In re Live Primary, LLC

626 B.R. 171

IN RE: LIVE PRIMARY, LLC, Debtor.

Case No. 20-11612 (MG)

United States Bankruptcy Court, S.D. New York.

Signed March 2, 2021

ROSEN & ASSOCIATES, P.C., Attorneys for Live Primary, LLC, 747 Third Avenue, New York, NY 10017, By: Sanford P. Rosen, Esq., Christine McCabe Dehney, Esq.

GOLDBERG WEPRIN FINKEL GOLDSTEIN LLP, Attorneys for Primary Member LLC, 1501 Broadway, 22nd Floor, New York, NY 10036, By: Neal Rosenbloom, Esq., Kevin Nash, Esq. Daniel, Goldenberg, Esq.

SCHAFER AND WEINER, PLLC, Attorneys for Noteholders, 40950 Woodward Ave., Ste. 100, Bloomfield Hills, MI 48304, By: Daniel Weiner, Esq., Howard Borin, Esq.

OFFICE OF THE UNITED STATES TRUSTEE, 201 Varick Street, Room 1006, New York, NY 10014, By: Shannon Anne Scott, Esq.

CORRECTED MEMORANDUM OPINION AND ORDER SUSTAINING IN PART AND OVERRULING IN PART DEBTOR'S OBJECTION TO PROOF OF CLAIM # 8 FILED BY PRIMARY MEMBER LLC

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

The principal issue in this case is whether the purported $6+ million debt claim of Primary Member LLC ("PM") (filed as Proof of Claim No. 8 (the "Proof of Claim" or "POC")), which also holds a 48.5% membership interest in Live Primary, LLC's (the "Debtor" and together with PM, the "Parties"), should be disallowed as a unsecured claim and recharacterized as equity. Recharacterization of purported debt as equity is available relief that is not usually granted. But this is one of those unusal cases where, for the reasons explained below, following trial, the Court concludes that recharacterization is granted in substantial part.

"Recharacterization is appropriate where the circumstances show that a debt transaction was actually an equity contribution ab initio ." Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics, Inc.) , 269 F.3d 726, 747–48 (6th Cir. 2001) (" Autostyle "). Courts in this Circuit have generally followed the 11-factor Autostyle analysis in deciding whether debt should be recharacterized as equity, and the Court will do so here. The "paradigmatic" recharacterization case involves a situation where "the same individuals or entities (or affiliates of such) control both the transferor and the transferee, and inferences can be drawn that funds were put into an enterprise with little or no expectation that they would be paid back along with other creditor claims." See Adelphia Commc'ns Corp. v. Bank of America, N.A. (In re Adelphia Commc'ns Corp.) , 365 B.R. 24, 74 (Bankr. S.D.N.Y. 2007) (" Adelphia "). Following trial, the Court concludes that is precisely the situation here.

On January 3, 2021, the Debtor filed the Motion for Objection to Claim No. 8 of Primary Member LLC ("Objection," ECF Doc. # 93.) The Debtors’ noteholders (the "Noteholders") filed the Response of Noteholders’ Joining with Debtor's Objection to Claim No. 8 of Primary Member, LLC, "join[ing] in and adopt[ing] as its own the Debtor's objection to the claim filed by Primary Member LLC." (ECF Doc. # 98 at 1.)

In support of the Objection, the Debtor filed the (1) Memorandum of Law of Debtor and Noteholders in Support of Objection to Claim No. 8 of Primary Member LLC ("Debtor MOL," ECF Doc. # 119); (2) Declaration, Amended and Restated, of Lisa Skye Hain, Managing Member and Chief Executive Officer of Live Primary, LLC in Support of Debtor's Objection to Claim No. 8 of Primary Member LLC ("Skye Hain Decl.," ECF Doc. # 110); (3) Debtor's and Noteholders’ Exhibit List (ECF Doc. # 111); (4) Exhibit Nos. 1–52 ("Obj. Exs.," ECF Doc. # 111-1); (5) Exhibit 53 - Transcript of Deposition of Lisa Skye Hain ("Skye Hain Dep.," ECF Doc. # 112); (6) Exhibit 54 - Transcript of Deposition of Joel Schreiber ("Schreiber Dep.," ECF Doc. #113); and (7) Witness List of Debtor and Noteholders (ECF Doc. # 114).

In response to the Objection, PM filed the (1) Memorandum of Law for Trial ("PM MOL," ECF Doc. # 117); (2) Declaration of Joel Schreiber in Opposition ("Schreiber Decl.," ECF Doc. # 106); (3) Primary Member LLC Exhibit List (ECF Doc. # 116); (4) Exhibits 1–12 ("PM Exs.," ECF Doc. ## 116-1–116-12); and (5) Corrected Exhibit 10 ("PM Ex. 10," ECF Doc. # 118).

The Parties also entered into a Stipulation, approved by the Court, admitting in evidence the declarations of Lisa Skye Hain and Joel Schreiber, all deposition designations and exhibits, and agreeing that the February 10, 2021 trial (the "Hearing") would proceed solely with counsels’ arguments. (ECF Doc. # 124.) Following the Hearing, the Court took the matter under advisement.

