Han v. Official Committee of Unsecured Creditors (In Re Kang) , 664 F. App'x 336 ( 2016 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-2345
In Re: MIN SIK KANG; MAN SUN KANG,
Debtors.
-----------------------------------
YEON K. HAN,
Creditor – Appellant,
v.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Creditor,
and
RAYMOND A. YANCEY,
Trustee – Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Leonie M. Brinkema,
District Judge. (1:15-cv-00953-LMB-IDD; 10-18839-RGM; 12-01496-
RGM)
Submitted: October 5, 2016 Decided: November 29, 2016
Before SHEDD, DUNCAN, and FLOYD, Circuit Judges.
Affirmed by unpublished per curiam opinion.
Timothy J. McGary, Vienna, Virginia, for Appellant. Todd M.
Brooks, Baltimore, Maryland, Bradford F. Englander, WHITEFORD
TAYLOR & PRESTON LLP, Falls Church, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Appellant Yeon Han challenges the district court’s order
affirming the bankruptcy court’s grant of summary judgment to
Appellee Raymond Yancey, the Chapter 11 Trustee in this
bankruptcy case. The bankruptcy court entered a declaratory
judgment invalidating a purported transfer of ownership
interests to Han in one of the bankruptcy debtors’ LLCs, on the
grounds that the transfer violated the LLC’s operating
agreement. Because we agree that the purported transfer is null
and void, we affirm.
I.
A.
Although the ownership transfer at issue here took place in
2009, it has its origins in events tracing back to 2004. In
February 2004, Grand Centreville, LLC (“Grand Centreville”) was
created for the sole purpose of acquiring, developing, and
managing a retail shopping center in Centreville, Virginia. At
the time of its formation, Grand Centreville had one member: a
shell company called Grand Equity, LLC (“Grand Equity”). Grand
Equity, in turn, was managed by its sole member, Grand
Development, LLC (“Grand Development”), another shell company.
Grand Development was wholly owned and managed by the Debtors,
Min and Mik Kang.
3
In June 2005, Grand Centreville refinanced an existing loan
and executed a “Deed of Trust, Assignment of Leases and Rents
and Security Agreement” (“2005 Deed of Trust”). The 2005 Deed
of Trust prohibited specific transactions that could threaten
the lender’s interests. In particular, (1) Grand Centreville’s
direct and indirect owners could not transfer more than a
49% interest in Grand Centreville; (2) Grand Centreville could
not incur debts outside the ordinary course of business, and
(3) Grand Centreville could not encumber the property with
additional security interests.
During the course of the refinancing, the Debtors
incorporated another entity, Grand Formation, Inc. (“Grand
Formation”), which became the managing member of Grand
Centreville and acquired a 0.5% ownership interest. Grand
Equity (99.5% owner) and Grand Formation (0.5% owner) created a
new operating agreement (“the 2005 Operating Agreement”), which
listed “Ronnie C. Kim” as an Independent Member. Kim, however,
testified that he was never a member of the entity. J.A. 1757–
64. The 2005 Operating Agreement incorporated requirements from
the 2005 Deed of Trust, including restrictions on the transfer
of ownership interests, incurrence of debts, and encumbrance
with additional liens on the property.
As relevant to the Trustee’s standing, the State
Corporation Commission of Virginia canceled the existence of
4
Grand Equity and Grand Development for nonpayment of annual
registration fees as of December 31, 2008. Virginia law
provides that when an LLC is canceled, its property “shall pass
automatically to its managers, . . . members, . . . or holders
of interest, . . . as trustees in liquidation.” See Va. Code
§ 13.1-1050.2(C). 1 Thus, because the Debtors wholly owned Grand
Development, which wholly owned Grand Equity, the interests in
Grand Centreville held by the canceled LLCs “pass[ed]
automatically” to the Debtors, as trustees in liquidation.
On March 16, 2009, the purported transfer at issue here
took place (“the 2009 Sale”). In the 2009 Sale, the Debtors
agreed to effectively sell 60% of their interests in Grand
Centreville and Grand Formation to Han 2 and James Sohn, 3 in
1 Citations throughout are to the current version of the
Virginia Limited Liability Company Act (the “Act”). The Act was
amended in 2008, effective April 1, 2009, which resulted in the
renumbering of certain provisions related to the cancellation of
an LLC’s certificate due to nonpayment of registration fees and
the process of winding up when such a cancellation occurred.
See 2008 Va. Acts 155, ch. 108. No substantive changes were
made, and the process now in effect is substantially similar to
the process then in effect. See Gen. Tech. Applications, Inc.
v. Exro Ltda, 388 F.3d 114, 119-20 (4th Cir. 2004).
2 Han pleaded guilty on May 15, 2013 before Judge Gerald
Bruce Lee in the Eastern District of Virginia to two counts of
conspiracy to commit wire fraud, including participation in the
creation of false HUD-1 settlement statements in connection with
the 2009 Sale. See J.A. 1985.
