Hickory Ridge, LLC, a WV LLC

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
HICKORY RIDGE, LLC ) Case No. 07-1251
)
Debtor. ) Chapter 7
MEMORANDUM OPINION
Branch Banking and Trust Company (“BB&T”) seeks relief from the automatic stay of the
Bankruptcy Code pursuant to 11 U.S.C. § 362(d)(1) to exercise its state law rights against real
property belonging to Hickory Ridge. LLC. George Van Wagner – a purported managing member
and creditor of Hickory Ridge – objects to the stay relief motion and requests, through Hickory
Ridge’s substitute counsel, that this court convert Hickory Ridge’s bankruptcy case from Chapter
7 to Chapter 11.
For the reasons stated herein, the court will grant BB&T stay relief and deny the motion to
convert this case to one under Chapter 11.
I. BACKGROUND
When Hickory Ridge filed its Chapter 7 bankruptcy case on September 24, 2007, Mr. Van
Wagner signed the petition as managing member. At the time, Mr. Van Wagner had a 50%
ownership interest in Hickory Ridge. Steven Crites owned 45% and the remaining 5% was held by
Elizabeth Williams. Robert Trumble was appointed as Hickory Ridge’s Chapter 7 trustee.
On January 7, 2008, Mr. Trumble filed an application to employ Natalie J. Hoffman, a
realtor, for the purpose of marketing and selling two parcels of real property belonging to Hickory
Ridge. One parcel consisted of about 71.3 acres and the other about 3.8 acres, both of which were
approved for commercial development. The court approved the application, over objection, on
March 4, 2008. Unfortunately, the marketing efforts of the Chapter 7 trustee and his professional
did not produce any buyer for the properties willing to pay more than the secured debt on the
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properties. Mr. Trumble stated that the highest offer he received was for $1.65 million, and that the
potential purchasers generally valued the properties in the range of $15,000 per acre.
On December 2, 2009, BB&T – not having received any payment on its three notes secured
by the 71.3 and 3.8 acre tracts since the summer of 2007 – moved for relief from the automatic stay.
According to Bret Butler, a commercial loan officer at BB&T, as of April 16, 2010, Hickory Ridge
owed $1,174,511.06, $547,081.39, and $207,413.68, on the three notes, totaling $1,929,006.13. In
addition to BB&T’s secured liens, the 71.3 and 3.8 acre tracts are also subject to other, purportedly
junior liens. According to BB&T’s stay relief motion, both parcels are encumbered by an note and
deed of trust in favor of John W. Jenkins, Jr. and George Van Wagner securing an obligation in the
stated principal amount of $1 million. Additionally, the property is encumbered by a note and deed
of trust in favor of Mr. Jenkins, Todd Blickenstaff, and Arthur Dodson, securing an obligation in the
stated principal amount of $500,000.00.
Meanwhile, Mr. Van Wagner filed his own Chapter 11 bankruptcy petition on March 28,
2008, which was converted to a case under Chapter 7 on July 1, 2009. In his personal bankruptcy
case, Mr. Van Wagner has a pending motion to compel his Chapter 7 trustee, Thomas Fluharty, to
abandon assets, including his ownership and management interest in Hickory Ridge.
II. DISCUSSION
BB&T requests that the automatic stay of the Bankruptcy Code be lifted for cause under 11
U.S.C. § 362(d)(1) on the basis that: (1) no equity exists in the property, (2) its notes continue to
accrue interest that is not being paid and its has been forced to advance funds to pay property taxes,
and (3) Hickory Ridge’s Chapter 7 trustee has been afforded about two years to market and sell the
property without success. While maintaining that it is entitled to stay relief either in Chapter 7 or
in Chapter 11, BB&T also objects to Mr. Van Wagner’s and/or Hickory Ridge’s request to convert
the case to Chapter 11 on the basis that management authority for Hickory Ridge rests with Mr. Van
Wagner’s Chapter 7 trustee, who has not authorized the conversion.
A. Stay Relief
Under either Chapter 7 or Chapter 11, BB&T has demonstrated that it is entitled to relief
from the automatic stay to exercise its state law rights against the 71.3 and 3.8 acres tracts of real
property belonging to Hickory Ridge.