For the following reasons, the Court GRANTS the Debtor's requested relief in part, recharacterizing the "Purported Loan" (defined below), with a stated balance in the POC of $6,354,900, as equity.

The Court DENIES the Debtor's requested relief to recharacterize as equity the "Other Loans" (defined below), with a stated balance in the POC of $81,284. But, as explained below, Objection to Claim No. 8 includes separate grounds objecting to the claim for the Other Loans, namely that the Other Loans were not properly authorized and, in addition, the claim for the Other Loans should be disallowed under section 502(d) because PM received a transfer of an avoidable preference that it has not repaid. The objection that the Other Loans were not properly authorized is OVERRULED . The section 502(d) objection is SUSTAINED to the extent that PM received a transfer of $40,000 within 90 days of the Petition Date, which amount has not been repaid.¹

I. FINDINGS OF FACT

The findings and conclusions set forth herein constitute this Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"),² which incorporates Rule 52 of the Federal Rules of Civil Procedure. Pursuant to Bankruptcy Rule 7052, findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact to the fullest extent of the law.

A. Formation of the Debtor

Lisa Skye Hain ("Skye Hain") is the Debtor's Chief Executive Officer and managing member. (Obj. Exs., Ex. 5 at 2.) In 2010 and 2011, Skye Hain was a Founding Community Manager of WeWork, a shared office space company similar to the Debtor.

(Skye Hain Decl. ¶ 5.) While at WeWork, Skye Hain met Joel Schreiber ("Schreiber"). (Schreiber Decl. ¶ 15.) Schreiber was one of the investors in WeWork. (Skye Hain Decl. ¶ 7.) Schreiber was also the founder and CEO of Waterbridge Capital ("Waterbridge"), a prominent real estate investment firm in New York City. (Obj. Exs., Ex. 2.) As described on the Waterbridge website, Schreiber and Waterbridge "were active in acquiring core plus, value-added and opportunistic assets in downtown Manhattan, with a focus on retail, office, and multifamily properties in Soho, Tribeca, the Meatpacking, Nolita, Chelsea, and the West Village." (Id. )

After Skye Hain left WeWork, on several occasions over the next few years Schreiber contacted Skye Hain and indicated that if she ever wanted to start her own shared office space company, he would be an investor. (Skye Hain Decl. ¶ 7.) In 2015, Skye Hain decided to start her own shared office space company––Live Primary. (Id. ¶ 8.) She spoke to Schreiber, and they agreed that Schreiber would invest the $6,000,000 that Skye Hain budgeted for the start-up of the company, in exchange for a 40% membership interest in the company. (Id. ¶ 10.) Skye Hain and Daniel Orenstein ("Orenstein") would each receive a 30% membership interest in exchange for their full-time employment by the company. Schreiber provided a draft operating agreement that called his investment a "loan" rather than a capital contribution. (Id. ¶ 11.) PM was formed as "the vehicle for the Live Primary project." (Schreiber Decl. ¶ 16.)

Skye Hain received a salary from the Debtor. Neither PM nor Schreiber received a salary or any other compensation. (PM MOL at 6.) PM had no involvement in day-to-day matters, and retained certain consent rights relating to major decisions. (Id. at 6–7.) Schreiber later became a member of the Debtor's supervisory committee, which was formed after the Noteholders became involved with the Debtor in 2019. (Id. at 7.) Skye Hain and representatives of the Noteholders were also on the supervisory committee. (Id. )

B. The Operating Agreements

On or about July 28, 2015, PM, Skye Hain and Orenstein, as members of Primary, LLC,³ each executed a Limited Liability Company Agreement of Primary, LLC, as of July 28, 2015 (the "First Operating Agreement," Obj. Exs., Ex. 3.)

According to the First Operating Agreement, the aggregate capital contribution for this start up business was only $1,000. (Id. at Schedule 1.) PM's portion was $400. (Id. )

Section 9 of the First Operating Agreement is titled "Capital Contributions and Loans." Within that section, section 9.2 of the First Operating Agreement contemplated that PM would make a single "Loan" in multiple tranches totaling $6,000,000. Specifically, section 9.2 of the First Operating Agreement, titled "Loans by PM," provides:

PM has agreed to lend the funds required by the Company in the form of a loan in the original principal amount of $6,000,000 (the "Loan") for the establishment and operation of two (2) shared office facilities (the "Initial Centers"), in addition to any necessary startup expenses (eg: website, marketing, branding) to be developed by the Company, provided however that the start-up expenses and costs for the first Initial Center shall not exceed $3,700,000 in the aggregate. The Loan may be memorialized by an agreement (the "Loan Agreement") and each tranche disbursement (a "Disbursement") under the Loan shall be evidenced by a promissory note made by the Company in favor of PM (the "Note" and together with the Loan Agreement, the "Loan Documents"). PM shall advance funds from the Loan within seventy-two (72) Business Hours after a request (a "Disbursement Request") from the Managers, depositing same into the Company's bank account, when such funds are requested by the

...