648 B.R. 434
S.D.N.Y.2022Background
- All Year Holdings (debtor) wholly owns YGWV LLC; Weiss and YGWV are the only members of Wythe Berry Member LLC ("Member LLC").
- Weiss and YGWV executed the Member LLC Agreement (Delaware law) restricting a "Member" (defined as Weiss and YGWV) from assigning its Member LLC interest without the other member's consent; All Year is not a signatory and is identified as lender and limited third‑party beneficiary.
- All Year filed Chapter 11 and, under its plan, sought to transfer its ownership interest in YGWV (an indirect interest in Member LLC) to a plan sponsor (Paragraph); Weiss alleges that transfer violates the anti‑assignment clause and seeks injunctive/declaratory relief and control.
- Weiss asserts two theories to bind All Year: (1) alter‑ego (YGWV is All Year’s instrumentality) and (2) All Year manifested intent to be party to the Member LLC Agreement; he also contends bankruptcy automatically terminated All Year’s membership interest under NY LLC law, dissolving YGWV.
- The bankruptcy court dismissed the amended complaint on multiple independent grounds (non‑signatory not bound; alter‑ego not pleaded as producing fraud/wrong; implied covenant claim barred/duplicative; NY LLC statutes do not produce automatic termination and are preempted by the Bankruptcy Code). The district court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether All Year (non‑signatory parent) is bound by the Member LLC Agreement (via alter‑ego or manifested intent) | Weiss: All Year dominated YGWV and thus is alter ego; alternatively All Year participated in negotiations and manifested intent to be bound | All Year: contract names only Weiss and YGWV as Members; agreement expressly treats All Year as separate lender/third‑party beneficiary and negates intent to be a party; domination not shown to have been used to commit a fraud/wrong | Dismissed — All Year is not bound. Alter‑ego allegations fail because domination was not alleged to have been used to perpetrate a fraud or to affect the challenged transfer; the contract shows no intent by All Year to be a party. |
| Whether YGWV breached the Member LLC anti‑assignment clause (and thus implied covenant claim) | Weiss: transfer of All Year’s interest in YGWV effectively circumvents the restriction and violates the implied covenant to protect his economic expectations | Defendants: Section 8.1 restricts only Members (Weiss and YGWV) and addresses transfers; implied covenant cannot rewrite explicit contract terms; claims duplicate breach claim | Dismissed — YGWV not alleged to have assigned its Member LLC interest; implied covenant claim fails because contract addresses the subject and is duplicative. |
| Whether All Year’s Chapter 11 filing automatically terminated its membership interest in YGWV and dissolved YGWV under NYLLCL §§603/701 | Weiss: bankruptcy of All Year counts as an event terminating membership interest, triggering dissolution and vesting rights in Weiss | Defendants: NYLLCL does not mandate automatic termination/dissolution absent operating‑agreement language; debtor in possession remains same legal entity (Bildisco); Section 541 of the Bankruptcy Code preempts any state law that would forfeit/modifiy debtor’s interest upon filing | Dismissed — NYLLCL does not effect automatic termination/dissolution here; in any event Section 541(c) preempts a state rule that would terminate or forfeit the debtor’s membership interest upon filing. |
| Whether equitable injunctive relief can survive after substantive claims fail | Weiss: seeks injunction to stop transfer and to assume control | Defendants: injunction is a remedy, not an independent cause of action | Dismissed — injunctive counts cannot stand once substantive claims are dismissed. |
Key Cases Cited
- N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (holding a debtor‑in‑possession is not a legally distinct entity from the prepetition debtor)
- Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002) (non‑signatory parent cannot be sued for subsidiary’s contract breach absent clear intent to be bound)
- Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911 (Del. 2021) (the implied covenant of good faith is a narrow, extraordinary remedy and cannot be used to rewrite explicit contract terms)
- N.Y. State Elec. & Gas Corp. v. FirstEnergy Corp., 766 F.3d 212 (2d Cir. 2014) (parent/subsidiary liability and veil‑piercing principles under New York law)
- In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019) (Bankruptcy Code broadly preempts conflicting state creditor‑rights laws)
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (Section 541(c) can preempt contractual/state provisions that forfeit/modify debtor’s property interest upon bankruptcy)
- Mirage Entm't, Inc. v. FEG Entretenimientos S.A., 326 F. Supp. 3d 26 (S.D.N.Y. 2018) (breach of contract, standing alone, is generally not the sort of fraud/wrong to support an alter‑ego veil piercing claim)
- Chamison v. HealthTrust Inc., 735 A.2d 912 (Del. Ch. 1999) (reciting that an implied covenant of good faith exists but is narrowly applied)