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Under § 362(d)(1) the automatic stay may be terminated “for cause, including the lack of
adequate protection of an interest in property of such party in interest.” Section 362(d)(1) does not
define “cause,” and “courts must determine when discretionary relief is appropriate on a case-by-case
basis.” Claughton v. Mixson, 33 F.3d 4, 5 (4 Cir. 1994). The party seeking relief under § 362(d)(1)th
is required to establish an initial showing of cause to lift the stay. E.g., In re Sonnax Indus., 907 F.2d
1280, 1285 (2d Cir. 1990) (“Section 362(d)(1) requires an initial showing of cause by the movant
. . . .”). If that initial showing is made, the burden shifts to the debtor to prove adequate protection.
11 U.S.C. § 362(g); see also 3 Collier on Bankruptcy ¶ 362.10 (Alan N. Resnick & Henry J. Sommer
eds. 15 ed. rev. 2010 (“Once the moving party makes this [initial] showing, the burden of goingth
forward and the ultimate burden of persuasion shift to the party opposing the relief . . . .”). Section
361 of the Bankruptcy Code provides that adequate protection may be provided by cash payments,
an additional or replacement lien, or other relief giving the creditor the “indubitable equivalent” of
its interest.
In this case, BB&T has met its initial burden of showing cause to lift the automatic stay under
§ 362(d)(1). It has not been paid for over two years, it has had to advance funds to pay the
delinquent property taxes of Hickory Ridge, and it has suffered the marketing of the properties by
Hickory Ridge’s Chapter 7 trustee for about two years. Hickory Ridge is not an operating business
and is not generating any income. The value of the property is declining by virtue of BB&T’s
accruing interest, fees and charges on its three notes secured by the properties. Hickory Ridge has
not suffered any risk of non-payment to BB&T; all the risks in this case have shifted to BB&T and
Hickory Ridge’s other secured lenders. This is inequitable.
In response to the stay relief motion, Mr. Van Wagner, as the purported managing member
of Hickory Ridge, through counsel, did not offer to make any periodic payments to BB&T, did not
offer replacement liens on unencumbered property, and did not demonstrate that an equity cushion
existed. Instead, Mr. Van Wagner testified that should the court convert the case to one under
Chapter 11, he could propose a plan of reorganization that would have a significant likelihood of
success within a reasonable time. This future plan, as postulated by Mr. Van Wagner, would be,
inferentially, an “indubitable equivalent” proposal under § 361 of the Bankruptcy Code and would
thereby provide BB&T with adequate protection. See, e.g., 3 Collier on Bankruptcy ¶ 362.10
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(stating that once the creditor had proven cause to lift the stay, and the burden has shifted to the
debtor, the debtor must “show that the collateral is not declining in value, the movant is adequately
protected by periodic cash payments, an equity cushion, replacement liens or otherwise, or that there
is a significant likelihood of a successful reorganization in a reasonable time.”). In making the
showing that a future plan of reorganization will provide BB&T adequate protection should stay
relief be denied, Mr. Van Wagner is required to show that his plan “will result in the realization . .
. of the indubitable equivalent of [the] collateral. . . .” United Sav. Ass’n of Tex. v. Timbers of
Inwood Forest Assoc., Ltd., 484 U.S. 365, 377-78 (1988)
Mr. Van Wagner, however, did not present any pro forma plan of reorganization for Hickory
Ridge. Instead, he stated that, if the court converted the case, he would engage in a new marketing
strategy for the two remaining parcels of Hickory Ridge’s real property – marketing it as a
commercial development instead of as raw land. In his belief as a real estate investor with over 30
years experience, the properties could generate a price of about $40,000 - $45,000 per acre, or
$3,379,500. Mr. Van Wagner, however, was not qualified as an expert, and no appraisal of the1
property was offered. Likewise, no analysis of a potential distribution to creditors in a reorganization
plan was offered, no marketing professionals appeared to testify, and after nearly two years of having
Hickory Ridge’s properties on the open market, no acceptable offer had been made. In short, Mr.
Van Wagner’s oral outline of a proposed Chapter 11 plan consists of doing little else than what
Hickory Ridge’s Chapter 7 trustee has already attempted to do – marketing and selling the properties.
