Sheehan v. Warner (In re Warner)

• Decision Date: 27 September 2012
• Docket Number: Bankruptcy No. 1:10–bk–888.,Adversary No. 1:12–ap–35.
• Citation: 480 B.R. 641
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re Benjamin F. WARNER, Debtor. Martin P. Sheehan, Chapter 7 trustee, Plaintiff, v. Karl K. Warner, Elizabeth A. Warner, Kristian E. Warner, Sr., Andrew M. Warner, Monroe P. Warner, and George B. Warner, Sr., Defendants.

480 B.R. 641

In re Benjamin F. WARNER, Debtor.Martin P. Sheehan, Chapter 7 trustee, Plaintiff,

v.Karl K. Warner, Elizabeth A. Warner, Kristian E. Warner, Sr., Andrew M. Warner, Monroe P. Warner, and George B. Warner, Sr., Defendants.

Bankruptcy No. 1:10–bk–888.

Adversary No. 1:12–ap–35.

United States Bankruptcy Court, N.D. West Virginia.

Sept. 27, 2012.

Martin P. Sheehan, Sheehan and Nugent PLLC, Wheeling, WV, for Plaintiff.

Edward R. Kohout, Law Office of Edward R. Kohout, Morgantown, WV, for Defendants.

MEMORANDUM OPINION

PATRICK M. FLATLEY, Bankruptcy Judge.

Martin P. Sheehan, the Chapter 7 trustee (the “Trustee”) for the bankruptcy estate of Benjamin F. Warner (the “Debtor”), requests entry of summary judgment on his adversary complaint against George B. Warner, Sr., Karl K. Warner, Elizabeth A. Warner, Kristian E. Warner, Sr., Andrew M. Warner, and Monroe P. Warner (“Defendants”). The Trustee seeks a declaration that McCoy Farm, LLC, (“McCoy Farm”) is dissolved pursuant to its operating agreement, and a writ of mandamus for the manager of McCoy Farm to liquidate the company or the appointment of a receiver to proceed with liquidation.

On June 1, 2012, the court conducted a status hearing on the Trustee's motion for summary judgment in Wheeling, West Virginia. After receiving post-hearing briefing the court took the matter under advisement. For the reasons stated herein, the court denies the Trustee's motion for summary judgment.

I. BACKGROUND

In December 2002, McCoy Farm acquired its only asset: George Warner, Sr., conveyed to McCoy Farm all of his right, title and interest in real property consisting of approximately 141.37 surface acres and 157.81 acres of oil and gas located in Barbour County, West Virginia. The land contains a family lodge, farmhouse, small cottage, and a mobile home. According to McCoy Farm's First Amended and Restated Operating Agreement (“Operating Agreement”), dated November 15, 2003, George Warner, Sr., is the named manager,¹ and the company's ownership is divided up into twelve membership units. Accompanying the Operating Agreement is the Schedule of Members, Contributions and Interest, which indicates that the Debtor, Karl, Andrew, Monroe, Kristian, and George Warner, Jr., each hold two membership units. George Warner, Jr., died in 2004 and the remaining members gave their written consent for his surviving spouse, Elizabeth Warner, to inherit his two membership units. Thus, each Defendant holds two membership units—a one-sixth interest in McCoy Farm.

In 2006, the Debtor and some of his brothers needed capital funds to invest in business enterprises located in Morgantown, West Virginia. Because they did not have enough capital to secure bank financing,they approached Karl Warner to inquire about a loan. He agreed to lend them $500,000 of his life savings. By December 2008, Karl Warner became concerned about repayment and asked his brothers to transfer to him their membership units in McCoy Farm as security for the loan. The brothers orally agreed to transfer the units in December 2008 and again on March 25, 2009; the oral agreements were eventually put in writing on January 19, 2010.

About three months later, on April 22, 2010, the Debtor filed his Chapter 7 bankruptcy petition. Soon thereafter the Trustee brought an adversary proceeding in this court against Karl Warner to recover the transfer of the Debtor's membership units in McCoy Farm. This court determined that the Operating Agreement expressly forbade the transfer of the Debtor's interest. ²Sheehan v. Warner (In re Warner), Case No. 10–100, 2011 WL 3510736, at *4 (Bankr.N.D.W.Va. July 1, 2011). The Trustee then sought a declaration that the Debtor's interest in McCoy Farm was property of the bankruptcy estate. After this court held that all of the Debtor's interest, however classified, was property of his estate under 11 U.S.C. § 541(a), Sheehan v. Warner (In re Warner), Case No. 10–100, slip. op. at 4 (Bankr.N.D.W.Va. Nov. 29, 2011), the Trustee contacted the Defendants and sought liquidation of McCoy Farm; the Defendants rejected the Trustee's request.