3 Sohn settled with the Trustee after the bankruptcy court
ruled on summary judgment.
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violation of the terms of the 2005 Operating Agreement. The
Debtors also purported to issue a promissory note in favor of
Han and Sohn, which was secured by a security interest in the
shopping center.
B.
On October 19, 2010, the Debtors jointly filed for
Chapter 11 bankruptcy. The Office of the United States Trustee
appointed the Official Committee of Unsecured Creditors (“the
Committee”) in early December 2010, which instituted the
underlying adversary action to reverse several transactions the
Debtors entered into prior to the bankruptcy. In January 2013,
the Office of the U.S. Trustee then appointed Appellee Yancey as
the Chapter 11 Trustee, and he took over the Committee’s claims
against Sohn and Han. The Trustee filed a second-amended
complaint, seeking, among other relief not relevant here, a
declaration that the 2009 Sale was invalid.
The parties filed cross-motions for summary judgment on
this claim, with the Trustee arguing that the 2009 Sale was null
and void because it violated the 2005 Operating Agreement. At
the summary judgment hearing, the bankruptcy court determined
that, if the 2005 Operating Agreement was effective, then the
2009 Sale was void. The court held a trial to resolve the
factual dispute as to whether the 2005 Operating Agreement was
effective. After trial, the court concluded that the agreement
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was effective, and that the purported transfer was null and void
because it violated the agreement. The district court affirmed
the bankruptcy court’s ruling invalidating the 2009 Sale.
II.
On appeal, Han argues that: (1) the Trustee lacks standing;
(2) the 2005 Operating Agreement never became effective and
therefore did not govern the 2009 Sale; and (3) even if the 2005
Operating Agreement governed, the 2009 Sale was not null and
void.
In reviewing a bankruptcy order, “we apply the same
standard of review that the district court applied when it
reviewed the bankruptcy court’s decision.” In re Jenkins,
784 F.3d 230, 234 (4th Cir. 2015) (quoting In re Nieves,
648 F.3d 232, 237 (4th Cir. 2011) (per curiam)). We thus review
the bankruptcy court’s factual findings for clear error and
legal conclusions of both the bankruptcy court and district
court de novo. Id.
A.
We begin with the threshold issue of standing. Han
contends that the Trustee does not have standing to bring the
instant claim because the Debtors, in whose shoes the Trustee
stands, did not have a direct interest in Grand Centreville, but
only an interest in the entities that controlled Grand
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Centreville--Grand Equity and Grand Development. Thus,
according to Han, the Trustee is impermissibly attempting to
assert the rights of corporate entities rather than rights
belonging to the Debtors. This argument is without merit.
A Chapter 11 Trustee has the power to assert the rights of
the debtor and creditors, as defined by state law. Steyr-
Daimler-Puch of Am. Corp. v. Pappas, 852 F.2d 132, 135 (4th Cir.
1988). Under Virginia law, the property of canceled LLCs
“pass[es] automatically” to the managers, members, or holders of
interest, who act as trustees in liquidation to distribute the
company’s assets after the LLC is wound up and all liabilities
and obligations are satisfied. Va. Code § 13.1-1050.2(c).
When Grand Development and Grand Equity were canceled in
2008, their interests in Grand Centreville were held in trust by
Mr. Kang “as trustee[] in liquidation” for himself and
Mrs. Kang, the ultimate owners. Id. Because there is no
evidence to suggest that the LLCs were anything but pass-through
entities with no business to wind up or outstanding debts to
pay, the interests they held in Grand Centreville passed
directly to the Debtors. Stepping into the Debtors’ shoes, the
Trustee therefore has standing to pursue its claim that the 2009
Sale is null and void.
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B.
Han next argues that because Ronnie Kim never agreed to the
2005 Operating Agreement, it never became effective. See Va.
Code § 13.1-1023(B)(1) (providing that “[a]n operating agreement
must initially be agreed to by all of the members”). There is
no basis for this argument.
It is true that the 2005 Operating Agreement lists Ronnie
Kim, together with Grand Formation and Grand Equity, as a member
of Grand Centreville. J.A. 1345. However, membership in an LLC
is a matter of assent, and a person cannot become a member
without agreeing to do so. Cf. Broyhill v. DeLuca (In re
DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996). 4 Ronnie Kim
testified that he had never been a member of Grand Centreville,
and had not seen the 2005 Operating Agreement prior to preparing
for his deposition, nor even heard of Grand Centreville before
4 Han argues that Broyhill does not support the district
court’s conclusion that “a member [must] have knowledge of and
consent[] to the membership interest.” Appellant’s Br. at 11.
