Chapter 11 Bankruptcy Case: DB Capital Holdings v. Aspen HH Ventures

In DB Capital Holdings, LLC v. Aspen HH Ventures, LLC , the Tenth Circuit Bankruptcy Appellate Panel (BAP), was considered whether a manager of a limited liability company (LLC) had authority to file Chapter 11 on the debtor’s behalf though the LLC operating agreement prohibited it from doing so. The BAP said No and dismissed the bankruptcy case. DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), 2010 Bankr. LEXIS 4176 (B.A.P. 10th Cir. Dec. 6, 2010).   

Background Facts

The debtor was a Colorado LLC manager-operated to develop and sell a luxury condominium in Aspen, Colorado. The project belonged to the debtor, the two members of the LLC, Aspen HH Ventures, LLC (Aspen) and Dancing Bear Development, LC (DB Development).  The LLC members agreed to grant management authority to the general partner of DB Development, Dancing Bear Management, LLC (Manager). The Manager was owned solely by Tom DiVenere, who became the de facto project manager. The Operating Agreement, dated January 2006, by and between Aspen and DB Development, governed the debtor’s operation. The Operating Agreement was amended in May 2006. The May amendment barred the LLC from filing for bankruptcy.

Bankruptcy Filing

As of February 2010, the debtor defaulted on its loans, facing foreclosure or bankruptcy. In March 2010, the lender requested a Colorado state court to appoint a receiver to take charge of, maintain, and protect the condominium project. In May 2010, Aspen intervened and filed a cross complaint to dissolve the debtor. On May 27, 2010, the Manager, without consent from its two members, filed a Chapter 11 bankruptcy petition on behalf of the debtor. DiVenere signed the petition as an “authorized individual” with the title “Member-Manager of Manager.” Aspen filed a motion to dismiss the Chapter 11 case, alleging the Manager had filed the petition without authorization and in bad faith. The bankruptcy court granted Aspen’s motion to dismiss, finding that the Operating Agreement as amended precluded the Manager from filing for bankruptcy on the debtor’s behalf. The matter was appealed by the debtor to the BAP.

Motion to Dismiss

The BAP began its analysis by noting that a bankruptcy case filed on behalf of an entity without authority under state law to act for that entity is improper and must be dismissed. The BAP explained that, in the case at hand, Colorado state law governed as mandated by a choice of law provision in the Operating Agreement. The BAP then looked to the Limited Liability Company Act, which governs LLCs under Colorado state law, and noted that it provides that an operating agreement governs the rights and duties of an LLC’s members and managers. As such, the BAP turned its attention to the Operating Agreement, as amended by the May Amendment.

Argument

The BAP explained that if the entire May Amendment was unenforceable, the Operating Agreement precluded the Manager from filing bankruptcy for the debtor. The BAP agreed with the bankruptcy court that the Operating Agreement did not authorize the Manager to commence a bankruptcy.  Rather, the rights and powers set forth in the Operating Agreement pertained to the Manager’s management of the affairs of the business in the ordinary course. A contractual grant of any power required or that was appropriate to the management of the business would not necessarily include authority to petition for bankruptcy on the company’s behalf, even without a restrictive provision. The filing of a Chapter 11 proceeding represents a departure from how any entity carries on business outside of bankruptcy.  A LLC’s operating agreement can prohibit a bankruptcy filing and reinforces the right of parties to contract for such terms.