In re Railyard Co.

In re: RAILYARD COMPANY, LLC, Debtor.

Case No. 15-12386 t11

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

September 12, 2018

OPINION

Before the Court is a $6,771,000 proof of claim filed by Railyard Brewing Company, LLC (RBC"), and the chapter 11 trustee's objection thereto. RBC did not retain counsel to respond to the objection. Instead, its members filed a pro se response. As RBC and the members well know, however, limited liability companies must have counsel in contested matters like this one, so the response must be stricken. The claim objection therefore will be sustained by default. Furthermore, the claim is wildly inflated and inadequately documented, and is subject to disallowance in any event.

I. FACTS¹

Railyard Company, LLC ("Debtor") was formed in 2004 to construct and operate a multi-unit building ("Market Station") at a rail station near downtown Santa Fe, New Mexico. Debtor's founding members included Richard Jaramillo, Steve Duran, and David Duran. Market Station is built on ground owned by the city and leased or subleased to Debtor.

RBC was formed to own and operate a family-friendly entertainment business at Market Station, which included a restaurant, bar, and eight bowling lanes. Members of RBC are Rick Jaramillo, Steve Duran, David Duran, Zack Vigil, and Raymond Archuleta (the "Members"). RBC isa New Mexico limited liability company. On or about January 30, 2014, the Debtor and RBC signed the Railyard Brewing Company LLC Lease (the "Lease").²

The Debtor paid for about $1,800,000 of tenant improvements, furniture, fixtures, and equipment that were installed in RBC's Market Station leasehold premises (the "Premises").

To refinance existing debt encumbering Market Station, Railyard obtained a $9,670,000 bridge loan from Thorofare Asset Based Lending Fund, III ("Thorofare") in December 2014. At the time, buildout of the Premises was about half done. Shortly thereafter, Flying Star (a major tenant) filed a chapter 11 bankruptcy case and moved out of Market Station.

Flying Star's closure hurt Debtor's cash flow significantly and caused problems with the Thorofare loan. In June 2015, Thorofare declared the loan in default and stopped releasing funds for tenant improvements. Buildout of the Premises ground to a halt, and the parties became embroiled in litigation.

Debtor filed this chapter 11 case on September 4, 2015. On March 30, 2016, the Court (Hon. Robert H. Jacobvitz) determined there was cause to appoint a chapter 11 trustee. Craig Dill (the "Trustee") was appointed in July 2016.

On August 18, 2016 the Trustee filed a motion to reject the Lease (the "Rejection Motion"). On September 12, 2016, Steve Duran and Rick Jaramillo, as RBC members, filed separate responses to the Rejection Motion. The Trustee objected to RBC proceeding pro se and moved for a default or summary judgment. Twelve days later, RBC hired a lawyer, who responded to the Rejection Motion and opposed default/summary judgment.

On November 8, 2016 the Court denied the default/summary judgment motion, and set the matter for trial. After taking extensive evidence over two days, the Court determined that the Rejection Motion was well taken and should be granted.

On May 15, 2017, RBC filed a proof of claim for $6,771,000 (the "Claim").³ Attached to the Claim are RBC's balance sheet; a three year lost profits projection (a one-page spreadsheet, without notes or analysis); and a UCC financing statement showing RBC as the debtor and "Zack Vigil c/o & [RBC]" as the secured party, to which is attached a list furniture, fixtures, and equipment.

On May 25, 2018, the Trustee objected to the Claim (the "Claim Objection"). The Members responded to the Claim Objection on June 27, 2018, purporting to act on their own behalf and for RBC (the "Response"). Attached to the Response is the same UCC financing statement and various quotes or statements for restaurant equipment.

On August 20, 2018, the Court held a preliminary hearing on the Claim Objection. The Members appeared pro se;⁴ no counsel appeared for RBC. At the hearing, the Trustee's counsel asked that the Claim Objection be sustained by default because of RBC's failure to obtain counsel.

II. DISCUSSION

A. Only RBC has Standing to Assert and Defend the Claim.

Although the Members apparently take the position that they are claimants along with RBC, the attempt fails.

1. The Members are Not Parties in Interest. Under the Bankruptcy Code, only a "party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter." 11 U.S.C. § 1109(b). Although 11 U.S.C. §1109(b) has a broad definition of "party in interest," the phrase is "generally understood to include all persons whose pecuniary interests are, directly affected by the bankruptcy proceedings." In re Alpex Computer Corp., 71 F.3d 353, 356 (10th Cir. 1995). Whether a party has standing to be heard under 11 U.S.C. § 1109(b) depends on whether its has a "sufficient stake in the in the proceeding so as to require representation." In re Sandia Resorts, Inc., 2016 WL 3150998, at *9 (Bankr. D.N.M.), citing In re Kaiser Steel Corp., 998 F.2d 783, 788 (10th Cir. 1995).