Although Broyhill does not directly touch on the issue in the
present case, the court there did conclude that an entity became
a member of an LLC through the assent of all its members. And
Han even concedes that she “is not suggesting that Mr. Kim be
made an ‘involuntary member.’” Appellant’s Br. at 12. Her
argument that the remaining members’ assent to the 2005
Operating Agreement is meaningless without Kim’s inclusion is
belied by the remaining members’ conduct--they never sought
Kim’s input on decisionmaking or his consent to the 2009 Sale.
Simply put, there is no indication they actually intended for
Kim to be a true member. Cf. In re Williams, 455 B.R. 485, 496
(Bankr. E.D. Va. 2011).
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then. J.A. 1757–64; J.A. 1823–27. And no testimony or other
evidence suggested otherwise. Thus, because Kim was never a
member of Grand Centreville, the 2005 Operating Agreement became
effective without his agreement. 5
C.
Finally, Han argues that the lower court erred by holding
that the transfer was null and void. She contends that
violations of the 2005 Operating Agreement only rendered the
transaction voidable, which would allow her to raise equitable
defenses such as estoppel. See Richard L. Deal & Assoc., Inc.
v. Commonwealth, 299 S.E.2d 346, 349 (Va. 1983). In particular,
she argues that an operating agreement is merely an agreement
among its members, and that just as the Debtors could be
estopped from denying they had the power to consummate the
2009 Sale, so too can the Trustee. We disagree.
Under Virginia law, an operating agreement binds the
parties to the agreement. Mission Residential, LLC v. Triple
Net Props., LLC, 654 S.E.2d 888, 891 (Va. 2008). And the
members can, through the operating agreement, “provide rights to
any person, including a person who is not a party to the
5
By not arguing it on appeal, Han waived any contention
that the 2005 Operating Agreement was not effective because of a
missing signature page for Grand Equity. We therefore do not
address that argument further.
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operating agreement, to the extent set forth in the operating
agreement.” Va. Code § 13.1-1023(A)(1).
Here, Han concedes that the restrictions in the
2005 Operating Agreement were designed to benefit the lender.
Appellant’s Br. at 13. She also concedes that “[t]he transfer
would have violated the transfer of control provisions contained
in the 2005 operating agreement.” Id. And yet, without citing
any authority, she argues that the violations would only give
the lender the right to void the 2009 Sale, not render it null
and void. Although few courts appear to have spoken on the
issue, the courts that have addressed it conclude that actions
that violate an LLC’s operating agreement are null and void.
See, e.g., Kapila v. Deutsche Bank AG (In re Louis J. Pearlman
Enters., Inc.), 398 B.R. 59, 65 (Bankr. M.D. Fla. 2008) (“The
purported transfer is void and of no effect pursuant to the
Operating Agreement.”).
We are likewise persuaded that such actions are without
legal effect because they exceed the scope of authority
conferred by the operating agreement. 6 As the district court
6 Han’s reliance upon News-Register Co. v. Rockingham Pub.
Co., 86 S.E. 874 (Va. 1915), to argue otherwise is misplaced.
First, News-Register Co. pre-dated the existence of LLCs, and
concerned two corporations that entered into a partnership
agreement. Second, as the court there stated, “[t]he main,
indeed the sole, contention in this case centers upon the
question whether, under the laws of Virginia, two corporations
(Continued)
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recognized, operating agreements define the authority of LLCs,
and companies that engage in transactions with an LLC
appropriately look to these agreements during the due-diligence
process to determine such authority. Actions taken outside the
authority conferred by the operating agreement are thus ultra
vires and without legal effect. 7 Because there is no dispute
that the 2009 Sale violated the 2005 Operating Agreement, it is
null and void.
can form a partnership.” Id. at 876. The court concluded that
the two corporations could validly form a partnership, and only
suggested in dicta that a corporate actor could be estopped from
arguing that it was without power to enter into such an
agreement after amending its corporate charter to expressly
allow it to do so and undertaking the transaction in good faith.
Among the other factors making the case inapposite, the
transaction here was not undertaken in good faith, but expressly
designed to obscure the fact that it violated the 2005 Operating
Agreement. See J.A. 1728.
7As the Trustee argues, the Fifth Circuit’s decision in
Kinwood Capital Group, LLC v. BankPlus (In re Northlake Dev.,
LLC), 643 F.3d 448 (5th Cir. 2011), further supports this
conclusion. In BankPlus, a minority member of an LLC purported
to transfer the LLC’s property to another company that he
created, without any authority under the LLC’s operating
agreement. He then used that property as collateral to obtain a
loan for his new company, and the bank sought to retain the
property after the new company filed for bankruptcy. Relying on
an opinion from the Mississippi Supreme Court, the Fifth Circuit
concluded that the purported transfer was void and of no legal
effect because the minority member, as an agent of the LLC,
acted without authority. Id. at 451.
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III.
For the foregoing reasons, we affirm the order of the
district court. 8
AFFIRMED
8 We dispensed with oral argument because the facts and
legal conclusions are adequately presented in the materials
before this court and argument would not aid in the decisional
process.
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