In re Curare Lab. LLC

642 B.R. 787

IN RE: CURARE LABORATORY LLC, Debtor.

Case No. 21-31588

United States Bankruptcy Court, W.D. Kentucky, Louisville Division.

Signed August 1, 2022

Charity S. Bird, Tyler R. Yeager, Kaplan Johnson Abate & Bird LLP, Louisville, KY, for Debtor.

John R. Stonitsch, Office of the US Trustee, Louisville, KY, for US Trustee.

MEMORANDUM OPINION

Charles R. Merrill, United States Bankruptcy Judge

This matter is before the Court on the Debtor's Expedited Motion to Remove Custodian and Restore Possession, Custody, and Control to Debtor (the "Custodian Removal Motion"), [D.E. 3], filed by Curare Laboratory LLC ("Curare," or the "Debtor"), the Joint Motion to Dismiss Pursuant to 11 U.S.C. § 1112 (the "Dismissal Motion"), [D.E. 171], filed by Bluewater Toxicology, LLC ("Bluewater"), Solar Holdings Group, LLC ("Solar"), and Jennifer Bolus ("Bolus") (together, the "Bluewater Parties"), and the Motion for Summary Judgment as to Debtor's Motion to Restore ("Summary Judgment Motion"), [D.E. 181], filed by the Bluewater Parties. For the reasons set forth below, the Court GRANTS the Bluewater Parties’ Dismissal Motion without prejudice to refiling.

I. FACTS AND PROCEDURAL HISTORY

Background: This case arises out of a dispute over the majority ownership interest in Bluewater, a medical testing and diagnostics company that has realized significant revenue in recent years due to the high demand for its COVID-19 testing services. As detailed more fully below, Curare maintains that it holds an 80% ownership interest in Bluewater pursuant to a Securities Purchase Agreement ("Sale Agreement") which the Debtor entered into with Solar in September of 2017. The Bluewater Parties counter that Curare failed to effectuate this 80% purchase of Bluewater because Curare immediately defaulted on the Sale Agreement. In response to this alleged default, Solar and Bolus filed a state court lawsuit ("State Court Litigation") against Curare in December 2017 in an effort to restore its control of Bluewater and hold Curare accountable for its alleged default and related misconduct.

According to the Bluewater Parties, the State Court Litigation resulted in the appointment of a monitor over Bluewater and Curare, the restoration of control over Bluewater back to Solar and its principal, Bolus, and a divestment of Curare's operations of Bluewater. As a result, the Bluewater Parties have filed the Dismissal Motion seeking to dismiss the bankruptcy, or to have this Court abstain¹ , on grounds that Curare no longer has any ownership or control over Bluewater pursuant to the state court orders, and accordingly has no basis for relief. Curare counters that, because the state court orders are interim, non-final orders that remain subject to further proceedings, Curare still maintains ownership and control over Bluewater, and seeks to have the state court-appointed monitor removed.

Additionally, the Bluewater Parties seek dismissal on grounds that Curare's newly-appointed manager, Tyler Burke ("Burke"), was never properly appointed as the LLC's manager, a process which required an 85% majority vote by its members under the express terms of Curare's operating agreement. Since the parties do not dispute that no such vote ever took place, the Bluewater Parties contend that Burke lacked the managerial authority to put the Debtor in bankruptcy, warranting dismissal of the case. Curare counters that the inclusion of any 85% majority vote provision in a subsequent version of the operating agreement was inadvertent, that Curare did effectuate a change in managerial authority by having its former manager, Kevin Liske ("Liske"), name Burke as the newly-appointed manager² , and that Solar and Bolus, as creditors of the Debtor, lack standing to challenge the terms of Debtor's operating agreement. Curare concludes that, as a result of that managerial change, Burke did in fact have the power to file bankruptcy under the controlling operating agreement. In February of 2022, the Court conducted a three-day evidentiary hearing³ ("Evidentiary Hearing") on the Custodian Removal Motion, Dismissal Motion, and the Summary Judgment Motion, as discussed in more detail below.

Curare Formation and Sale Agreement (July 2017): Originally formed in 2013, Bluewater is a medical diagnostics company located in Mt. Washington, Kentucky, that provides laboratory services in the form of specimen collection, testing, and diagnostic services. Feb. 16 Tr. 23:10-12, 23:20-24:5. Solar, also formed in 2013, is a holding company co-owned by Bolus and Dr. Praveen Arla ("Arla") which was created to hold Bluewater shares. Feb. 16 Tr. 21:19-22:3. Besides its shares in Bluewater, Solar has no other assets. Feb. 16 Tr. 22:4-6. Solar initially held 95% of Bluewater's membership interests along with two other minority partners. Feb. 16 Tr. 23:13-19; 29:19-25. However, in July 2017, Bolus was approached by Charles "Junior" Johnson ("Johnson") regarding the potential sale of Bluewater, and ultimately agreed to proceed with a purchase transaction with Johnson. Feb. 16 Tr. 26:22-24; 27:10-19; 29:1-6.

