KSB

Judge Karlin

BAP CO-10-046 In Re DB Capital Holdings, LLC - Document Text

FILED

U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
December 6, 2010
Blaine F. Bates

Clerk

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT

IN RE DB CAPITAL HOLDINGS,
LLC,

Debtor.

DB CAPITAL HOLDINGS, LLC,
Appellant,

v.
ASPEN HH VENTURES, LLC, and
WESTLB, AG,
Appellees.

BAP No. CO-10-046

Bankr. No. 10-23242
Chapter 11

OPINION*

Appeal from the United States Bankruptcy Courtfor the District of Colorado

Before CORNISH, Chief Judge, KARLIN, and SOMERS, Bankruptcy Judges.

KARLIN, Bankruptcy Judge.

Debtor, DB Capital Holdings, LLC (“Debtor”), appeals a bankruptcy court
order dismissing its bankruptcy case as having been filed without authorization.
We affirm.

I. APPELLATE JURISDICTION
Debtor timely filed a notice of appeal from a final order dismissing its
Chapter 11 bankruptcy petition, and no party has elected to have the district court

* This unpublished opinion may be cited for its persuasive value, but is notprecedential, except under the doctrines of law of the case, claim preclusion, andissue preclusion. 10th Cir. BAP L.R. 8018-6.

hear the appeal. Therefore, this Court has appellate jurisdiction.

II. PARTIES1
Debtor is a manager-operated Colorado limited liability company. It was
created to develop and sell a luxury condominium project in Aspen, Colorado,
known as Dancing Bear Residences - Aspen (the “Project”). Debtor has one Class
A member,2 Aspen HH Ventures, LLC (“Aspen”), and one Class B member,
Dancing Bear Development, LP (“DB Development”), a Colorado limited
partnership. The general partner of DB Development is Dancing Bear
Management, LLC (“DB Management” or “Manager”), which has no membership
or other interest in the Debtor, and is solely owned by Tom DiVenere.
Debtor is managed, pursuant to its Operating Agreement, by DB Management.

The mortgage lender on the Project is WestLB AG (“WestLB”), a German
banking corporation. Debtor defaulted on its loan agreements with WestLB,
resulting in WestLB filing a Colorado state court receivership on the Project prior
to Debtor filing its bankruptcy petition.

III. OPERATING AGREEMENT
In January 2006, Aspen and DB Development entered into an Operating
Agreement (“Original Agreement”)3 that is the principal agreement that governs

1 Although Debtor is the named party appellant to this appeal, the Courtrecognizes that this appeal is actually a dispute between Debtor’s primarymember, Aspen HH Ventures, LLC, the named appellee, and the designatedmanager of Debtor—Dancing Bear Management, LLC. Dancing BearManagement, LLC is not a named party but is essentially acting as the appellantin this matter. As a result, this decision sometimes refers to Manager, rather thanDebtor, as the party to this appeal, in an effort to clarify the parties’ actualinterests.

2 A “member” is “a person with an ownership interest in a limited liabilitycompany.” Colo. Rev. Stat. § 7-80-102(9) (West 2010).

3 The January 1, 2006 document is actually entitled Amended OperatingAgreement, indicating there was a prior agreement. For ease of reference,
however, and because no party has suggested an earlier agreement is relevant tothese proceedings, the Court will nevertheless refer to it as the Original

(continued...)

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how Debtor is managed. The “Member and Managers” of Debtor formally

amended the Original Agreement in May 2006 (“May Amendment”).4 The

Original Agreement, as modified by the May Amendment, governs whether

Manager had authority to file the Chapter 11 petition.5 The Manager contends

that the provisions of the Original Agreement gave it authority to commence

bankruptcy proceedings on Debtor’s behalf, and a provision in the May

Amendment that specifically prohibited such actions should be disregarded.

IV. BACKGROUND6
Although the Project belonged to Debtor, its members jointly agreed to

grant management authority, over both Debtor and the Project, to Manager.

Debtor and Manager are linked by Tom DiVenere, who is the sole owner of

Manager, which in turn, is the general partner of DB Development, Debtor’s

Class B member. DiVenere was the de facto Project manager.

In February 2009, the first of two condominium buildings planned for the

3 (...continued)
Agreement.

4 Debtor and Manager executed another operating agreement in March 2006that briefly superceded the Original Agreement. However, that operatingagreement was eliminated by the parties’ execution of the May Amendment,
because it specifically provides that it, together with the Original Agreement,
constitutes the entire Operating Agreement of the Debtor.

