524 B.R. 798
Bankr. S.D. Ind.2014Background
- Lester L. Lee (Debtor) filed Chapter 7 on January 3, 2012; a trustee was appointed.
- The Lee Group Holding Company, LLC (Lee Group) Operating Agreement named Debtor as Manager and reflected that he held 51 votes (majority) though his economic distribution share was 0%.
- After the trustee asserted Debtor’s voting rights were estate property, family members (the Family Defendants) executed a Resolution and Addendum effective December 31, 2013, purporting to terminate Debtor’s membership and voting rights and to appoint a new manager; Debtor was later characterized as a consultant.
- Trustee sued seeking a declaration that Debtor’s voting rights were property of the estate and that the post‑petition termination violated the automatic stay and was avoidable.
- The parties filed cross‑motions for summary judgment; the court treated the § 549 claim as subsumed by the § 362 claim and resolved the summary judgment motions on the stay/estate‑property issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were Debtor’s voting rights in the LLC property of the bankruptcy estate under 11 U.S.C. § 541? | Debtor’s voting rights were incident to membership and thus became estate property on the petition date. | Voting rights derived only from Debtor’s managerial role and/or were nontransferable such that they were not estate property. | Held: Yes. Under the Operating Agreement and Indiana law, Debtor was a member with voting and economic (and non‑economic) rights; those rights became estate property. |
| Did the Family Defendants’ post‑petition actions terminating membership/voting rights violate the automatic stay (§ 362(a)(3))? | Termination of voting rights was a post‑petition act exercising control over estate property and therefore violated the stay. | The actions were permissible under the Operating Agreement/Indiana law (different vote categories) and did not affect estate property. | Held: The Resolution and related actions violated § 362(a)(3) and are invalid. |
| Could the Trustee be required to assume Debtor’s managerial role or be compelled to keep Debtor as manager? | Trustee did not seek to step into manager role or compel Debtor’s continuation; relief focused on invalidating post‑petition acts. | Defendants implied Trustee sought such relief or could not obtain it. | Held: Court did not grant relief to place Trustee in manager role and did not need to decide that question. |
| Is separate consideration of the § 549 avoidance claim required? | Trustee treated § 549 as subsumed by the § 362 claim and sought relief accordingly. | Defendants also treated § 549 as subsumed. | Held: Court found no need to separately address § 549 given parties’ positions and ruling on the § 362 claim. |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment burden allocation)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (summary judgment standard on implausible evidence)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (§ 541 broad construction of estate property)
- Segal v. Rochelle, 382 U.S. 375 (broad scope of property under bankruptcy law)
- In re Yonikus, 996 F.2d 866 (property interests within § 541 include contingent/derivative rights)
- Butner v. United States, 440 U.S. 48 (state law defines property interests for bankruptcy)
- In the Matter of Daugherty Const., Inc., 188 B.R. 607 (post‑petition member votes removing debtor/manager violate stay)
- In re McCabe, 345 B.R. 1 (amending LLC agreement post‑petition to reallocate a debtor’s interest violates stay)
- Sheehan v. Warner (In re Warner), 480 B.R. 641 (debtor’s economic and non‑economic LLC rights become estate property)
- Richardson v. Trustees of Ind. Univ., 497 B.R. 546 (acts taken in violation of the stay have no legal effect absent bankruptcy court validation)