Tara Retail Group, LLC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
In re: )
)
TARA RETAIL GROUP, LLC, ) Case No. 17-bk-57
)
Debtor. ) Chapter 11
)
___________________________________ )
MEMORANDUM OPINION
On April 13, 2017, the court conducted a telephonic hearing to deliver its decision and
rationale regarding, among other things, a motion to dismiss filed by COMM2013 CCRE 12
Crossing Mall Road LLC (“Comm2013”). Based upon the court’s analysis at the hearing, it denied
the motion to dismiss and, given the exigencies surrounding its oral ruling, reserved the right to
issue a written memorandum opinion if any party filed an appeal. The court entered its order
denying the motion to dismiss on April 14, 2017, and on April 26, 2017, Comm2013 filed notice
of its appeal from that order. In order to create a more robust record for the District Court, the
court issues this written memorandum opinion restating its justification for denying the motion to
dismiss.
Comm2013 asserts that the court should grant its motion to dismiss because the Debtor
failed to secure the appropriate corporate authority, required by the Debtor’s governing documents,
to commence this case. Specifically, it asserts that the Debtor failed to obtain approval for the
bankruptcy filing from (i) an Independent Director, (ii) all of the Debtor’s members, and (iii) a
special purpose entity (“SPE”) who serves as a manager of the Debtor but possesses no equity
interest therein. The Debtor concedes that it did not strictly comply with the requirements to obtain
appropriate authorization to file its bankruptcy case. Despite that, the Debtor asserts that the court
should deny the motion to dismiss because it substantially complied with the governing documents
regarding its ability to file a petition for relief under Chapter 11. Moreover, it asserts in its
supplemental briefing regarding Comm2013’s motion to dismiss that it attempted to obtain a
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substitute Independent Director but was unsuccessful in that regard based upon its inability to
compensate such director.
Although the court is unpersuaded by the Debtor’s arguments that it substantially complied
with its corporate governance or that obtaining proper authorization was legally impossible, and
thus unnecessary, the court denies Comm2013’s motion to dismiss because the Debtor’s managing
member, Tara Retail Management, through its Independent Director, John Hosmer, ratified the
petition by remaining silent, despite having complete information and an opportunity to be heard
on the matter.
I. BACKGROUND
The Debtor, a Georgia LLC, manages and operates Elkview Crossing Mall (the “Shopping
Center”) in Elkview, West Virginia. The Debtor is a single-asset real estate debtor with rents
derived from the Shopping Center as its only source of revenue. Comm2013 is the Debtor’s
principal creditor and is secured by a lien on the Shopping Center and an assignment of rents
derived therefrom. On June 23, 2016, a series of thunderstorms caused calamitous flooding across
much of southern West Virginia including Elkview. The flooding destroyed the culvert and bridge
that provided the only public access to the Shopping Center. Thus, the Shopping Center has been
inaccessible and inoperable since that date. Before the flood, the Debtor was current and in
compliance with its monetary obligations to Comm2013. However, quite naturally, in the
aftermath of the flood, the Debtor has not generated any rents for the benefit of Comm2013.
The organizational documents that created the Debtor are, at times, murky. Nonetheless,
it is clear that the Debtor exists for the limited purpose of owning and operating the Shopping
Center. Moreover, the Debtor cannot voluntarily file a bankruptcy petition without the unanimous
consent of its members. Articles of Amendment to Articles of Organization ¶ 3(iii), ECF No. 30.
Additionally, so long as Comm2013 (or its initial predecessor-in-interest) holds a mortgage lien
on any portion of the Debtor’s property, the Debtor shall have as its manager a single purpose
entity that owns at least zero percent of the membership interests of the limited liability company
(“SPC Party”), Articles of Amendment ¶ 4(xxxiii); there shall be in place at all times an
Independent Director who serves as either a manager of the Debtor or a director of the SPC party,
Articles of Amendment ¶ 4(xxxv); and the Debtor will not seek bankruptcy protection without
unanimous consent of its board of directors or managers including the consent of each Independent
Director, Articles of Amendment ¶ 4(xxxvii).
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The Debtor’s Articles of Organization clearly define Independent Director.