The court is not convinced, and was presented no evidence to the contrary, that a mere change in
marketing strategy (if indeed marketing the property as a commercial development is a change) will
result in offers being made to the estate in excess of the liens secured by the properties. Meanwhile,
no payments are proposed to be made to BB&T.
This value, $3,379,500, is less than the face value of all the liens secured by the two1
properties, about $3.4 million. Mr. Van Wagner testified, however, that he disputed the status or
amount of all the secured liens on the properties, except those belonging to BB&T. Of course,
Mr. Van Wagner’s value estimates are far in excess of the offers actually received by Hickory
Ridge’s Chapter 7 trustee – the highest of which was $1.65 million. Based on actual offers
received for the properties, the court does not believe that $3,379,500 is a credible assessment of
the properties actual value as of the time of the April 16, 2010 hearing.
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Consequently, whether this case remains in Chapter 7 or the court converts it to Chapter 11,
“cause” exists under 11 U.S.C. § 362(d)(1) to lift the automatic stay as requested by BB&T.
B. Conversion
Mr. Van Wagner, purporting to be the managing member of Hickory Ridge, authorized and2
directed Hickory Ridge’s substitute counsel, Arthur W. Boyce, to file a motion to convert the case
from Chapter 7 to Chapter 11. BB&T objects to the conversion on the basis that Mr. Van Wagner
is a dissociated member of Hickory Ridge, and any management authority he had belongs to Mr. Van
Wagner’s Chapter 7 trustee, Thomas Fluharty.
Under W. Va. Code § 31B-6-601(7) “[a] member is dissociated from a limited liability
company upon the occurrence of . . . (7) The member’s (i) becoming a debtor in bankruptcy . . . [or]
(iii) . . . acquiescing in the appointment of a trustee . . . of the member or of all or substantially of
the member’s property . . . .”
Under this statute, Mr. Van Wagner’s personal bankruptcy filing effected his disassociation
from Hickory Ridge. Once disassociated, Mr. Van Wagner’s “right to participate in the management
and conduct of the company’s business terminates . . . and the member ceases to be a member and
is treated the same as a transferee of a member.” § 31B-6-603(b)(1); see also Klingerman v.
ExecuCorp, LLC (In re Klingerman), 388 B.R. 677, 678 (Bankr. E.D.N.C. 2008) (holding that under
state law, the bankruptcy of a member of the limited liability company effected this disassociation;
under “the Operating Agreement and North Carolina law of limited liability corporations, Mr.
Several times during the April 16, 2010 hearing, either Mr. Van Wagner or Hickory2
Ridge’s substitute counsel stated that this court has recognized Mr. Van Wagner as the managing
member of Hickory Ridge. To the contrary, the court has never made a finding of fact in that
regard. In the past, the court has referred to Mr. Van Wagner as the managing member of
Hickory Ridge, but such statements were merely referencing Mr. Van Wagner’s own assertions
regarding his capacity; those statement were not findings of fact after a considered review of the
record.
Moreover, Hickory Ridge’s bankruptcy case has always been under Chapter 7. As such,
Mr. Trumble, Hickory Ridge’s Chapter 7 trustee, has been in control of the affairs of Hickory
Ridge. After filing bankruptcy, which Mr. Van Wagner could authorize as managing member,
no need existed for the management of Hickory Ridge’s business and no previous need existed to
adjudicate Mr. Van Wagner’s authority to act as managing member of Hickory Ridge since
Hickory Ridge’s bankruptcy filing preceded the personal bankruptcy filing of Mr. Van Wagner.
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Klingerman would not have standing to pursue dissolution [of the LLC].”); In re Garrison-Ashburn,
L.C., 253 B.R. 700, 704 (Bankr. E.D. Va. 2000) (“The effect on a member on becoming
disassociated from a limited liability company is to divest the member of all rights as a member to
participate in the management or operation of the company.”).
Of course, under W. Va. Code § 31B-1-103(a), “all members of a limited liability company
may enter into an operating agreement, which need not be in writing, to regulate the affairs of the
company . . . and to govern relations among the members, managers and company.” With the
exception of certain non-waivable provisions – not applicable here – the West Virginia Limited
Liability Act only governs relations among the members, managers and company “[t]o the extent the
operating agreement does not otherwise provide.” § 31B-1-103(a).
