In re 3P Hightstown, LLC

631 B.R. 205

IN RE: 3P HIGHTSTOWN, LLC, Debtor.

Case No. 21-12957 (MBK)

United States Bankruptcy Court, D. New Jersey.

Hearing Date: July 20, 2021

Signed July 22, 2021

Douglas G. Leney, Esq., Archer & Greiner, P.C., One Centennial Square, Haddonfield, NJ 08033, Counsel for Movant Hightstown Enterprises, LLC.

Craig Provorny, Esq., Herold Law, P.A., 25 Independence Boulevard, Warren, NJ 07059, Special Counsel for Chapter 11 Debtor.

Joseph M. Shapiro, Esq., Middlebrooks Shapiro, P.C., 841 Mountain Avenue, 1^st Floor, Springfield, NJ 07081, Counsel for Chapter 11 Debtor.

MEMORANDUM OPINION

Michael B. Kaplan, United States Bankruptcy Judge This matter comes before the Court on a Motion ("Motion") (ECF No. 15) filed by Hightstown Enterprises, LLC ("Hightstown Enterprises"), a putative creditor¹ , seeking dismissal of the chapter 11 bankruptcy case filed by the Debtor 3P Hightstown, LLC ("Debtor" or "3P Hightstown"). This matter first came before the Court on June 3, 2021, at which time the Court requested supplemental briefing from the parties. Specifically, the parties were directed to address whether the Debtor had the authority to file unilaterally for bankruptcy without the consent of its preferred equity class, pursuant to Section 4.06(b)(xi) of the 3P Hightstown Limited Liability Company Agreement dated December 19, 2019 (the "LLC Agreement"), or whether that section of the LLC Agreement should be void as contrary to public policy. The parties submitted additional briefing on this public policy issue and the matter was back before the Court on July 1, 2021. During the hearing held on that date, Counsel for the Debtor raised the issue of Hightstown Enterprises' standing to bring the instant motion. In light of the unresolved standing issue, the Court declined to issue a ruling and, instead, asked the parties to submit yet further briefing as to Hightstown Enterprises' standing to challenge the bankruptcy. The parties have since filed their supplemental arguments. The Court has reviewed all submissions and has considered fully the arguments presented during oral argument on the hearing dates of June 3, 2021, July 1, 2021, and July 20, 2021. For the reasons set forth below, the Court will DISMISS the bankruptcy case.

I. Background

The factual background and procedural history of this matter are well known to the parties and will not be repeated in detail here. For a more comprehensive recitation of the facts and history of this case, the Court directs the parties to the Declaration of Peter Wersinger, Senior Vice President and General Counsel to Hightstown Enterprises and the accompanying Exhibits (ECF No. 15-2). In relevant part, on or about March 22, 2019, 3P Equity Capital Inc. ("3PEC"), an affiliate of the Debtor, borrowed the original principal amount of $420,000.00 (the "Progress Loan") from Progress Direct LLC, as lender ("Progress"). The Progress Loan is secured by, among other collateral, a minority membership interest held at the time by 3PEC in a joint venture known as 3PRC, LLC (the "3PRC Minority Membership Interest"). In September 2019, 3PEC assigned its 3PRC Minority Membership Interest (subject to the lien and security interest held by Progress) to the Debtor, 3P Hightstown. On or about September 15, 2020, Hightstown Enterprises entered into a transaction with Progress, reflected in an Assignment of Note and Loan Documents, pursuant to which Hightstown Enterprises paid Progress the aggregate sum of $425,000.00 in exchange for an assignment of the Progress Loan and all rights associated therewith, including the lien on the Debtor's 3PRC Minority Membership Interest.

In December 2019, the Debtor sought additional capital investment from four (4) individuals (collectively, the "4J Group"). Specifically, in exchange for $500,000.00 from the 4J Group, the individuals comprising the 4J Group were given preferred membership units in the Debtor. On top of the equity investment made by the 4J Group as set forth above, the 4J Group also loaned the Debtor a total of $125,000.00 in subordinated financing. The 4J Group's admission as members of the Debtor is evidenced by the LLC Agreement, which is signed by 3P Equity Capital Advisors, LLC ("3PECA") as "Sole Common Member" and by each of the individuals comprising the 4J Group, each as a "Preferred Member." On or about July 27, 2020, Hightstown Enterprises paid the 4J Group the aggregate sum of $625,000.00 in exchange for (i) a transfer of the 4J Group's preferred membership interests in the Debtor, and (ii) an assignment of the 4J Group Loan. As a result of this transaction, Hightstown Enterprises became the Preferred Member of the Debtor, holding 5,196 preferred membership units and preferred unit capital contributions totaling $500,000.²

On April 9, 2021, 3P Hightstown filed a voluntary petition under chapter 11 of the Bankruptcy Code. On April 20, 2021, Hightstown Enterprises filed the instant Motion seeking dismissal of 3P Hightstown's bankruptcy case. Specifically, Hightstown Enterprises asserts that, pursuant to the LLC Agreement, the Debtor lacks authority to file a petition in bankruptcy absent certain prerequisites, which were not obtained. The Debtor opposes the motion and, as set forth above, the Court has requested several rounds of supplemental briefing to resolve outstanding issues.