“Independent Director” shall mean an individual who (i) has at least three (3) years
prior employment experience and continues to be employed as an independent
director, independent manager or independent member by CT Corporation,
Corporation Service Company, National Registered Agents, Inc., Wilmington Trust
Company, Stewart Management Company, Lord Securities Corporation, SPE
Independent Director, LLC, or , if none of those companies is then providing
professional independent directors, independent managers, and independent
members, another nationally-recognized company that provides such services and
which is reasonably approved by the lender . . . .
Articles of Amendment ¶ 4.
The Debtor’s Operating Agreement provides that the initial manager of the Debtor is Tara
Retail Management, Inc. (“Tara Retail Management”). Read consistent with the Articles of
Organization, Tara Retail Management is the Debtor’s SPC Party. The Articles of Incorporation
for Tara Retail Management (the Debtor’s SPC Party) largely mirror those of the Debtor’s Articles
of Organization. It exists for the limited purpose of managing the Debtor. Moreover, for as long
as a mortgage lien remains in place on the Debtor’s property, it shall have at least one duly
appointed Independent Director and will not cause the board of directors to take any action
requiring the unanimous affirmative vote of the members of its board of directors unless each
Independent Director participated in that vote, Articles of Incorporation of Tara Retail
Management, Inc. ¶ 6(xxxiii), ECF No. 163 Ex. 3; it shall not replace an Independent Director
without the occurrence of certain triggering events, Articles of Incorporation, ¶ 6(xxxiv); and shall
not approve the filing of a bankruptcy petition without unanimous consent of its board of directors,
Articles of Incorporation, ¶ 6(iii) .
The Independent Director of Tara Retail Management is John Hosmer, an employee and
majority owner of SPE Independent Director, LLC. SPE Independent Director, LLC, is a business
that offers corporate services specifically for single-asset entities, particularly focusing on
providing independent directors or trustees. Before starting SPE Independent Director, LLC, Mr.
Hosmer worked as an attorney for several national law firms performing commercial mortgage-
backed security work. Hosmer Dep., 4:22-6:8.
On the eve of bankruptcy, the Debtor’s bankruptcy counsel reached out to Mr. Hosmer to
obtain the necessary approval required by the Debtor’s Articles of Organization to file its
bankruptcy petition. Mr. Hosmer declined to approve the petition on such short notice, stating that
he would need at least a week and additional information. When the Debtor stated it needed to
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file bankruptcy by the next day, Mr. Hosmer remained undeterred. In response, William
Abruzzino and Debtor’s counsel drafted a resolution purporting to remove Tara Retail
Management as its manager and replace it with Martin Sheehan and William Abruzzino as new
managers. Moreover, the resolution provided that Martin Sheehan would serve as an Independent
Manager, and that Mr. Sheehan and Mr. Abruzzino approved the filing of the bankruptcy petition.
The Debtor, through its purported new managers, then filed its bankruptcy petition on January 24,
2017.
The court convened four hearings to address the motion to dismiss.1 At the first hearing,
on March 2, 2017, the court raised the possibility that ratification of the petition may be an issue.
After an additional round of briefing, the court convened a second hearing on March 30, 2017
regarding the motion to dismiss and other pending matters. At that hearing, the court held that
Comm2013 had standing to raise the motion to dismiss. Moreover, the court found that the
Debtor’s effort to remove Tara Retail Management as the Debtor’s SPE party was void, thus Tara
Retail Management remained the independent manager of the Debtor and Mr. Hosmer remained
the Independent Director of Tara Retail Management. The court therefore rejected the Debtor’s
argument that it substantially complied with its Articles of Organization. Furthermore, the court
rejected the Debtor’s arguments that its corporate documents violated public policy and created a
legal impossibility. However, the court stopped short of granting the motion to dismiss,
explaining that the Debtor’s independent manager, Tara Retail Management, may have ratified the
petition by remaining silent. In order to make a determination on that matter, the court entered an
order that required the Debtor to identify all of the directors and officers of Tara Retail
Management. It also required the Debtor to provide a copy of that order to all directors of Tara
Retail Management. The order informed them that they may appear and be heard at a subsequent
hearing to consider whether the Debtor’s management ratified the bankruptcy petition. The order
also gave the Debtor and Comm2013 an opportunity to provide additional supplemental briefing
on the issue.
1 The court acted to resolve the motion, in addition to other pending matters, as quickly as
practicable given its importance as a threshold issue and the financial strain and uncertainty that
the loss of the Shopping Center has caused the residents of Elkview, the surrounding
communities, and the business tenants and creditors of the Debtor.
