Han v. Official Committee of Unsecured Creditors (In Re Kang)
664 F. App'x 336
| 4th Cir. | 2016Background
- Grand Centreville, LLC was formed to own a shopping center; its ownership chain was Grand Centreville <- Grand Equity (99.5%) <- Grand Development (owned by Debtors Min and Mik Kang).
- A 2005 Deed of Trust and the 2005 Operating Agreement (incorporating deed restrictions) limited transfers of more than 49% and prohibited certain encumbrances and out-of-course debts to protect the lender.
- Grand Equity and Grand Development were administratively canceled in 2008 for failure to pay fees; under Va. law their interests passed to the Kangs as trustees in liquidation.
- In March 2009 the Kangs purported to sell 60% of their interests in Grand Centreville/Grand Formation to Yeon Han and James Sohn and issued a secured promissory note — transactions that violated the 2005 Operating Agreement.
- The Debtors filed Chapter 11 in 2010; the Chapter 11 Trustee (Yancey) sued to declare the 2009 Sale void. The bankruptcy court and district court held the 2005 Operating Agreement effective and the 2009 Sale null and void; this appeal followed.
Issues
| Issue | Plaintiff's Argument (Han) | Defendant's Argument (Trustee/Yancey) | Held |
|---|---|---|---|
| Standing to sue to void the 2009 Sale | Trustee lacks standing because Debtors only held interests in intermediary LLCs (Grand Equity/Grand Development), not directly in Grand Centreville | When intermediary LLCs were canceled, their interests passed to the Kangs as trustees in liquidation; Trustee steps into Debtors' shoes and has standing | Trustee has standing under Va. Code §13.1-1050.2(c); standing affirmed |
| Validity/effectiveness of the 2005 Operating Agreement | 2005 Operating Agreement ineffective because it listed Ronnie Kim as a member though he never agreed | Membership requires assent; Kim testified he never was a member, so his nonconsent does not invalidate the agreement | 2005 Operating Agreement effective despite Kim's inclusion; agreement became effective without him |
| Legal effect of violating the Operating Agreement | Violations render the transaction voidable only; equitable defenses (e.g., estoppel) may apply | Violations exceed authority conferred by the operating agreement and are ultra vires; such transfers are null and void as without legal effect | Transactions breaching the operating agreement are null and void, not merely voidable |
| Availability of equitable defenses (estoppel) | Han may invoke estoppel or other defenses because operating agreements are agreements among members | Operating agreements bind parties and grant rights to third parties as specified; parties cannot validate ultra vires transfers by estoppel when transaction was designed to evade restrictions | Equitable defenses rejected; estoppel not available to validate the void transfer |
Key Cases Cited
- In re Jenkins, 784 F.3d 230 (4th Cir. 2015) (standard of appellate review for bankruptcy decisions)
- Steyr-Daimler-Puch of Am. Corp. v. Pappas, 852 F.2d 132 (4th Cir. 1988) (trustee can assert debtor and creditor rights as defined by state law)
- Mission Residential, LLC v. Triple Net Props., LLC, 654 S.E.2d 888 (Va. 2008) (operating agreements bind parties and can grant rights to nonparties)
- Kapila v. Deutsche Bank AG (In re Louis J. Pearlman Enters., Inc.), 398 B.R. 59 (Bankr. M.D. Fla. 2008) (purported transfers violating an operating agreement are void)
- Kinwood Capital Grp. v. BankPlus (In re Northlake Dev., LLC), 643 F.3d 448 (5th Cir. 2011) (unauthorized transfers by an LLC agent are void and of no legal effect)