Nothing in Hickory Ridge’s operating agreement, however, prevents Mr. Van Wagner’s state
law disassociation as a member of Hickory Ridge. Regarding a member’s bankruptcy, the operating3
agreement provides:
7.1 Death, Resignation, Etcetera of a Member. If a Member . . . becomes bankrupt
. . . (the Incapacitated Member), the Company shall be dissolved unless the business
of the Company is continued by the consent of a majority of interest of the remaining
Members. If the business of the Company is continued pursuant to Article 8.1(A) of
this Agreement, a majority of interest of the remaining Members shall elect either to:
(i) permit the Incapacitated Member’s successor-in-interest to continue as Assignee
or substitute Member, or (ii) cause the Company to redeem the interest of the
Incapacitated Member. . . .
. . . .
8.1 Dissolution. . . . The Company shall be dissolved upon:
A. The . . . bankruptcy . . . of a Member . . . except where the Members,
other than the effected Member, vote unanimously to continue the business
of the company.
B. The filing by the Manager of any petition . . . seeking . . .
reorganization . . . liquidation . . . or similar relief under the . . . federal
bankruptcy act . . . .
. . . .
8.2 Continuation of Company. In the event [of dissolution] of the Company pursuant
Hickory Ridge’s articles of organization provide that its operating agreement must be in3
writing and that no oral operating agreement is valid. This feature of the articles of organization
effectively undercuts the contention of Hickory Ridge in its response (Document No. 174) that its
operating agreement was orally modified to waive the statutory dissolution provisions.
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to the events described in section 7.1(A) above, the business and affairs of the[4]
Company shall not be discontinued and the Company shall remain in existence as a
Limited Liability Company under the laws of the State of West Virginia, if the
remaining Members unanimously agree to continue the company under this
Agreement within 60 days of such event of [dissolution].”
(Exhibit 30).
Accordingly, no provision of the operating agreement waives the disassociation of a member
when that member files a bankruptcy petition. Under § 7.1, a member’s bankruptcy makes that
member an Incapacitated Member, and the only stated options for the remaining members are to
either redeem the interest of the Incapacitated Member or to allow the member’s successor in interest
– not the Incapacitated Member – to continue as an assignee or substitute member. Sections 8.1 and
8.2 provide for the dissolution of Hickory Ridge based on that bankruptcy filing unless the remaining
members vote to continue its business. Consequently, nothing in Hickory Ridge’s operating
agreement waives the operation of W. Va. Code § 31B-601(7), and, under applicable state law, Mr.
Van Wagner is a disassociated member of Hickory Ridge.
Regarding the application of federal bankruptcy law, however, when Mr. Van Wagner filed
his March 28, 2008 bankruptcy petition he was the managing member of Hickory Ridge.
Notwithstanding any prohibition or restriction under state law that would otherwise limit the transfer
of Mr. Van Wagner’s interest in Hickory Ridge or his management authority, all his interest in
Hickory Ridge became property of his bankruptcy estate. E.g., 11 U.S.C. §§ 541(a) (stating that the
bankruptcy estate consists of, inter alia, “all legal or equitable interests of the debtor in property as
of the commencement of the case . . . .”); § 541(c) (“[A]n interest of the debtor becomes property
of the estate . . . notwithstanding any . . . applicable nonbankruptcy law – (A) that restricts or
conditions transfer of such interest by the debtor, or (B) that is conditioned on . . . the
commencement of a case under this title . . . .”); Klingerman, 388 B.R. at 679 (holding that all
membership and management rights of a member filing bankruptcy passed to the bankruptcy estate
notwithstanding applicable nonbankruptcy law that would prohibit that transfer); Movitz v. Fiesta
The operating agreement does not contain a section 7.1(A). The court believes that this4
is a typographical error and that the proper reference is to section 8.1(A).
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Invs., LLC (In re Ehmann), 334 B.R. 437 (Bankr. D. Ariz. 2005) (“The effect of Code § 541(c) is
not limited to ‘economic’ interests, a distinction that does not there appear. Rather, its effect is to
preserve, for the benefit of debtor’s creditors, all of the debtor’s interests in property whether deemed
economic or not, and to eliminate any contractual or statutory limitations that might otherwise apply
on account of their transfer to a trustee in bankruptcy.”), withdrawn, 337 B.R. 228 (Bankr. D. Ariz.
