The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
Utilizing provisions of the New York Limited Liability Company Law, a bankruptcy court in the Eastern District of New York (the Court) granted a chapter 11 liquidating trustee’s motion to appoint co-trustees to liquidate the assets of LLCs in which the deceased debtor was a managing member. The co-managing member of the LLCs had also died. In re Maidan, 2023 WL 2190228 (Bankr. E.D. NY February 23, 2023).
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Debtor Michael Maidan was a real estate developer and did business as either the sole member of, or held financial interests in, several limited liability companies (LLCs). He filed a chapter 11 in late 2019 and died in March 2020. His son took over administration of the chapter 11 and the bankruptcy court confirmed the estate’s liquidating plan in March 2021. The confirmed plan established a liquidating trust for the benefit of the class of unsecured creditors, with a Liquidating Trustee vested with authority to liquidate assets of the estate. Among those assets were the debtor’s interests in three LLCs called (collectively) the East End Ventures.
The debtor had been one of two managing members of the East End Ventures, which he co-owned with Emil Talel, also deceased. The East End Ventures held a 40% interest in another LLC, Sag Harbor Development; the remaining member was a different LLC, JAB SH Holdings (JAB), controlled by Jay Bialsky. Sag Harbor was developing property, and the Liquidating Trustee deemed the estate’s interest in that property to be the largest asset of the chapter 11 estate. Therefore, the Liquidating Trustee filed a motion which requested the bankruptcy court to appoint him and the executor of Talel’s estate as liquidating trustees of the East End Ventures LLCs in order to monetize that interest. The Talel executor supported that appointment.
Bialsky opposed the motion, asserting among other things that the bankruptcy court lacked jurisdiction to make such appointment under New York LLC law. The bankruptcy court ruled that Bialsky lacked standing to object and that it had jurisdiction to make the appointment. Therefore, it granted the motion.
First, the Court analyzed whether Bialsky, as a member of JAB, had constitutional and prudential standing and concluded he did not. To establish constitutional standing, a party must demonstrate that he suffered an injury in fact that is concrete, particularized, and actual or imminent; that the injury was likely caused by the defendant; and that the injury would be redressed by judicial relief. Transunion LLC v. Ramirez, 141 S. Ct. 2190, 2203 (2021). The Court concluded that Bialsky had presented no evidence to establish his alleged harm caused by the appointment. He therefore failed to have constitutional standing. Prudential standing requires litigants to assert their own legal rights, not the legal rights of a third party. Here, the only conceivable harm would be to JAB, the co-venturer in Sag Harbor and a third party, not Bialsky. Bialsky also lacked prudential standing.
The Court then addressed its own jurisdiction and authority to appoint liquidating trustees of the LLCs. As to the bankruptcy court’s general authority to monetize the LLC interests, the answer was straight-forward. Those interests were property of the estate under Bankruptcy Code § 541(a) since the debtor owned them on the petition date. The assets were valuable and the Liquidating Trustee was tasked with monetizing all estate property for distribution to the class of unsecured creditors. With regard to its authority to appoint the Talel executor as co-trustee for the LLCs, the Court found that his consent was sufficient.
The trickier query was whether New York LLC law allowed a bankruptcy court to appoint trustees to liquidate an LLC formed under those laws. The Court first determined that the East End Ventures were “in dissolution” under the provisions of the operating agreements. Those agreements stated that upon the death of the managing members, as had occurred here, the LLCs were automatically “in dissolution.” At that point the statutes intervened, because NY LLCL § 703(a) vests exclusive authority to appoint a liquidating trustee in the New York State Supreme Court in the proper judicial district. To clear that hurdle, the Court cited a case with similar facts about being “in dissolution,” In re Futterman, 584 B.R. 609, 624 (Bankr. S.D.N.Y. 2018), for its holding that “[i]n such a dissolution, the [bankruptcy court] may appoint a liquidating trustee or a receiver but it is not required to do so.” The Court did not explain or analyze the Futterman reasoning to skirt the words of the statute other than it was in the same judicial district as the applicable Supreme Court. For further support, the Court then referenced cases in Delaware and Virginia which had similar language vesting power in a state trial court to appoint a liquidating trustee when dissolution was mandated. In those instances, the bankruptcy courts had also found the right to use the powers accorded to the state courts. The Court acknowledged that, in two of the matters, pertinent state court dissolution proceedings had been removed to the bankruptcy court but ruled that was a distinction without a difference.
Finding the necessary cause to appoint liquidating trustees under NY LLC law, the Court granted the motion and made the appointments.
A few years ago, while still on the bench, I was on a panel that talked about the intersection between LLC laws and bankruptcy. My particular subject matter was what might happen if a chapter 7 debtor held interests, management or economic or both, in LLCs and how a trustee could monetize those assets to pay creditors. To prepare for the program, I read every published case I could find on the subject and noted diverging rulings. One major difference was the approach of the trustees, whether they treated the interests as an asset or instead exercised the rights of a hypothetical lien creditor. Those distinct approaches caused some of the variation in rulings, as well as whether the interest was that of a manager or was only economic. Since that time, I have also followed the topic in reported cases. Until now I was not aware that any bankruptcy court thought that it could usurp powers granted by statute to a particular state court. Therefore, I found this opinion surprising, as well as the authority it cites (which obviously my research skills missed). Quite frankly, I doubt that bankruptcy courts have the jurisdictional powers they assumed in these cases. Perhaps they have the power upon removal, but not otherwise. An appeal here is not likely, because the lack of standing was correctly decided and an appellate court would dismiss for that reason. But I will be on the lookout for any appellate court weighing in on this issue.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.