On December 2, 2011, the Trustee filed a complaint in the District Court for the Northern District of West Virginia, seeking, among other things, a declaration that the Operating Agreement requires the dissolution of McCoy Farm. The district court found that it had subject matter jurisdiction to hear the proceeding and then referred it to this court.³ This court held a telephonic status conference on June 1, 2012 to take up the Defendants' second motion to dismiss and the Trustee's motion for summary judgment. At the hearing, the court expressed concern over whether the Trustee may force dissolution of McCoy Farm under the Operating Agreement.The court gave the parties an opportunity to file post-hearing hearing briefing to address the court's concerns.

II. STANDARD OF REVIEW

Federal Rule of Civil Procedure 56, made applicable by Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment is only appropriate if the movant demonstrates “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A party seeking summary judgment must make a prima facie case by showing: first, the apparent absence of any genuine dispute of material fact; and second, the movant's entitlement to judgment as a matter of law on the basis of undisputed facts. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The movant bears the burden of proof to establish that there is no genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Showing an absence of any genuine dispute as to any material fact satisfies this burden. Id. at 323, 106 S.Ct. 2548. Material facts are those necessary to establish the elements of the cause of action. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Thus, the existence of a factual dispute is material—thereby precluding summary judgment—only if the disputed fact is determinative of the outcome under applicable law. Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.1994). “Disposition by summary judgment is appropriate ... where the record as a whole could not lead a rational trier of fact to find for the non-movant.” Williams v. Griffin, 952 F.2d 820, 823 (4th Cir.1991) (citation omitted); see also Anderson, 477 U.S. at 248, 106 S.Ct. 2505.

If the moving party satisfies this burden, the nonmoving party must set forth specific facts that demonstrate the existence of a genuine dispute of fact for trial. Celotex Corp., 477 U.S. at 322–23, 106 S.Ct. 2548. The court is required to view the facts and draw reasonable inferences in the light most favorable to the nonmoving party. Shaw, 13 F.3d at 798. However, the court's role is not “to weigh the evidence and determine the truth of the matter [but to] determine whether there is a need for a trial.” Anderson, 477 U.S. at 249–50, 106 S.Ct. 2505. Nor should the court make credibility determinations. Sosebee v. Murphy, 797 F.2d 179, 182 (4th Cir.1986). If no genuine issue of material fact exists, the court has a duty to prevent claims and defenses not supported in fact from proceeding to trial. Celotex Corp., 477 U.S. at 317, 323–24, 106 S.Ct. 2548.

III. DISCUSSION

The Trustee argues that the Debtor's bankruptcy was an event of dissolution under the terms of the Operating Agreement and that either a writ of mandamus should be issued to the manager of McCoy Farm to liquidate the company, or a receiver should be appointed to dissolve the company. The Trustee draws support from two provisions in the Operating Agreement: Section 10(a)(ii) provides that McCoy Farm “shall be dissolved upon the occurrence of any of the following events: ... (ii) upon the death, retirement, withdrawal, expulsion, bankruptcy or dissolution of a Member ...”; and § 10(c) which states that “the dissolution of the Company shall be effective on the date on which the event occurs giving rise to such dissolution.... [A] manager, or (in the absence of a manager) a liquidator ... shall liquidate the assets of the Company, apply and distribute the proceeds thereof....”

The Defendants contend that McCoy Farm has not dissolved because the remaining members met in December 2011 and agreed to continue the company in accordance with § 10(b) of the Operating Agreement. Section 10(b) states:

In the event of dissolution of the Company pursuant to the events of dissolution described in Section 10a.(ii), ... [McCoy Farm] shall not be discontinued, and ... shall remain in existence ... if the remaining Members unanimously agree to continue the Company under this Agreement within sixty (60) days of such dissolution.

The Defendants allegedly agreed to continue McCoy Farm sometime “between July 1–10, 2011” and memorialized this resolution (“Resolution”) on December 17, 2011.⁴ In this Resolution, all the members except the Debtor agree, among other things, that the Debtor is dissociated and “shall have no right to participate in the business of the company” and that McCoy Farm shall continue to operate and remain in existence.

The enforceability of the Defendants' Resolution is potentially dispositive because, if enforceable, McCoy Farm would not dissolve and the Trustee's rights would be relegated to those of a disassociated member. The Defendants' Resolution, however, suffers from two fatal infirmities which render it invalid insofar as it seeks to disassociate the Debtor and avoid dissolution of McCoy Farm.

First, the Defendants attempt to disassociate the Debtor violates the automatic stay. See In the Matter of Daugherty Const., Inc., 188 B.R. 607, 615 (Bankr.D.Neb.1995) (concluding that LLC members voting post-petition to remove the debtor as manager and approving a new manager are actions that amount to “exercise of control over property of the estate and in violation of the...