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Subsequently, both the Debtor and Comm2013 diligently applied themselves to
supplementing the record as it relates to the possibility of ratification. The Debtor identified the
directors of Tara Retail Management. In that regard there are only two such directors: William
Abruzzino and John Hosmer. Moreover, the Debtor provided Mr. Hosmer with a copy of the
court’s order dated March 30, 2017, which includes in its final paragraph “that the Debtor shall
provide a copy of this order to all known Directors of Tara Retail Management, Inc. in the most
expeditious manner reasonably available who are hereby notified that they may be heard” at the
hearing set on April 6, 2017. On Tuesday, April 4, 2017, both counsel for the Debtor and for
Comm2013 deposed Mr. Hosmer in Charlotte, North Carolina. Among other things, Mr. Hosmer
indicated during his deposition that he did not explicitly authorize the filing of the Debtor’s
bankruptcy and that he was unaware of the filing until March 20, 2017, when he received certain
bankruptcy pleadings, but that he did not read those pleadings until March 27, 2017, because he
was traveling until that time.2 However, he indicated that by the time of his deposition, he had
listened to the recording of the March 30 hearing and was thus informed that his potential
ratification was a key issue in this case. Mr. Hosmer also stated during his deposition that he was
undecided whether he would approve or disapprove of the Debtor’s filing. In fact, he professed
uncertainty about whether any decision in that regard should be based on the facts that existed as
of the date the case was filed or at the present time. He further indicated that, short of further
instruction, he would not conduct any additional analysis to determine if he would expressly ratify
the Debtor’s bankruptcy filing.
On April 6, 2017, the court convened a third hearing on the motion to dismiss. Notably,
neither John Hosmer nor anyone representing him or SPE Independent Director, LLC appeared.
However, rather than ruling immediately, the court took the matter under advisement and did not
render a final judgment on the motion to dismiss until April 13, 2017, at which time it convened a
2 Notably when asked “would you agree . . . that you have not ratified the debtor’s bankruptcy as
of today, either affirmatively or by silence?” Mr. Hosmer responded, “I would agree that I have
not ratified the bankruptcy affirmatively. I agree that it’s a legal conclusion as to whether I’ve
ratified it by silence or acquiescence. That was not my intention, and I don’t think I did. But
again, I suspect that’s a legal matter to be decided based on the facts . . . .” The court agrees with
Mr. Hosmer’s analysis that reaching a determination regarding whether he implicitly ratified the
petition requires a legal conclusion based upon the facts. For that reason, the court does not give
weight to his statement that he did not think that he implicitly ratified the Debtor’s decision to
file bankruptcy.
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telephonic hearing for the purpose of announcing its decisions regarding the motion to dismiss and
other pending motions. At that time, the record as it pertains to Mr. Hosmer and his business
remained unchanged: neither he nor anyone on his behalf filed anything with the court, appeared
at a hearing, or otherwise attempted to voice any concern with the Debtor’s bankruptcy filing.
Thus, the court provided its rationale explaining that Hosmer ratified the Debtor’s filing by
remaining silent for a substantial period of time despite full knowledge that the Debtor filed
bankruptcy without first obtaining his authorization. The court entered an order denying
Comm2013’s motion to dismiss the next day.
II. ANALYSIS
The determination of who has the authority to file a bankruptcy petition on behalf of a
business entity is based on state law because “[t]he Bankruptcy Code does not establish what the
internal requisites are for the initiation of a voluntary corporate bankruptcy proceeding.” In re
Amercian Globus Corp., 195 B.R. 263, 265 (Bankr. S.D.N.Y. 1996). Furthermore, depending on
the applicable state law, “the unauthorized filing of a voluntary petition in bankruptcy [on] behalf
of a corporation might be ratified in appropriate circumstances by ensuing conduct of persons with
power to have authorized it originally.” Hager v. Gibson, 108 F.3d 35, 40 (4th Cir. 1997). In
Georgia, “the law is clear regarding the fact that the actions of a corporate officer acting without
authority may be ratified by the Board of Directors after the fact.” In re Valles Mec. Indus., 20
B.R. 355, 356 (Bankr. N.D. Ga. 1982). Furthermore, “an unauthorized act may be ratified by
failing to promptly disavow that act promptly upon its discovery.” Jape v. Reliable Air, Inc., (In
re Reliable Air, Inc.), No. 05-85627, 2007 WL 7136475, at *4 (Bankr. N.D. Ga. Mar. 9, 2007)
(citing Southtrust Bank of Georgia v. Parker, 486 S.E.2d 402, 406 (Ga. App. 1997)). Thus,
ratification by silence may be inferred when, despite obtaining full knowledge of the material facts
relating to a transaction, a responsible party fails to promptly disavow the action. However,
courts should not infer ratification by apparent “silent acquiescence to a transaction . . . [which
results] from the complexity of the situation rather than intent.” In re Adelphia Recovery Trust,