5 Although the Manager initially questioned whether the May Amendmentcould “resurrect” the Original Agreement because it had been superceded by theMarch agreement, it now concedes on appeal that the Original Agreement,
together with the May Amendment, constitute the entire Operating Agreement ofthe Debtor. See Brief for Appellant DB Capital Holdings, LLC (“Appellant’sBrief”) at 5, Point II.

6 At a hearing on June 8, 2010, the parties stipulated to the facts contained inparagraphs 1-3 of Aspen’s Motion to Dismiss, and paragraphs 1-8 of TomDiVenere’s Affidavit. Minute Entry dated June 8, 2010 in Appendix at 224. The
statements contained therein relate to the parties’ relationship to each other and tothe Project. The facts stated in this Background section are an amalgam of thestipulated facts and the parties’ briefs. Essentially, the parties do not disagree onthe factual basis for the appealed decision. Their disagreement is limited to theinterpretation of Debtor’s Operating Agreement.

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Project was completed, more than 14 months behind its scheduled completion
date, and approximately $4 million over the Project’s entire $82 million budget.
As of January 2009, Debtor had no funds to continue the Project, and was both
insolvent and in breach of its loan agreements with WestLB. Approximately one
year later, in February 2010, DiVenere notified Debtor’s Class A member, Aspen,
that Debtor had defaulted on its loans and was facing foreclosure or bankruptcy.
In March 2010, at the request of WestLB, a Colorado state court appointed a
receiver to take charge of, maintain, and protect Project property.

In May 2010, Aspen intervened in the receivership action, and filed a cross-
complaint seeking dissolution of Debtor and some other, related companies.
Shortly thereafter, Aspen requested emergency injunctive relief and immediate
appointment of a receiver in the receivership action, contending that Project files
had been seized, at DiVenere’s request, without authorization.

On May 27, 2010, the state court judge signed an order: 1) directing return
of eight boxes of files that had been removed; 2) prohibiting all parties in
possession of Debtor’s documents from transferring or destroying them; and 3)
setting the request for appointment of a receiver for a hearing on June 9, 2010.
That same date, Manager filed a Chapter 11 bankruptcy petition on behalf of
Debtor. Thomas DiVenere signed the petition as an “authorized individual” with
a title of “Member-Manager of Manager.”

Thereafter, Aspen filed a motion to dismiss the Chapter 11 case pursuant to
11 U.S.C. § 1112(b), alleging that Manager had filed the petition both without
authorization and in bad faith. Following an evidentiary hearing, the bankruptcy
court declined to address the bad faith portion of the motion to dismiss, but
nevertheless granted Aspen’s motion to dismiss, finding that the parties’
Operating Agreement precluded Manager from filing for bankruptcy on Debtor’s

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behalf.7

V. ISSUE AND STANDARD OF REVIEW
The only issue is whether or not Manager had authority to file a Chapter 11
bankruptcy petition on Debtor’s behalf. This Court reviews the grant of a motion
to dismiss de novo.8

VI. DISCUSSION
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.9 Bankruptcy courts
must look to state law to determine who has authority to commence a bankruptcy
case on behalf of a limited liability company (“LLC”) organized pursuant to state
law.10 In this case, because Section 11.9 of the Original Agreement specifies that
it shall be governed by Colorado law, the bankruptcy court correctly applied
Colorado law to the facts.

Colorado has adopted a Limited Liability Company Act (“LLC Act”), and it
governs LLCs organized in that state.11 Pursuant to the LLC Act, an operating
agreement governs the rights and duties of an LLC’s members and managers.12

7 Three days after entry of the order from which this appeal is taken, aninvoluntary Chapter 11 petition was filed by some of Debtor’s creditors. That
petition is also the subject of a motion to dismiss or suspend, filed by Aspen,
which claims that the “involuntary petition was filed as a result of the collusiveand otherwise unlawful conduct of DiVenere and the petitioning creditors.” See
Brief of Appellee Aspen HH Ventures, LLC at 4.

8 Sutton v. Utah State School for the Deaf & Blind, 173 F.3d 1226, 1236(10th Cir. 1999).

9 See In re Real Homes, LLC, 352 B.R. 221, 225 (Bankr. D. Idaho 2005) (avoluntary case may only be commenced by the filing of a petition for relief by anentity who qualifies to be a debtor, and the issue of a filer’s authority to file onbehalf of an entity must be determined by state law).

10 Price v. Gurney, 324 U.S. 100, 106 (1945).

11 Colo. Rev. Stat. §§ 7-80-101 to -1101 (West 2010).

12 Id. at § 7-80-108(1)(a) (West 2010). The LLC Act requires each member’s
(continued...)

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The parties to this appeal agree that the Original Agreement, as modified by the
May Amendment, controls the issue of Manager’s authority to file a bankruptcy
petition on Debtor’s behalf. The May Amendment specifies that the Original
Agreement, together with the May Amendment, “shall together constitute the
complete Operating Agreement” of Debtor.

Paragraph (v) on page three of that May Amendment expressly bars Debtor
from filing a bankruptcy petition, as follows:

The Company (v) to extent permitted under applicable Law, will not

institute proceedings to be adjudicated bankrupt or insolvent; or

consent to the institution of bankruptcy or insolvency proceedings

against it; or file a petition seeking, or consent to, reorganization or

relief under any applicable federal or state law relating to

bankruptcy . . . .13
Manager argues that this Court should invalidate this provision because it “was
executed at the demand, and for the sole benefit of” Debtor’s main secured
creditor, WestLB.14 For that reason, it argues, the provision is unenforceable as a
matter of public policy. In support, it cites to numerous cases holding that
contractual provisions prospectively prohibiting bankruptcy protection are
unenforceable.15

As the bankruptcy court correctly noted, however, all of the case law upon
which Manager relies for this assertion “involves a debtor’s agreement with third

(...continued)
consent to authorize an act of the LLC that is not in the ordinary course of thebusiness of the LLC, unless the operating agreement provides otherwise. Id. at
§ 7-80-401(2)(c).

cited therein.

13 May Amendment at ¶ v, in Appendix at 96.
14 Appellant’s Brief at 9.
15 See, e.g., In re Cole, 226 B.R. 647, 651-52 (9th Cir. BAP 1998), and cases

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parties to waive the benefits of bankruptcy.”16 Debtor has not cited any cases

standing for the proposition that members of an LLC cannot agree among

themselves not to file bankruptcy, and that if they do, such agreement is void as

against public policy, nor has the court located any.

In addition, Debtor does not point to any record evidence that the May

Amendment was coerced by a creditor. For that reason, the Court declines to

opine whether, under the right set of facts, an LLC’s operating agreement

containing terms coerced by a creditor would be unenforceable.

Even if the Court were to disregard the May Amendment’s express

restriction barring the filing of a bankruptcy, subsection (i) of the May

Amendment requires the manager to “conduct and operate its business as

presently conducted” (emphasis added). Filing a Chapter 11 proceeding, with the

attendant (and oftentimes expensive and time-consuming) statutory duties placed

on debtors-in-possession,17 and thus their management, essentially makes it

impossible to conduct and operate a business as it was being conducted

16 Transcript of bankruptcy court’s June 21, 2010, oral ruling (“Tr.”) at 11, ll.
21-23, in Appendix at 237.

17 In re Blue Stone Real Estate, Const. & Dev. Corp., 392 B.R. 897, 903(Bankr. M.D. Fla. 2008) (noting that “[t]he Bankruptcy Code is laden withexpress requirements of and limitations on business operations of a debtor inpossession, not to mention discretionary requirements and limitations that may beimposed by the bankruptcy court where permitted”). Further, the debtor mustperform the duties prescribed by Federal Rule of Bankruptcy Procedure 2015,
relating to keeping records, making reports, and giving notice of the case, mustexamine proofs of claims and object to the allowance of any claim that isimproper, must seek to employ professionals who are disinterested pursuant to 11

U.S.C. § 327 and Federal Rule of Bankruptcy Procedure 2014, must exerciseavoidance powers, including recovery of preferences and fraudulent transfers, andmust assume or reject executory contracts and unexpired leases pursuant to 11
U.S.C. § 365(a). And, like a trustee, the debtor in possession cannot use, sell, orlease property of the estate other than in the ordinary course of business, withoutnotice and court approval for extraordinary transactions, such as use of cashcollateral and borrowing money pursuant to 11 U.S.C. §§ 363(c)(1) and (2),
364(b), and 363(b).
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immediately before the filing of the petition.18 As the Supreme Court has
indicated, “the debtor, though left in possession by the judge, does not operate
[the business] as it did before the filing of the petition, unfettered and without
restraint.”19 To the contrary, the debtor in possession becomes a fiduciary of the
estate, holding its powers in trust for the benefit of its creditors, and is subject to
the court’s imposition of orders and duties.20

Maybe even more importantly, because Section 6.1(a) of the Original
Agreement expressly calls for the Manager to cease operating in that capacity
“upon the dissolution or bankruptcy” of Debtor, we know that Manager would no
longer be eligible to manage the LLC after a petition was filed. Because a
complete change in management is the exact opposite of “business as presently
conducted,” this portion of the parties’ agreement further buttresses the
bankruptcy court’s decision that Manager did not have authority to file this
bankruptcy without consent of both members of Debtor.

The Court also agrees with the bankruptcy court that even if the entire May
Amendment was somehow deemed unenforceable, the Original Agreement also
precludes the Manager from filing bankruptcy for Debtor when that agreement is
read as a whole, as Colorado law requires.21 Manager relies principally on the

18 See id. at 902-03 (noting that a debtor in possession operating in Chapter11 is not conducting “business as usual” during the time between thecommencement of the case and its emergence from bankruptcy as a reorganizeddebtor).

19 Case v. Los Angeles Lumber Prods. Co., Ltd., 308 U.S. 106, 125-26 (1939).

20 See In re Modern Office Supply, Inc., 28 B.R. 943, 944 (Bankr. W.D. Okla.
1983) (noting that the Bankruptcy Code and the Federal Rules of BankruptcyProcedure establish pervasive reporting and disclosure duties for the debtor inpossession).

21 Absent a contrary statutory provision, Colorado courts consider a limitedliability company’s operating agreement according to the general principles ofcontract law. Condo v. Conners, No. 09CA1130, 2010 WL 2105926, at *3 (Colo.
App. May 27, 2010, modified on denial of rh’g, Sept. 16, 2010). Further,

(continued...)

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general grant of authority in Section 6.3 of the Original Agreement for his

authority to commence a bankruptcy. It provides, in full, as follows (with

emphasis on the specific language relied on by Manager):

6.3 Rights and Powers of the Manager.
(a) The Manager shall (i) contribute his or her time, skill, energy,
advice, and experience to the management of the Company’sbusiness; (ii) determine all matters relating to the financing,
management, and operation of the assets and property of theCompany; and (iii) manage the Company. The Manager shall devotesuch time to the affairs of the Company as the Manager deemsreasonably necessary.
(b) In addition to any other rights and powers that he, she or it maypossess by law or under this Agreement, the Manager shall have allspecific rights and powers required or appropriate to themanagement of the Company business, including, but not limited to,
the following rights and powers on behalf of the Company:
(i) to cause any property owned or leased by the Company tobe held by the Company, or a nominee;
(ii) to employ, engage, or contract with unrelated andnon-affiliated persons in the operation and management of1heCompany business, on such terms and for such compensationas the Manager shall determine;
(iii) to invest and reinvest all funds available to the Company;
(iv) to borrow money for Company purposes; to mortgage,
hypothecate, pledge, enter into sale and leasebackarrangements with respect to, or otherwise give as security forsuch indebtedness, property of the Company; but only withrespect to the Senior Permitted Liens and to sell and conveytitle to, and to grant an option for the sale of, property of theCompany, as fractional ownership interests in the ordinarycourse of the Business;
(v) to acquire and enter into any contract of insurance that theManager deems necessary or appropriate for the protection ofthe Company, the conservation of its assets, or any purposeconvenient or beneficial to the Company;
(vi) to pay any and all fees and expenses incurred in the
(...continued)
Colorado courts have adopted the general principle of contract law that “languageshould be construed as a whole, and specific phrases or terms should not beinterpreted in isolation.” Rogers v. Westerman Farm Co., 29 P.3d 887, 898(Colo. 2001) (en banc).

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modification of the Company and the sale of Companyinterests therein;

(vii) to employ, when and if required, such accountants,
agents, and attorneys as the Manager may determine to benecessary from time to time; and
(viii) to execute, acknowledge, and deliver any and allinstruments to effectuate the foregoing provisions of thisparagraph.22
The bankruptcy court correctly found that Section 6.3 of the Original
Agreement does not specifically authorize Manager to commence a bankruptcy on
behalf of Debtor.23 Instead, each of these “rights and powers” pertains to
Manager’s management of the affairs of the business in the ordinary course. We
are also not persuaded that a contractual grant of any power “required or
appropriate to the management of the Company’s business” would necessarily
include authority to petition for bankruptcy on the company’s behalf, even
without a restrictive provision. Indeed, as noted earlier, the filing of a Chapter 11
bankruptcy proceeding represents a radical departure from how any entity carries
on its business outside of bankruptcy.