2006) (opinion withdrawn due to settlement).
Once a managing member’s interest in a limited liability company becomes part of the
bankruptcy estate, the trustee is free to use, sell or lease that property pursuant to 11 U.S.C. § 363(l),
which provides that “the trustee may use, sell, or lease property . . . notwithstanding any provision
in a contract, a lease, or applicable law that is conditioned on the insolvency or financial condition
of the debtor . . . .”5
Consequently, not only is Mr. Van Wagner a dissociated member under state law, his 50%
ownership interest in Hickory Ridge that he had when he filed his March 28, 2008 bankruptcy case
became property of his Chapter 11 bankruptcy estate, subject to the control of his Chapter 7 trustee
when he converted his case from Chapter 11 to Chapter 7 on July 1, 2009.
On March 25, 2010, Mr. Van Wagner did acquire, for himself, an additional 45% ownership
interest in Hickory Ridge from Steven Crites. Mr. Crites, however, is not a managing member of
Hickory Ridge, and is not a majority owner of Hickory Ridge. Under § 2.6 of Hickory Ridge’s
operating agreement, the consent of the holders of more than 50% of Hickory Ridge’s ownership
must consent to authorize the substitution of a new manager.
Therefore, the court finds that Mr. Van Wagner’s 50% ownership interest, and his rights as
a managing member, are currently controlled by his Chapter 7 trustee, Thomas Fluharty. At the time
of the April 16, 2010 hearing on the motion to convert, Mr. Van Wagner did not have the authority
to make management decisions for Hickory Ridge. Mr. Fluharty has not yet formally abandoned any
In this case, Mr. Van Wagner’s Chapter 7 trustee has not attempted to exercise any5
management authority over Hickory Ridge. The court expresses no opinion as to whether the
trustee is entitled to exercise such control. See, e.g., 11 U.S.C. § 365(c) (stating that the trustee
may not assume an executory contract – potentially an operating agreement – if applicable law
excuses a party, other than the debtor, from accepting performance from . . . an entity other than
the debtor or debtor in possession . . . .”).
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interest in Hickory Ridge in Mr. Van Wagner’s personal bankruptcy case. Contrary to the
contentions of Mr. Van Wagner, any previous conduct or representations by Mr. Fluharty that he did
not want to administer Mr. Van Wagner’s interest in Hickory Ridge do not constitute an
abandonment – abandonment must be express as required by 11 U.S.C. § 554 and Fed. R. Bankr. P.
6007. See, e.g., Wissman v. Pittsburgh Nat'l Bank, 942 F.2d 867, 873 (4 Cir. 1991) (no informalth
abandonment); In re FCX, Inc., 54 B.R. 833, 839 (Bankr. E.D.N.C. 1985) (“For a notice of
abandonment . . . to be effective, it must identify the property to be abandoned . . . .”); 10 Collier on
Bankruptcy ¶ 6007.02[d] (Alan N. Resnick & henry J. Sommer eds. 15 ed. rev. 2010) (“Other thanth
for automatic abandonment under section 554(c), Rule 6007(a) sets forth the exclusive procedure
by which the trustee or debtor in possession may abandon property. Informal or constructive
abandonment is not effective.”). Consequently, Hickory Ridge has not been authorized by its
manager or members to convert its case to Chapter 11, and, therefore, cannot be a debtor in Chapter
11 pursuant to 11 U.S.C. § 706(d).6
III. CONCLUSION
For the above-stated reasons, the court will enter a separate order that grants BB&T relief
from the automatic stay and that denies Hickory Ridge’s motion to convert its case from Chapter 7
to Chapter 11.7
Section 706(d) of the Bankruptcy Code provides: “a case may not be converted to a case6
under another chapter of this title unless the debtor may be a debtor under such chapter.”
Because the court has denied Hickory Ridge’s motion to convert based on the lack of7
corporate authority under 11 U.S.C. dd 706(d), the court need not address the objection of the
Chapter 7 trustee to the conversion of the case based on bad faith.
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