Weiss v. All Year Holdings Ltd. (In re All Year Holdings Ltd.)

648 B.R. 434

IN RE: ALL YEAR HOLDINGS LIMITED, Debtor.

Zelig Weiss, Appellant,

v.All Year Holdings Limited, YGWV LLC, and Wythe Berry Member LLC, Appellees.

21-12051 (MG)

22 Civ. 8867 (CM)

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

Signed December 12, 2022

Jason Matthew Pierce, Paul Hastings LLP, San Diego, CA, Kris Hansen, Paul Hastings LLP, New York, NY, Nicholas Alan Bassett, Paul Hastings LLP, Washington, DC, for Appellant.

Angelo George Labate, Richard Gage, Gary Todd Holtzer, Robert Scher Berezin, Weil Gotshal & Manges LLP, New York, NY, Avery S. Mehlman, Janice I. Goldberg, Stephen B. Selbst, Rodger T. Quigley, Herrick, Feinstein LLP, New York, NY, for Appellees.

MEMORANDUM DECISION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S DECISION

McMahon, District Judge:

INTRODUCTION

This case comes before the court on an expedited appeal by Zelig Weiss, who filed a complaint in Appellee All Year's chapter 11 case against All Year and an affiliated entity, YGWV, only to have his case dismissed by the bankruptcy court (Glenn, B.J.). After considering the parties briefs and arguments, the Bankruptcy Court's order is AFFIRMED – largely on the opinion below.

The facts pertinent to this appeal are recited fully in Judge Glenn's thoughtful and thorough opinion and will not be repeated in detail here. Appellant Weiss, through various entities, operates the luxury William Vale Hotel in Brooklyn. He is also a 50% owner of the hotel, by virtue of his membership in an entity known as Wythe Berry Member LLC. The other 50% owner of Member LLC Appellee YGWV; YGWV also serves as the managing member of Member LLC. Appellee All Year owns a 100% interest in YGWV.

YGWV and Appellant executed, and are the only parties to, a Member LLC Limited Liability Company Agreement (the "Member LLC Agreement"). That agreement contains a provision that prohibits either Member (YGWV or Appellant) from transferring its membership interest in Member LLC absent the other party's consent. All Year is not a party to the Member LLC Agreement; it is specifically identified in that Agreement as the Lender to the LLC – not as a Member of Member LLC – and as a third-party beneficiary of certain specified provisions of the Member LLC Agreement. (A121 §§ 11.1–11.2; Dkt. No. 7).¹ Other provisions of the Agreement make it clear that All Year and YGWV are separate entities, notwithstanding the fact that All Year created and wholly owns YGWV; Weiss signed the Member LLC Agreement with full knowledge that All Year had been removed as a Member.

All Year filed for chapter 11 protection in December 2021 and has continued to operate its business as a debtor-in-possession. Pursuant to its proposed chapter 11 plan of reorganization (the "Plan"), All Year's interests will vest on the effective date of the Plan in a wind-down entity to be formed for the benefit of, and controlled by, All Year's impaired creditors ("Wind Down Co."). As part of that transaction, All Year's interest in YGWV is being sold to a third-party entity, Paragraph Partners LLC ("Paragraph"); this arrangement was made after negotiations between All Year and Weiss to sell All Year's interest in YGWV to Weiss failed to result in a final signed agreement.

In his complaint, Weiss alleges that All Year's transfer of its interest in YGWV to Paragraph without Weiss’ consent violates the Member LLC Agreement. He argues that All Year should be deemed a party to the Member LLC Agreement – despite the fact that the Agreement is between Weiss and YGWV and specifically acknowledges that All Year cannot be equated with its wholly-owned subsidiary – either because All Year negotiated the Member LLC Agreement, or because YGWV is the alter ego of All Year. Weiss alleges that both All Year and YGWV have violated both the literal terms of the contract and the covenant of good faith and fair dealing by agreeing to transfer All Year's interest in YGWV to Paragraph; he seeks to enjoin the proposed transaction.

Weiss further alleges that, as a matter of New York law, All Year's chapter 11 filing automatically and immediately terminated its membership interest in YGWV, which in turn automatically resulted in YGWV's dissolution. Appellant seeks a declaration to that effect, as well as an order allowing him to assume management control of Member LLC and the entity that owns the William Vale Hotel.

In a well-reasoned and thorough decision (the "Order"), the Bankruptcy Court dismissed Appellant's complaint on multiple independently sufficient grounds. The Bankruptcy Court properly rejected Appellant's attempt to bind a non-party (All Year) to the Member LLC Agreement; dismissed his contention that the New York Limited Liability Company Law ("NYLLCL") mandates the automatic termination of an LLC when any member declares bankruptcy; and held that Weiss’ reading of Sections 701(b) and 603(a) of the NYLLCL would in any event be preempted by the Bankruptcy Code. Seeing no error in the learned Bankruptcy Judge's reasoning, this court affirms Judge Glenn's order.

