Article Contributed by Christopher Linden and Kyle J. Ortiz
In our previous article, Chapter 11? No Thank You! Courts Find Restrictions on Bankruptcy Filings in LLC Agreements Enforceable we commented on the decision of the United States Bankruptcy Appellate Panel for the Tenth Circuit, holding that an LLC’s manager lacked authority to file a chapter 11 petition because the operating agreement contained language explicitly prohibiting the manager from taking such action. In re DB Capital Holdings, LLC, Nos. CO-10-046, 10-23242, 2010 WL 4925811 (B.A.P. 10th Cir. Dec. 6, 2010). Our discussion pointed out that nothing in the court’s decision appeared to prohibit creditors from filing an involuntary petition against the LLC. Well, we hate to say we told you so, but we told you so. Shortly after the BAP’s decision dismissing the voluntary petition, five of DB Capital’s creditors filed an involuntary petition against the company.
In response to the involuntary petition, Aspen (the same LLC member that had opposed the voluntary filing), moved to dismiss the petition, asserting that (1) the petitioning creditors’ claims were in bona fide dispute and (2) the filing was in bad faith. The bankruptcy court denied the motion to dismiss, holding that although Aspen had standing to seek dismissal, dismissal was not appropriate. (Note that the issue of whether a party other than the debtor may challenge an involuntary filing also was discussed in the recent Zais decision Tranche Warfare, or How I Learned To Stop Worrying and Love Bankrupt CDOs in which the court stated that, consistent with Third Circuit law, only the debtor may challenge whether creditors meet the standard for commencing an involuntary.) Aspen promptly appealed from the decision to the district court.
On appeal, the district court held that Aspen lacked standing to appeal from the bankruptcy court’s decision, finding that Aspen failed to meet its burden of demonstrating that it was a “person aggrieved” by the decision. Aspen HH Ventures v. G.D.B.S. at Snowmass, Inc. (In re DB Capital Holdings, LLC), No. 10-cv-03031-PAB, 2011 WL 3236169 (D. Colo. July 28, 2011). Standing to appeal a bankruptcy court’s order is limited to persons aggrieved by the ruling, i.e., parties whose rights or interests are “directly and adversely affected pecuniarily.” Aspen argued that its pecuniary interests were adversely affected by the bankruptcy court’s decision to allow the involuntary case to go forward because the order violated DB Capital’s Operating Agreement. The district court found this argument unpersuasive, pointing out that Aspen had failed to explain how the violation of the Operating Agreement “directly” impacted its pecuniary interests. As such, the district court dismissed the appeal for lack of standing.
As of this writing, Aspen has not appealed the district court decision, and the statutory period for filing a notice of appeal has passed. So, it appears that Aspen’s attempts to bankruptcy-proof DB Capital have finally come to an end.