Shortly thereafter, on or about August 10, 2017, Curare was formed to be a toxicology lab that would partner with and purchase membership interests in Bluewater from Solar. See Feb. 15 Tr. 74:18-20. Contemporaneously, four additional, related companies were also created: (1) Curare Telehealth, LLC ("Telehealth"), a mobile telemedical company; (2) Curare Management, LLC ("Management"); (3) Curare Medical; and (4) Kentucky Telehealth ("KYTH"), a holding company. Feb. 15 Tr. 73:19-74:17; Feb. 16 Tr. 117:15-118:3; 119:7-11. Bolus is the president, CEO, and 100% owner of KYTH, which in turn owns 20% of Telehealth. Feb. 16 Tr. 117:15-25; 118:1-13. Bolus is also the president and CEO of Telehealth, which owns 20% of the Debtor. Feb. 16 Tr. 160:20-25.

On or about September 5, 2017, shortly after its formation, Curare entered into a Sale Agreement with Solar, [D.E. 137-1], to purchase 80% interest in Bluewater from Solar for an aggregate purchase price of $4,000,000.⁴ In conjunction with the Sale Agreement, Curare paid Solar $250,000 at closing⁵ and executed a Term Promissory Note ("Note"), [D.E. 137-2], in favor of Solar and Bolus in the original principal amount of $3,750,000 for the remaining balance. The Note was secured by a contemporaneous Pledge Agreement, [D.E. 248-15], that Curare executed in favor of Solar which granted Solar a first lien over all of Bluewater's property and assets as collateral securing Curare's payment due under the Note. The Note was secured by a Security Agreement executed by Bluewater in favor of Solar, [D.E. 248-16], which granted Solar a security interest in all Bluewater's business assets and inventory. As part of the sale transaction, Bolus (through KYTH) received a 20% ownership interest in Telehealth, was named president of Telehealth, and executed an employment contract with Telehealth. Feb. 16 Tr. 7:3-13; Feb. 15 Tr. 90:3-17. Additionally, Curare agreed to contract with Bolus’ former associate, Mick Tarullo ("Tarullo"), as a consultant. [D.E. 3 ¶ 14].

Curare Operating Agreements (Sept.-Oct. 2017): As part of Curare's formation and subsequent acquisition of shares in Bluewater, various operating agreements were drafted for Curare, Telehealth, Management, and Bluewater. Feb. 16 Tr. 97:12-23. Ultimately, the shareholders had three different versions of Curare's operating agreement drafted, and the parties disagree as to which of the three agreements is controlling. [D.E. 171 at 3-4]. Each of the three operating agreements provides that Curare shall be "manager managed." [D.E. 248-1 at 4], [D.E. 248-2 at 4], [D.E. 248-3 at 2]. Furthermore, each of the three versions identifies Liske as Debtor's manager. See, e.g., [D.E. 248-1 at 13].

However, there are key differences among the three operating agreements. The first operating agreement ("Operating Agreement A"), [D.E. 248-1], is undated and signed only by Liske. The second operating agreement ("Operating Agreement B"), [D.E. 248-2], has some terms which vary slightly from Operating Agreement A and was executed by Liske and Langley on September 1, 2017. Curare's third operating agreement ("Operating Agreement C"), [D.E. 248-3, 248-4, 248-5, 248-6, 248-7, 248-8, 248-9, and 248-10], was separately executed by eight of Curare's members between September 5, 2017 and October 23, 2017.⁶ According to the signing members’ ownership percentages, the Bluewater Parties calculate that at least 78% (and 80% if counting Olga Group, LLC) of Curare's members executed Operating Agreement C. [D.E. 171 at 3-4]. The Bluewater Parties contend that Operating Agreement C controls because it is signed by the majority of Curare's members.

Notably, only Operating Agreement C contains the following provision requiring a meeting of Curare's members and an 85% super majority vote in order to effectuate the election of a new manager:

4.1 MANAGEMENT OF THE BUSINESS: This Company shall be manager managed. The initial elected manager is set forth in the articles of organization filed with the appropriate State agency. ... Managers listed in the articles of organization and/or elected under this agreement will serve as the Managers of this Company until a meeting of members is held and new Manager(s) elected with a super majority of 85% required to make the change.

[D.E. 248-3 at 2-3] (emphasis added). Further, Operating Agreement C makes clear that members "shall not take part in the operation of the Company's affairs," and that the manager alone "is authorized by Members to make all decisions as to ... the management of all or any part of the Company's assets" and "the employment of persons, firms or corporations for the operation and management of the Company's business." [D.E. 248-3 at 3].

Based on the terms of Curare's operating agreement, the Bluewater Parties now argue that Curare lacked the authority to file bankruptcy, because Operating Agreement C clearly only permitted...