Court Opinion

ID: 4102992
Source: CourtListenerOpinion
Date Created: 2016-11-29 20:01:04.00645+00
Date Added: 2024-06-11T09:36:29.806488
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 15-2345

In Re:   MIN SIK KANG; MAN SUN KANG,

                 Debtors.

-----------------------------------

YEON K. HAN,

                 Creditor – Appellant,

           v.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS,

                 Creditor,

           and

RAYMOND A. YANCEY,

                 Trustee – Appellee.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.      Leonie M. Brinkema,
District Judge. (1:15-cv-00953-LMB-IDD; 10-18839-RGM; 12-01496-
RGM)

Submitted:   October 5, 2016                 Decided:   November 29, 2016

Before SHEDD, DUNCAN, and FLOYD, Circuit Judges.

Affirmed by unpublished per curiam opinion.
Timothy J. McGary, Vienna, Virginia, for Appellant.      Todd M.
Brooks, Baltimore, Maryland, Bradford F. Englander, WHITEFORD
TAYLOR & PRESTON LLP, Falls Church, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:

     Appellant Yeon Han challenges the district court’s order

affirming the bankruptcy court’s grant of summary judgment to

Appellee     Raymond      Yancey,     the        Chapter       11    Trustee   in    this

bankruptcy case.           The bankruptcy court entered a declaratory

judgment     invalidating         a   purported           transfer       of    ownership

interests to Han in one of the bankruptcy debtors’ LLCs, on the

grounds    that     the      transfer       violated           the   LLC’s     operating

agreement.       Because we agree that the purported transfer is null

and void, we affirm.

                                            I.

                                            A.

     Although the ownership transfer at issue here took place in

2009, it has its origins in events tracing back to 2004.                               In

February 2004, Grand Centreville, LLC (“Grand Centreville”) was

created    for    the     sole    purpose       of     acquiring,      developing,    and

managing a retail shopping center in Centreville, Virginia.                           At

the time of its formation, Grand Centreville had one member: a

shell company called Grand Equity, LLC (“Grand Equity”).                            Grand

Equity,    in     turn,     was    managed        by     its    sole    member,     Grand

Development, LLC (“Grand Development”), another shell company.

Grand Development was wholly owned and managed by the Debtors,

Min and Mik Kang.

                                            3
       In June 2005, Grand Centreville refinanced an existing loan

and executed a “Deed of Trust, Assignment of Leases and Rents

and Security Agreement” (“2005 Deed of Trust”).                            The 2005 Deed

of Trust prohibited specific transactions that could threaten

the lender’s interests.              In particular, (1) Grand Centreville’s

direct      and    indirect       owners     could    not   transfer        more         than   a

49% interest in Grand Centreville; (2) Grand Centreville could

not incur debts outside the ordinary course of business, and

(3) Grand         Centreville      could     not     encumber     the      property        with

additional security interests.

       During       the    course       of    the      refinancing,           the        Debtors

incorporated         another      entity,      Grand    Formation,         Inc.          (“Grand

Formation”),         which      became       the     managing     member            of     Grand

Centreville        and    acquired      a    0.5%    ownership     interest.              Grand

Equity (99.5% owner) and Grand Formation (0.5% owner) created a

new operating agreement (“the 2005 Operating Agreement”), which

listed “Ronnie C. Kim” as an Independent Member.                           Kim, however,

testified that he was never a member of the entity.                             J.A. 1757–

64.    The 2005 Operating Agreement incorporated requirements from

the 2005 Deed of Trust, including restrictions on the transfer

of    ownership      interests,      incurrence        of   debts,      and    encumbrance

with additional liens on the property.

       As    relevant        to     the      Trustee’s       standing,         the         State

Corporation        Commission      of     Virginia     canceled      the      existence         of

                                              4
Grand    Equity   and    Grand    Development       for     nonpayment      of   annual

registration      fees   as   of    December        31,     2008.      Virginia       law

provides that when an LLC is canceled, its property “shall pass

automatically to its managers, . . . members, . . . or holders

of interest, . . . as trustees in liquidation.”                        See Va. Code

§ 13.1-1050.2(C). 1      Thus, because the Debtors wholly owned Grand

Development, which wholly owned Grand Equity, the interests in

Grand    Centreville       held     by    the       canceled        LLCs    “pass[ed]

automatically” to the Debtors, as trustees in liquidation.

     On March 16, 2009, the purported transfer at issue here

took place (“the 2009 Sale”).                 In the 2009 Sale, the Debtors

agreed    to   effectively       sell   60%    of   their     interests     in   Grand

Centreville     and   Grand   Formation        to   Han 2    and    James   Sohn, 3    in

     1 Citations throughout are to the current version of the
Virginia Limited Liability Company Act (the “Act”). The Act was
amended in 2008, effective April 1, 2009, which resulted in the
renumbering of certain provisions related to the cancellation of
an LLC’s certificate due to nonpayment of registration fees and
the process of winding up when such a cancellation occurred.
See 2008 Va. Acts 155, ch. 108.      No substantive changes were
made, and the process now in effect is substantially similar to
the process then in effect.    See Gen. Tech. Applications, Inc.
v. Exro Ltda, 388 F.3d 114, 119-20 (4th Cir. 2004).
     2 Han pleaded guilty on May 15, 2013 before Judge Gerald
Bruce Lee in the Eastern District of Virginia to two counts of
conspiracy to commit wire fraud, including participation in the
creation of false HUD-1 settlement statements in connection with
the 2009 Sale. See J.A. 1985.
     3 Sohn settled with the Trustee after the bankruptcy court
ruled on summary judgment.

