Jeffery A. Deller, United States Bankruptcy Judge.
Samir Hadeed, M.D. and Johnstown Heart and Vascular Center, Inc. (collectively, the "Movants") have moved to dismiss the above captioned bankruptcy case. Among the reasons averred for dismissal is the contention that this chapter 11 filing is an ultra vires filing due to lack of consent by the owners of the "Majority Interest" of the units in the Debtor (which is a limited liability company).
The United States Supreme Court long ago opined that with respect to corporations, the entity vested with "the power of management" has the requisite authority to file a bankruptcy petition.
The question before the Court is whether it was proper for the Debtor to file the instant bankruptcy case when one of its equity holders— Johnstown Heart and Vascular Center, Inc. ("
The Debtor and JHVC do not dispute that the governance of the Debtor is set forth in the corporate document entitled: Advanced Vascular Resources of Johnstown, LLC Operating Agreement (the "
Specifically, Section 4.1 of the Operating Agreement assigns the "full power and authority . . . to manage the business and affairs of [the Debtor] to the "Manager," which in-turn is initially defined as AVR Management, LLC.
Section 4.1 places certain limitations on the power and authority of the Debtor's "Manager." That is, Section 4.1 of the Operating Agreement sets forth instances where the "Manager" lacks authority to act on behalf of the Debtor "without first obtaining written approval of the holders
One instance where the Manager lacks the capacity to act without the express written consent of the holders of the "Majority Interest of the Class A Units" is when the "Manager" desires to:
The term "Majority Interest" is defined in the Operating Agreement as being "Class A Members that, taken together, hold more than sixty six percent (66%) of the aggregate of all Percentage Interests of Class A Members entitled to act or vote on such matter."
In turn, a "Class A Member" is defined in the Operating Agreement as a "Person admitted as a Class A member and identified as a Class A member on
Schedule I to the Operating Agreement lists as "Class A Members" both Advanced Vascular Resources, LLC and JHVC. Schedule I further indicates that JHVC holds a Class A interest in the amount of fifty-five percent (55%) and that Advanced Vascular Resources, LLC holds a forty-five percent (45%) interest. Consistent with the ratable portion of their respective interests, Schedule I states that the "Number of Units Purchased/Awarded" to JHVC is 55,000 and the number awarded to Advanced Vascular Resources, LLC is 45,000.
Relying upon this equity structure, JHVC contends that the Debtor lacked the requisite authority to commence the instant bankruptcy case because JHVC never consented to the bankruptcy filing and never ratified it. Specifically, JHVC contends that absent JHVC's express written consent, the Debtor's bankruptcy filing is ultra vires due to the Debtor's failure to obtain approval from the Debtor's "Majority Interest" holders pursuant to § 4.1.6 of the Operating Agreement.
The alleged Debtor does not dispute JHVC's construction of the Operating Agreement generally. Instead, the Debtor contends that JHVC does not hold a 55% Class A Membership interest in the Debtor. Rather, the Debtor contends that JHVC holds a mere 3% interest and that Advanced Vascular Resources, LLC holds a 97% interest.
In support of its efforts to re-allocate member interests, the alleged Debtor further concedes that Schedule I reflects a 55% membership allocation to JHVC, but nonetheless argues that Schedule I "is not reflective of the parties' intent and with other provisions of the Operating Agreement."
More particularly, the Debtor argues that a "Counterpart Signature Page" to the Operating Agreement contemplates that JHVC was required to make an initial payment or capital contribution of $480,000 as a pre-requisite to it obtaining its 55% interest. This "Counterpart Signature Page" states, in pertinent part, as follows:
The Debtor contends that JHVC only contributed a mere $36,000 upon execution
Turning to the plain language of the Operating Agreement, Section 10.6 of the agreement provides that "[a]ll questions concerning the construction, validity and interpretation" of the Operating Agreement, with the exception of the non-compete provisions, are governed by Delaware law. Id. at p. 27.
Delaware follows the objective theory of contract.
Although the law of contract generally strives to enforce agreements in accord with their makers' intent, the objective theory considers "objective acts (words, acts and context)" the best evidence of that intent.
In addition, unambiguous written agreements should be enforced according to their terms, without using extrinsic evidence "to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity."
A court should not conclude that a contract is ambiguous merely because the parties disagree about its proper interpretation. Whether a contract is ambiguous is determined according to an objective, reasonable-person standard and is a question of law.
Thus, in order for the Operating Agreement to be rendered ambiguous as argued by the Debtor, it must first be objectively reasonable to read the Operating Agreement as making the allocation to JHVC of a 55% Class A Membership interest contingent on the full payment of a $480,000 capital contribution. The Court, however, does not find this to be the case.
The Court reaches this conclusion because the Operating Agreement itself makes express reference to JHVC's capital contribution of $36,000 and states unequivocally as follows at Section 5.1:
Operating Agreement at § 5.1 (emphasis added).
As this language recognizes, JHVC was permitted to contribute only $36,000 upon execution of the agreement, and the remaining sums were "deemed" by the parties to have been contributed by JHVC. These provisions are plain and unambiguous. They are also not unreasonable in light of other provisions of the Operating Agreement.
Indeed, these provisions make sense as the agreement itself provides that JHVC expressly agreed to permit Advanced Vascular Resources, LLC to have the lion's share of distributions of the company's profits until the "Recovery Date," which is the date distributions total $1.2 million. This $1.2 million figure also equals the total amount of initial aggregate capital contributions by the Debtor's members as set forth in Schedule I to the Operating Agreement. Specifically, Section 6.1.1 of the Operating Agreement provides:
In addition, the plain text of Section 3.2 of the Operating Agreement states that "[t]he Percentage Interests of each Class A Member shall be as set forth on
Furthermore, the Court's interpretation is in accord with the Debtor's prior admissions in related litigation that "[p]ursuant to the Operating Agreement, [Advanced Vascular Resources, LLC] holds a 45% ownership interest in AVR-Johnstown while JHVC holds a 55% majority interest."
Delaware law, however, commands that no extrinsic evidence may be used to "interpret the intent of the parties, to vary the terms of the contract or to create ambiguity."
Even if the Court could consider the evidence cited by the Debtor, the Court finds such evidence unconvincing. For example, JHVC did not participate in the preparation or filing of the tax documents cited by the Debtor and the Debtor's effort to impute them to JHVC does not make any sense. Rather, the Debtor's invocation of them is self-serving and unpersuasive.
For all of these reasons, the Court finds that the Debtor's bankruptcy filing is ultra vires and must be dismissed.
For purposes of completeness, the Court further notes that dismissal ordinarily results in dismissal of pending adversary proceedings that have been filed in connection with a bankruptcy case. An exception shall apply sub judice.
The record of this bankruptcy case is that a civil action in the District Court captioned as
In light of the fact that this bankruptcy case is going to be dismissed, it is appropriate that the reference be withdrawn by the District Court with respect to the Prior Pending Action so that the lawsuit may continue in that forum. Under these circumstances, an order shall be entered that: