590 B.R. 689
Bankr. W.D. Pa.2018Background
- Debtor: Advanced Vascular Resources of Johnstown, LLC (an LLC) filed a Chapter 11 case; Movants Samir Hadeed, M.D. and Johnstown Heart and Vascular Center, Inc. (JHVC) moved to dismiss.
- Operating Agreement vests management in a "Manager" (AVR Management, LLC) but §4.1.6 requires written approval of holders of a "Majority Interest of the Class A Units" before commencing bankruptcy or similar proceedings.
- Schedule I of the Operating Agreement lists JHVC as holding 55% of Class A units (55,000 units) and Advanced Vascular Resources, LLC (AVR) 45% (45,000 units); "Majority Interest" is defined as >66% of Class A voting percentage.
- Debtor argued Schedule I is inconsistent with other provisions and extrinsic documents (a counterpart signature page and K-1s), claiming JHVC paid only $36,000 and thus holds only 3% (or at most 40%) rather than 55%.
- Court applied Delaware contract law (objective theory): Operating Agreement explicitly lists JHVC's percentage on Schedule I, §5.1 acknowledges a $36,000 payment with the remainder "deemed" contributed, and §3.2 states percentage interests are as on Schedule I, so Schedule I governs.
- Conclusion/procedure: Court held the bankruptcy filing was unauthorized (ultra vires) because JHVC did not consent; case dismissed, stayed 14 days to allow the District Court to withdraw the reference to a related pending action.
Issues
| Issue | Plaintiff's Argument (Movants) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether the Chapter 11 filing was authorized under the Operating Agreement | JHVC: filing required written approval of "Majority Interest" holders under §4.1.6; JHVC did not consent, so filing is ultra vires | Debtor: Manager had authority; JHVC did not hold a 55% Class A interest and thus its non-consent is immaterial | Filing was unauthorized; dismissal granted because §4.1.6 required consent and JHVC holds 55% per the Agreement |
| Proper allocation of Class A Percentage Interests (55% v. 3% claim) | JHVC: Schedule I governs; it shows 55% membership for JHVC | Debtor: Schedule I inconsistent with other provisions and counterpart page; JHVC paid only $36,000 so its interest is only 3% (or different) | Court enforces Schedule I and §3.2; the Agreement unambiguously gives JHVC a 55% interest; extrinsic evidence barred |
| Admissibility of extrinsic/parol evidence (tax K-1s, counterpart page) | JHVC: Agreement is controlling; extrinsic evidence cannot vary clear terms | Debtor: extrinsic documents show parties' intent and actual contributions, supporting reallocation | Under Delaware law, unambiguous contract terms control; parol/extrinsic evidence inadmissible to vary clear terms; Debtor’s evidence unpersuasive |
| Effect on related adversary/proceeding reference | Movants sought dismissal and continuation of related District Court action | Debtor sought to keep matters in bankruptcy forum | Court dismissed bankruptcy but stayed dismissal 14 days to permit District Court to withdraw the reference of the pending civil action |
Key Cases Cited
- Price v. Gurney, 324 U.S. 100 (bankruptcy filing requires authority of entity vested with management power)
- In re NNN 123 N. Wacker, LLC, 510 B.R. 854 (Bankr. N.D. Ill.) (unauthorized corporate bankruptcy filings warrant dismissal)
- In re Avalon Hotel Partners, LLC, 302 B.R. 377 (Bankr. D. Or.) (same principle applied to LLCs)
- MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204 (3d Cir.) (parol evidence inadmissible to vary unambiguous contract terms)
- Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del.) (unambiguous written agreements enforced as written)
- Haft v. Haft, 671 A.2d 413 (Del. Ch.) (Delaware follows objective theory of contract)