But even if one construes the general grant of authority to merely not
preclude such a filing, Section 6.4 of the Original Agreement then lists ten
limitations on the authority of Manager. Those limitations include the following:

(a) Notwithstanding any contrary provision of this Agreement, theManager shall have no authority without the prior written consent ofall Members to:
. . .

22 Original Agreement at 15-16, in Appendix at 142-43 (emphasis added).

23 Manager argues that the bankruptcy court determined that the OriginalAgreement also did not specifically prohibit its filing of a bankruptcy petition.
See Appellant’s Brief at 7 n.4. We disagree. The bankruptcy court simply notedthat such was Manager’s position, concluding that, “the absence of a provisionprohibiting the filing of a bankruptcy petition does not lead to a conclusion thatsuch a filing is actually permitted.” See Tr. at 9-10, ll. 24-25, 1, in Appendix at235-36. The court went on to find that contractual restrictions did, in fact,
preclude Manager’s conduct.

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(ii) do any act that would make it impossible to carry on theordinary business of the Company; [or]
. . .

(x) intentionally cause or allow the dissolution of theCompany.24
The bankruptcy court concluded, as do we, that filing a bankruptcy petition
“constitutes an act preventing the carrying on of ordinary business of the
debtor,”25 which specifically requires the consent of both members of Debtor.

Debtor argues that a Chapter 11 bankruptcy does not make it “impossible”
for a debtor to do business. We agree that a reorganization pursuant to Chapter
11 does not necessarily result in the winding up and ultimate dissolution of a
debtor’s business, although that is sometimes the case. However, this argument
ignores the express modification of the term “business” by the term “ordinary.”
We believe, as did the bankruptcy court, that the filing of a Chapter 11
bankruptcy petition is an act that makes it impossible to carry on a company’s
“ordinary business,” even though the company’s ability to continue to “do
business” is not completely eliminated.

Other courts have also reached the conclusion that placing a business into
bankruptcy does not fall within the confines of “ordinary business.” For example,
in In re Avalon Hotel Partners, LLC,26 the bankruptcy court considered whether
the manager of an LLC could file a Chapter 11 petition, despite a provision in that
debtor’s operating agreement that required member approval of “Major
Decisions.” The non-exclusive list of such decisions in the operating agreement
did not include bankruptcy filings. Nonetheless, the court noted that a “decision

24 Original Agreement at 16, in Appendix at 143.

25 Tr. at 11, ll. 15-16, in Appendix at 237. There is no dispute that Managerlacked the members’ consent to file the bankruptcy petition.

26 302 B.R. 377 (Bankr. D. Or. 2003).

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to file for bankruptcy protection is a decision outside of the ordinary course of
business, even for an entity in dissolution.”27

Similarly, In re Zaragosa Properties, Inc.28 involved dismissal of a Chapter
11 petition that had been filed on behalf of a Panamanian corporation. In that
case, the corporation had granted a principal shareholder authority, by a power of
attorney, to sign documents on its behalf, “relating to its ordinary course of
business.”29 The court concluded that “filing a Petition for Relief under Title 11
is not the ordinary course of anyone’s business.”30

VII. CONCLUSION
Pursuant to Colorado law and the parties’ Operating Agreement, Manager
did not have authority to file a petition in bankruptcy on behalf of the Debtor.
Therefore, the bankruptcy court’s order dismissing the petition is AFFIRMED.

27 Id. at 380.
28 156 B.R. 310 (Bankr. M.D. Fla. 1993).
29 Id. at 312.
30 Id. at 313. Debtor asserts that the Avalon and Zaragosa cases are

inapposite here, suggesting they involved extraordinary business decisions and amuch more limited grant of authority, respectively. See Reply Brief at 4. Instead,
Debtor relies on Amdura National Distribution Co. v. Amdura Corp. (In reAmdura Corp.), 75 F.3d 1447 (10th Cir. 1996) for the proposition that “[i]t is wellsettled that a debtor in possession under Chapter 11 is authorized to carry on itsordinary business.” Reply Brief at 3. We disagree with Debtor’s citation to thiscase for the proposition that filing bankruptcy, itself, was in the ordinary courseof that business, or that the Tenth Circuit Court of Appeals so held. Amdura, andthe other cases cited by Debtor, stand only for the proposition that a debtor inpossession is allowed to operate a business as would a trustee. See 11 U.S.C.
§§ 1107(a) and 1108. While 11 U.S.C. § 363(c)(1) allows a trustee (and thereforea debtor in possession) to enter into certain transactions “in the ordinary course ofbusiness,” unless the bankruptcy court orders otherwise, this does not mean that acompany’s entire operation within a bankruptcy case is “ordinary.”

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