Validity of Bankruptcy Filing Upheld

Validity of Bankruptcy Filing Upheld

In a recent decision from the Bankruptcy Court for the Southern District of New York, the bankruptcy petition filed on behalf of a North Carolina organized LLC, that petition being authorized by the manager of the LLC, was affirmed. In re: The Northwest Company, Case No. 20-10990 (MEW), 2020 WL 2121269 (Bankr. S.D.N.Y. May 1, 2020).

The Northwest Company, LLC, organized in North Carolina, was a manager-managed LLC for which Ross Auerbach served as the manager. After he placed the company in bankruptcy, a member, Extreme Horse Limited, asserted that the bankruptcy petition was not properly authorized and that the case should be dismissed. Extreme Horse made essentially two arguments as to why the petition was invalid, namely (i) while the manager of a North Carolina LLC may act with respect to matters in the ordinary course, the manager could not act with respect to extraordinary matters such as filing a bankruptcy petition, and (ii) a bankruptcy filing constitutes effectively a transfer of all or substantially all of the LLCs assets, and under North Carolina law that transaction requires the unanimous approval of the members and that approval was here lacking. Both of these arguments were considered in detail and rejected by the Northwest Company Court.

With respect to the argument that the manager of the North Carolina organized LLC is restricted to acting to matters in the ordinary course, the court reviewed the statute, and found no such limitation. Rather:

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.  2020 WL 2121269, *1.

With respect to the second allegation, namely that the bankruptcy constituted a transfer of all or substantially all LLC assets, and under the North Carolina LLC act that requires the consent of all members, the court determined that the filing for bankruptcy is not a transfer of assets. Continuing this analysis, the court considered the creation of the bankruptcy estate and a significant number of opinions of various bankruptcy courts around the country and as well a variety of decisions with respect to on-site number of decisions interpreting the North Carolina LLC Act. After a careful exposition of those decisions, the Court concluded: 

Based on the language of the Bankruptcy Code, the Supreme Court’s decision in [NLRB v. Bildisco & Bildisco, 460 5U. S. 513 (1984)], and the many other authorities I have cited above, I hold that the contention that the mere filing of a Chapter 11 petition and the creation of a Chapter 11 estate automatically amounts to a transfer or a disposition of substantially all of the debt towards that property for purposes of other laws is simply wrong, particularly where the debtor continues as a debtor-in-possession and continues to exercise dominion and control over its businesses and properties. Id., *4.

Extreme Horse would also make something akin to a “substance over form” argument, alleging that the purpose of the bankruptcy filing “is to complete a sale of assets.” The court found, inter alia, that that question was not before it. Rather:

That the [bankruptcy] filing itself did not accomplish such a sale or transfer, and even if a sale is contemplated (or planned, or expected, or likely) it is not a foregone conclusion, and it is not an outcome that irrevocably follows from the bankruptcy filing itself. The issue before me is whether the filing was authorized. Whether the Debtor does or does not need unanimous consent in order to propose a sale is not an issue that is before me today. Id., *5.