the State of North Carolina. I have retrieved them and take judicial notice of them. The Articles of Organization provide that the Northwest Company LLC is a manager-managed LLC and is not a member-managed LLC. I have confirmed with the parties this morning that they agree that this is correct. I have also retrieved the annual reports filed with the State of North Carolina by The Northwest Company LLC. They all state that Ross Auerbach is the manager of the company. The parties agree that Ross Auerbach is the manager, and there is no contention that there are any other managers.

The parties dispute whether or not there is a separate operating agreement that supplements or amends the Articles of Organization for The Northwest Company, LLC. I do not need to reach that point, because I think that even if the objector, Extreme Horse, were correct, and even if there were no separate operating agreement, the bankruptcy filing nevertheless was authorized as a matter of North Carolina law.

In a manager-managed limited liability company the designated manager or managers have the authority to act on behalf of the company, subject only to limits set forth in the statuteor in an operating agreement. For purposes of Extreme Horse's argument here, I will assume without deciding that there was no separate operating agreement and that the Articles of Organization are the only governing document.

Extreme Horse argues that under North Carolina law the manager of a limited liability company can only take actions in the ordinary course of business. I believe that is a misstatement of North Carolina law. The North Carolina statute says generally that the manager or managers have the authority to act for the entity. See N.C. Gen. Stat. § 57D-3-20(a). There is nothing in that section that limits a manager's authority to matters done in the ordinary course of business. The North Carolina statute separately lists certain items that can only be done with the consent of all members, and I will review that in a moment. But otherwise the manager can act on behalf of the limited liability company as a matter of North Carolina law.

Extreme Horse has cited to the decision in In re Cabernet Holdings, LLC, No. 10-50602C, 2010 WL 2540116 (Bankr. M.D.N.C. June 21, 2010), in support of its contention. However, in the Cabernet Holdings case the relevant operating agreement said that each member would be a manager, and that the managers could delegate responsibility "for day-to-day management" to an individual member. Id. at *1. The court's discussion in Cabernet Holdings of the "day-to-day management" restriction was in the context of what that particular operating agreement said. Id. at *2. The court did not hold that as a general matter of North Carolina law managers can only handle ordinary course of business transactions.

Section 57D-3-03 of the North Carolina statute lists matters for which the approval of "all members" is required. This is the only place where I found any reference to matters done in the ordinary course of business. Subpart (3) states that the approval of all members is required if "[o]ther than in the ordinary course of business" there is a "transfer" in one transaction or aseries of related transactions of "all or substantially all" of the assets of the limited liability company prior to the dissolution of the limited liability company. N.C. Gen. Stat. § 57D-3-03. Extreme Horse contends that this "transfer" provision applies to a bankruptcy filing. I do not believe that is correct either as a matter of bankruptcy law or as a matter of North Carolina law.

Section 541 of the bankruptcy code provides that the commencement of a bankruptcy case "creates" an estate that is comprised of most of a debtor's property, with some exceptions. See 11 U.S.C. § 541. The estate defines the property that is subject to bankruptcy jurisdiction. In a chapter 11 case, such as this one, what happens to that property - including whether it remains with the debtor - depends on what happens during the chapter 11 case. In addition, unless a trustee is appointed, the debtor remains in possession of its businesses and properties as a debtor-in-possession in a chapter 11 case. See 11 U.S.C. § 1107.

Extreme Horse has cited to a statement by the Sixth Circuit Court of Appeals in its decision in Indian Harbor Ins. Co. v. Zucker, 860 F.3d 373, 378 (6th Cir. 2017), for the proposition that a bankruptcy "estate" is a "new legal entity that is distinct from" the debtor. It is true that the Sixth Circuit Court of Appeals used those words. However, the real issue in that case was whether a liquidating trustee was the same entity as the "debtor." In that same opinion, the Sixth Circuit Court of Appeals noted that the United States Supreme Court had previously held that a debtor-in-possession in bankruptcy should not be regarded as a new and legally distinct entity. Id. at 376-77.

More particularly, the Supreme Court held in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984) that a debtor-in-possession who takes charge of an estate is not a legally distinct entity from the pre-bankruptcy debtor. The Court noted that if the debtor-in-possession were really a legally distinct entity there would be no need to give it the authority to reject contracts, becauseas a separate entity it would not be bound by those contracts in the first place. The Court therefore rejected the various analogies and metaphors that have often appeared in prior decisions, and held that "for our purposes, it is sensible to view the debtor-in-possession as the same entity which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have employed absent its bankruptcy filing." Id. at 528.

On this basis, at least one court has rejected the purported statement in the Sixth Circuit's decision in Indian Harbor to the effect that a debtor is a "new entity" when it files for Chapter 11. See In re HardRock HDD Inc., No. 17-46425, 2019 Bankr. LEXIS 1861, at *6 (E.D. Mich. June 29, 2017).

Extreme Horse has argued that it is "black letter law" that a bankruptcy filing constitutes a transfer of assets, but that is not the case. Decisions that speak of the estate as being separate from the debtor are in fact speaking metaphorically. It is true that the estate may include some property rights that would not otherwise belong to the debtor, such as a right to undo fraudulent transfers. It is also true that an estate may come under the control of somebody different from the debtor if a trustee is appointed. But there is nothing in the Bankruptcy Code itself that supports the notion that a transfer to a new legal entity takes place when an estate is created that remains under the control of a debtor-in-possession in a chapter 11 case.

It also appears from our own research that courts generally reject the contention that a bankruptcy filing itself constitutes a transfer of assets to a new entity. See, e.g., Biltmore Associates LLC v. Twin City Fire Insurance Company, 572 F.3d 663, 691 (9th Cir. 2009) (concluding that the pre-filing company and the company as debtor-in-possession in chapter 11 are the same entity for purposes of applying an insured-versus-insured exclusion); U.S. ThroughAgr. Stabilization And Conservation Service v. Gerth, 991 F.2d 1428, 1436 (8th Cir. 1993) (holding that when a debtor-in-possession assumes an executory contract, the debtor and the debtor-in-possession are the same entity for purposes of mutuality under a section 553 setoff analysis); In re Central Illinois Energy LLC, 482 B.R. 772, 791 n. 18 (Bankr. C.D. Ill. 2012), aff'd, 497 B.R. 312 (C.D. Ill. 2013) (holding that "[b]ecause a debtor in possession is, in fact, the same person or entity as the debtor, entitled to deal with its assets and enforce its property and contract rights in its own name, there is no reasoned basis for most bankruptcy purposes to consider a filing to have effected a transfer to a new or different person or entity"); In re James Cable Partners, L.P., 154 B.R. 813, 815-816 (M.D. Ga. 1993), aff'd, 27 F.3d 534 (11th Cir. 1994) (holding that the debtor in possession has contract rights upon the commencement of a bankruptcy case "without an assignment from the debtor," and thus "no real transfer occurs.")

I am aware of the decision...