2. The Proof of Claim and Supporting Documents Show that RBC is the Real Party in Interest. The Claim itself shows that only RBC is the creditor. First, only RBC, not its Members, was the lessee under the Lease. Second, the Claim appears to be in part for RBC's lost profits. Third, the Claim attaches RBC's balance sheet. Fourth, the financing statement attached to the claim shows RBC as both debtor and secured party, while only mentioning one of the members (Zack Vigil), acting as RBC's "Chief Operation Officer." Fifth, attached to the Response are a number of quotes, invoices, and statements for restaurant equipment, audio equipment, bar furniture, and the like. All were directed to RBC, not the Members. Sixth, the Members signed the proof of claim as RBC's "attorney or authorized agent." Finally, the signature block shows the Members signing for RBC. Only RBC, not its Members, has a colorable claim against the estate relating to the Lease and/or the Premises.

3. The Members Cannot Assert Claims Based on Alleged Wrongs to RBC. The New Mexico Supreme Court has stated that it "is the general rule of law that one who is not a party to a contract cannot maintain a suit upon it." Staley v. New, 56 N.M. 756, 758 (S. Ct. 1952). This rulederives from the concept that a party is only indirectly injured by a contract to which it lacks privity, and therefore cannot meet the requirement for an injury in fact. See Marchman v. NCNB Tex. Nat'l Bank, , 120 N.M. 74, 81 (S. Ct. 1995) ("An indirectly injured party should look to the recovery of the directly injured party, not the wrongdoer for relief.").

Under New Mexico law, property that is "transferred or otherwise acquired by a limited liability company is property of the limited liability company and not of the members. A member has no interest in an item of limited liability company property." NMSA § 53-19-29(A).

Here, RBC is the only person or entity with a direct pecuniary interest in the Lease and/or the Premises. The Members have no direct interest in the Claim, so lack standing to defend it.

B. Limited Liability Companies Must be Represented by Counsel.

The Tenth Circuit requires business entities appearing before district courts to be represented by an attorney. Flora Constr. Co. v. Fireman's Fund Ins. Co., 307 F.2d 413, 414 (10th Cir. 1962) ("The rule is well established that a corporation can appear in a court of record only by an attorney at law."); See also Harrison v. Wahatoyas, LLC, 253 F.3d 552, 556 (10th Cir. 2001) ("As a general matter, a corporation or other business entity can only appear in court through an attorney and not through a non-attorney corporate officer appearing pro se."); Tal v. Hogan, 453 F.3d 1244, 1254 (10th Cir. 2006) ("It has been our long-standing rule that a corporation must be represented by an attorney to appear in federal court.").⁵

This requirement is reflected in the local rules for the District Court and this Court. Under the Local Rules for the U.S. District Court for the District of New Mexico, a "corporation, partnership or business entity other than a natural person must be represented by an attorney authorized to practice before this Court." D.N.M.LR-Civ. 83.7. The local rule of this Court is similar: for "all purposes except filing proofs of claims⁶, reaffirmation agreements, requests for unclaimed funds or participation in a meeting of creditors, any entity other than an individual, including but not limited to a corporation, limited liability company, partnership, or trust, must be represented by an attorney authorized to practice before this court." NM LBR 1074-1.

The rule clearly applies to limited liability companies. See Roscoe v. United States, 134 Fed. App'x 226, 227 (10th Cir. 2005) (unpublished) (a limited liability company cannot proceed pro se in an appeal); Gallegos v. Tygart, 2015 WL 13667104, at *2 (D.N.M.) (granting a motion to strike a pro se motion filed by a limited liability company); Light Tower Rentals, Inc. v. Astoco Oilfield Servs., LLC, 2013 WL 12335312, at *1 (D.N.M.), adopted, 2013 WL 12334019 (D.N.M.) (striking a pro se answer filed by a limited liability company); Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F. Supp. 2d 1221, 1223-24 (D.N.M. 2011) (limited liability companies cannot proceed pro se); Boeckman v. Dakil, 2010 WL 11565623, at *1 (N.D. Okla.) (same).

C. RBC Had Notice of The Requirement to Obtain an Attorney.

RBC has had ample notice of the requirement that it must appear through counsel. On August 18, 2016, the Trustee filed a motion to reject the lease (the "Lease Rejection Motion"). Two of the Members objected to the Lease Rejection Motion on September...