555 B.R. 565
Bankr. N.D. Miss.2016Background
- Debtor Mid-South Business Associates, LLC (a Mississippi LLC) filed a voluntary Chapter 11 petition signed by Thomas L. Windham, Sr. (stated as "managing member").
- Operating Agreement (1995) allocated membership interests (later adjusted when one member transferred back his interest) and designated two managers: Thompson and Tom, who had exclusive management authority; certain major acts required a two-thirds member vote.
- Thompson (Claude S. Thompson) moved to dismiss (or convert) arguing he retained a vested membership interest and that the petition was filed without corporate authority; Tom joined the motion.
- The Debtor (via Dr. Windham and Taylor) countered that Thompson and Tom abandoned or forfeited their membership interests and/or committed fiduciary breaches, and thus lacked membership voting power.
- The court found (based on the Operating Agreement and Mississippi LLC law) that Thompson and Tom remained members with vested ownership percentages and that filing bankruptcy was an act outside the ordinary course requiring member authorization; no valid two‑thirds vote or written consent authorized the petition.
- Because Dr. Windham lacked corporate authority under Mississippi law to file on behalf of the LLC, the court concluded it lacked subject‑matter jurisdiction and dismissed the Chapter 11 case.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether petition was filed with proper corporate authority | Thompson: petition unauthorized because he and Tom remained members and managers whose consent was required | Debtor (Windham): Thompson and Tom abandoned/forfeited interests and thus lacked authority to block filing | Held: Petition unauthorized; Windham lacked authority; dismissal required |
| Whether Thompson and Tom still held vested membership interests | Thompson: membership interests vested upon formation and via Operating Agreement transfers; not lost by alleged misconduct | Debtor: alleged abandonment, tortious/illegal acts, and failure to make initial capital contributions divested them | Held: Interests vested under the Agreement; alleged misconduct/abandonment did not divest interests absent procedures not followed |
| Effect of failure to make initial capital contributions | Debtor: Thompson and Tom never became/retained members because they did not make required contributions | Thompson: contributions (or subsequent conduct) sufficed; in any event membership vested on formation | Held: Membership was not conditioned on contribution in this Agreement; issue waived by long acquiescence and conduct of members |
| Proper remedy where petition filed without authority | Thompson: dismiss or convert under §1112(b) because filing unauthorized | Debtor: sought to proceed in bankruptcy despite lack of formal authorization; suggested later cure or other remedies | Held: Lack of corporate authority means court lacks subject‑matter jurisdiction; dismissal required; state chancery remedies (judicial dissolution/receiver) remain available |
Key Cases Cited
- Price v. Gurney, 324 U.S. 100 (U.S. 1945) (a petition filed by persons without local‑law authority must be dismissed)
- Peterson v. Atlas Supply Corp., 857 F.2d 1061 (5th Cir. 1988) (delay in seeking dismissal for lack of authority can be a waiver defense)
- Hager v. Gibson, 108 F.3d 35 (4th Cir. 1997) (lack of corporate authority requires dismissal)
- Keenihan v. Heritage Press, Inc., 19 F.3d 1255 (8th Cir. 1994) (bankruptcy petition filed without corporate authority mandates dismissal)
- In re Arkco Properties, Inc., 207 B.R. 624 (Bankr. E.D. Ark. 1997) (bankruptcy filing is an act requiring specific authorization)
- In re Avalon Hotel Partners, LLC, 302 B.R. 377 (Bankr. D. Or. 2003) (decision to file bankruptcy is outside ordinary course of business)
- Sanderson Farms, Inc. v. Gatlin, 848 So.2d 828 (Miss. 2003) (contract rights can be waived by words or conduct)