634 F.3d 678, 695 (2nd Cir. 2011).
In this instance, there are only three facts that are relevant to Mr. Hosmer’s ratification: (1)
that the corporate documents of the Debtor required his permission to seek bankruptcy protection,
(2) that the Debtor filed a bankruptcy petition without his assent, and (3) that, post-filing, he
remained the Independent Director of Tara Retail Management which was still the manager of the
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Debtor. Mr. Hosmer was made aware of each of those material facts. He knew that the Debtor
was in bankruptcy no later than March 27, 2017, and that the filing occurred without his
endorsement. He was also aware, no later than March 31, 2017, that his role in relation to the
Debtor remained unaffected by the filing or the Debtor’s actions immediately preceding filing.
Thus, he had full knowledge of all facts pertinent to exercising a veto to the bankruptcy filing no
later than March 31, 2017.
Despite that knowledge, Mr. Hosmer took no action objecting to the Debtor’s filing up to
the entry of the court’s order denying the motion to dismiss on April 14, 2017. Moreover, Mr.
Hosmer, a trained attorney, received an order notifying him of his opportunity to appear and be
heard on the issue of ratification at a hearing on April 6, 2017, but he took no action in response
to it. Rather, he elected to remain silent.
Comm2013 asserts that Mr. Hosmer’s inaction is reasonable because his silence resulted
from the complexity of the situation. Moreover, it asserts that no inference of ratification may be
drawn because an insufficient period of time has elapsed to support an inference of ratification.
However, both of these arguments miss the mark, along with Mr. Hosmer’s comment that he has
not yet reached a determination regarding whether he would ratify the petition because he has not
yet reviewed pertinent financial documents. The act by which ratification is measured is the
Debtor’s filing of its bankruptcy petition without proper authorization. Whether Mr. Hosmer
believes that such filing is or was financially justified at the time is of no consequence. Rather,
the sole issue at hand is simple: does the Independent Director object to the Debtor’s entry into
bankruptcy without proper authorization?
At no point between March 31, 2017 and the entry of the order denying the motion to
dismiss on April 14, 2017, did Mr. Hosmer ever object to the Debtor’s action. Contrary to
Comm2013’s argument that the passage of 15 days without action is too short a time period from
which to deduce that a director, such as Mr. Hosmer, has ratified an unauthorized action, the court
is convinced that, under the circumstances of this case, Mr. Hosmer was accorded a reasonable
time period and opportunity within which to make his objections, if any, known to the Debtor and
the court. Mr. Hosmer was put on notice that ratification was a key issue in determining whether
this bankruptcy case would continue. He was deposed by both interested parties. He received an
order presenting him with an opportunity to be heard on the issue of authorization regarding the
Debtor’s bankruptcy filing, including ratification. And yet, he never once objected to the Debtor’s
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filing. Rather, he chose silence. Thus, the sum of Mr. Hosmer’s conduct leads to the inexorable
conclusion that he does wish to be heard on the issue of the Debtor’s bankruptcy filing in the
absence of his authorization. In fact, as of the entry of this memorandum opinion, he has still taken
no action to disavow the Debtor’s filing.
III. CONCLUSION
For the reasons stated herein, and on the record previously, the court finds that the Debtor’s
manager, Tara Retail Management, ratified the filing of the bankruptcy petition such that it now
has appropriate authorization by which it may pursue its case. There is no dispute that William
Abruzzino supports the ratification. Furthermore, Mr. Hosmer’s silence, particularly in light of a
court order providing him with an opportunity to be heard, supports the inference that he too
supports ratification or is at least indifferent. Thus, it is now undisputed that the Debtor obtained
authorization from all of its members to file. Therefore, the Debtor complied with its governing
documents and Comm2013’s motion to dismiss must be denied.
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