II. Discussion

During oral argument, the Debtor challenged Hightstown Enterprises' standing to bring the Motion. Therefore, prior to addressing the merits of the Motion, the Court will address the threshold issue of standing.

A. Standing

As an initial matter, the Court must address the issue of whether it is necessary for Hightstown Enterprises to have standing for this Court to render a decision on its Motion to Dismiss. The short answer is no because this Court may raise the issue sua sponte . Bankruptcy courts may dismiss a case under Section 1112(b) sua sponte if cause is established. Section 1112(b)(1) states:

[O]n request of a party in interest, and after notice and a hearing ... the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause .

11 U.S.C. § 1112(b)(1) (emphasis added).

There is no question that the parties had proper notice and the opportunity for a hearing as required under § 1112(b). The concept of "notice and hearing"—of kind required prior to dismissal of a chapter 11 case under the "for cause" dismissal provision—is a flexible one, and the type of notice and hearing that is required depends on what is appropriate in the particular circumstances. 11 U.S.C.A. § 1112(b) ; See In re Irasel Sand, LLC , 569 B.R. 433 (Bankr. S.D. Tex. 2017). The Motion to Dismiss was filed more than three months ago on April 20, 2021 and the parties appeared at three separate hearings to litigate various issues stemming from this Motion. This Court is satisfied that the parties were properly noticed and afforded the opportunity to be heard as required under § 1112(b).

Despite the plain language requiring a "party in interest" to raise dismissal, courts "generally hold that after the 1986 amendments to Section 105 of the Bankruptcy Code, the Bankruptcy Court has the authority to dismiss a bankruptcy petition for cause under Section 1112(b) on its own motion ." In re Munteanu , No. 06-6108, 2007 WL 1987783, at *3 (E.D.N.Y. June 28, 2007) (referencing a bankruptcy court's equitable powers under 11 U.S.C. § 105 ) (emphasis added). Improper authority to file for bankruptcy is often cited as cause for dismissal. See id . (citing In re A–Z Elec., LLC, 350 B.R. 886, 891 (Bankr. D. Idaho 2006) (holding that § 1112(b) provided grounds for dismissal of case filed by individual who lacked authority to file the petition on behalf of the debtor company); In re Real Homes, LLC, 352 B.R. 221, 225 (Bankr. D. Idaho 2005) (same); In re J&J Prop. Holdings, LLC, 2004 WL 5463804 at *2 (Bankr. W.D.N.C. Jan. 20, 2004) (same)). In In re Munteanu , the district court found that the bankruptcy court did not abuse its discretion when it raised the issue of dismissal sua sponte and without a motion from the U.S. Trustee. Id .

In addition, the Court has authority to dismiss this case without relying on § 1112(b). Should a court find "that those who purport to act on behalf of the corporation have not been granted authority by local law to institute the proceedings, it has no alternative but to dismiss the petition." Price v. Gurney, 324 U.S. 100, 106, 65 S. Ct. 513, 89 L.Ed. 776 (1945). Further, should a court find that a debtor, who acts on behalf of a corporation, filed bankruptcy without the prerequisite authority, "the Court ... would be required to dismiss [that] unauthorized filing even if § 1112(b) were not in the Bankruptcy Code." In re ComScape Telecommunications, Inc. , 423 B.R. 816, 830 (Bankr. S.D. Ohio 2010) ; citing In re Southern Elegant Homes, Inc., 2009 WL 1639745 at *1 (Bankr. E.D.N.C. June 9, 2009) (dismissing unauthorized petition without relying on § 1112(b) ); In re N2N Commerce, Inc., 405 B.R. 34, 41 (Bankr. D. Mass. 2009) (same); In re Telluride Income Growth Ltd. P'ship, 311 B.R. 585, 591 (Bankr. D. Colo. 2004) (same); Kelly v. Elgin's Paint & Body Shop, Inc. (In re Elgin's Paint & Body Shop, Inc.), 249 B.R. 110, 112 (Bankr. D.S.C. 2000) (same).

Accordingly, Hightstown Enterprises' standing to bring a motion seeking dismissal under § 1112(b) is of no import because this Court may sua sponte raise the issue of whether cause for dismissal exists. As will be discussed, the Court finds that the Debtor did not have the proper authority to commence the instant bankruptcy proceeding. Thus, this Court is permitted—and indeed compelled—to dismiss the unauthorized filing under § 105 and applicable case law.

B. Authority to File for Bankruptcy Under the LLC Agreement

The United States Supreme Court holds that, with respect to corporations, the...