STATEMENT OF THE CASE

As this is an appeal from a motion to dismiss a complaint, the well-pleaded non-conclusory factual allegations of the amended complaint are presumed true. The Bankruptcy Court's conclusions of law are reviewed de novo. See In re Belmonte , 931 F.3d 147, 152 (2d Cir. 2019).

The relevant contract (the Member LLC Agreement) contains a Delaware choice of law provision, so it governed by Delaware law. In his reply brief, Weiss asserts that any contract claims should be governed by New York law, but he made no such argument in the court below, so even if it had merit (and it does not), he cannot so assert on this appeal.

YGWV is a limited liability corporation organized under the law of the State of New York, As a result, New York law governs claims against it that do not arise out of any alleged breach of the Member LLC Agreement. See, e.g., Fletcher v. Atex, Inc. , 68 F.3d 1451, 1456 (2d Cir. 1995).

I. Factual Background

A. Ownership of the William Vale Hotel

Appellant's claims involve his indirect ownership interest in the William Vale Hotel in the Williamsburg neighborhood of Brooklyn, New York. Appellant originally held partial title to the William Vale indirectly through an entity called Wythe Berry LLC ("WB LLC"), in which he held a 50 percent membership interest. Yoel Goldman (All Year's former principal) held the remaining 50 percent membership interest and served as managing member. (A77–78, 83 ¶¶ 2, 24). Appellant currently owns his indirect interest in the William Vale through Member LLC.

In approximately September 2016, Goldman proposed a refinancing transaction to close out the William Vale's construction loan. (A83–84 ¶ 25). Under Goldman's proposal, All Year issued a bond series (the "Series C Bonds") and the proceeds of the bond issuance would refinance the William Vale's existing mortgage and WB LLC's corresponding debts. (A84 ¶ 27). As part of the refinancing, WB LLC transferred title to the hotel to a new entity—Wythe Berry Fee Owner, LLC ("Fee Owner"). (A84 ¶ 28). WB LLC then leased the William Vale from Fee Owner. (A84 ¶ 28). Member LLC, a newly created special-purpose vehicle, would own Fee Owner. (A84, 86 ¶¶ 28, 33).

During the early discussions regarding the refinancing, Appellant and Goldman were both going to own Member LLC as 50 percent co-members. (A84 ¶ 28).

Although Appellant owned his 50 percent membership interest in his individual capacity, Goldman chose to own his membership interest indirectly through another entity. (A84–85 ¶¶ 30-31). Initially, this entity was going to be All Year. (A85–86 ¶¶ 31–32). But in late January 2017, Goldman informed Appellant that a new entity, YGWV, needed to act as manager of the special-purpose vehicle Member LLC instead of All Year, as originally contemplated. (A86 ¶ 33). Appellant accepted Goldman's proposal, and Debtor formed YGWV shortly before closing on the refinancing solely to hold the 50 percent membership interest in Member LLC and act as Member LLC's manager. (A86 ¶¶ 29, 34).

As the core of the refinancing, Mishmeret Trust Company Ltd., the Trustee for the Series C bondholders, loaned over $165 million to All Year pursuant to the Series C Bonds. (A86 ¶ 35). All Year in turn loaned the bond proceeds to Fee Owner pursuant to a promissory note between All Year and Fee Owner that was secured by a mortgage against the William Vale. (A86 ¶ 36). Member LLC also guarantied the Series C Bonds pursuant to a guarantee in favor of Mishmeret, and All Year conditionally assigned the note and mortgage to Mishmeret as security for the Series C Bonds. (A86 ¶ 36). Fee owner used the loan to pay WB LLC's debts, including the mortgage on the William Vale. (A86 ¶ 36).

B. The Member LLC Agreement

YGWV and Appellant are the only signatories to the Member LLC Agreement. (A113). YGWV and Appellant chose Delaware law to govern the Member LLC Agreement. (A121 § 10.4). The parties also agreed to an integration clause providing that the Member LLC Agreement "constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior understandings or agreements between the parties." (A121 § 10.3).

Several other provisions of the Member LLC Agreement are relevant to Appellant's claims.

• Section 8.1 is the anti-assignment provision, which provides that a "Member"—defined in the Agreement as only YGWV and Appellant — "may not assign in whole or in part any interest in [Member LLC] without the written consent of the other Members." (A119 § 8.1).

• Section 5.3 specifically acknowledges that YGWV, Appellant, and any of their affiliates (e.g. , All Year) "may engage in or possess an interest in other business ventures of every kind." (A117 § 5.3).

• Section 11.3 requires that the managing member of Member LLC (i.e., YGWV) "shall be a corporation or limited liability company whose sole asset is its interest in the Company." (A123–24 § 11.3(o)).

• Sections 11.1, 11.3 and 11.4 further (i)

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