                                         5
violation of the terms of the 2005 Operating Agreement.                             The

Debtors also purported to issue a promissory note in favor of

Han and Sohn, which was secured by a security interest in the

shopping center.

                                          B.

     On    October       19,     2010,    the    Debtors     jointly       filed    for

Chapter 11 bankruptcy.           The Office of the United States Trustee

appointed the Official Committee of Unsecured Creditors (“the

Committee”)       in   early      December      2010,     which       instituted    the

underlying adversary action to reverse several transactions the

Debtors entered into prior to the bankruptcy.                      In January 2013,

the Office of the U.S. Trustee then appointed Appellee Yancey as

the Chapter 11 Trustee, and he took over the Committee’s claims

against    Sohn    and    Han.      The    Trustee       filed    a    second-amended

complaint,    seeking,      among    other      relief    not     relevant   here,    a

declaration that the 2009 Sale was invalid.

     The   parties       filed    cross-motions      for    summary      judgment    on

this claim, with the Trustee arguing that the 2009 Sale was null

and void because it violated the 2005 Operating Agreement.                           At

the summary judgment hearing, the bankruptcy court determined

that, if the 2005 Operating Agreement was effective, then the

2009 Sale was void.              The court held a trial to resolve the

factual dispute as to whether the 2005 Operating Agreement was

effective.    After trial, the court concluded that the agreement

                                           6
was effective, and that the purported transfer was null and void

because it violated the agreement.                          The district court affirmed

the bankruptcy court’s ruling invalidating the 2009 Sale.

                                                 II.

       On appeal, Han argues that: (1) the Trustee lacks standing;

(2) the       2005    Operating          Agreement         never     became    effective          and

therefore did not govern the 2009 Sale; and (3) even if the 2005

Operating Agreement governed, the 2009 Sale was not null and

void.

       In     reviewing       a     bankruptcy            order,     “we     apply       the     same

standard      of     review       that    the    district          court    applied       when     it

reviewed       the    bankruptcy          court’s         decision.”         In    re     Jenkins,

784 F.3d 230,    234    (4th        Cir.       2015)     (quoting       In     re    Nieves,

648 F.3d 232, 237 (4th Cir. 2011) (per curiam)).                               We thus review

the    bankruptcy      court’s          factual          findings     for   clear        error    and

legal    conclusions         of    both        the       bankruptcy    court       and    district

court de novo.         Id.

                                                 A.

        We    begin    with       the     threshold          issue     of    standing.            Han

contends that the Trustee does not have standing to bring the

instant claim because the Debtors, in whose shoes the Trustee

stands, did not have a direct interest in Grand Centreville, but

only     an    interest       in         the    entities        that        controlled         Grand

                                                     7
Centreville--Grand          Equity     and     Grand       Development.             Thus,

according to Han, the Trustee is impermissibly attempting to

assert    the    rights     of   corporate     entities         rather     than   rights

belonging to the Debtors.            This argument is without merit.

       A Chapter 11 Trustee has the power to assert the rights of

the    debtor    and   creditors,     as     defined      by    state    law.     Steyr-

Daimler-Puch of Am. Corp. v. Pappas, 852 F.2d 132, 135 (4th Cir.

1988).         Under   Virginia     law,     the    property      of     canceled    LLCs

“pass[es] automatically” to the managers, members, or holders of

interest, who act as trustees in liquidation to distribute the

company’s assets after the LLC is wound up and all liabilities

and obligations are satisfied.             Va. Code § 13.1-1050.2(c).

       When Grand Development and Grand Equity were canceled in

2008, their interests in Grand Centreville were held in trust by

Mr.    Kang     “as    trustee[]      in     liquidation”         for     himself        and

Mrs. Kang,       the   ultimate     owners.         Id.        Because    there     is    no

evidence to suggest that the LLCs were anything but pass-through

entities with no business to wind up or outstanding debts to

pay,     the    interests    they     held     in    Grand       Centreville      passed

directly to the Debtors.             Stepping into the Debtors’ shoes, the

Trustee therefore has standing to pursue its claim that the 2009

Sale is null and void.

                                           8
                                           B.

     Han next argues that because Ronnie Kim never agreed to the

2005 Operating Agreement, it never became effective.                            See Va.

Code § 13.1-1023(B)(1) (providing that “[a]n operating agreement

must initially be agreed to by all of the members”).                            There is

no basis for this argument.

     It is true that the 2005 Operating Agreement lists Ronnie

Kim, together with Grand Formation and Grand Equity, as a member

of Grand Centreville.           J.A. 1345.       However, membership in an LLC

is a matter of assent, and a person cannot become a member

without    agreeing   to    do    so.      Cf.    Broyhill     v.      DeLuca    (In   re

DeLuca),    194 B.R. 65    (Bankr.       E.D.   Va.   1996). 4      Ronnie       Kim

testified that he had never been a member of Grand Centreville,

and had not seen the 2005 Operating Agreement prior to preparing

for his deposition, nor even heard of Grand Centreville before

     4 Han argues that Broyhill does not support the district
court’s conclusion that “a member [must] have knowledge of and
consent[] to the membership interest.”   Appellant’s Br. at 11.
Although Broyhill does not directly touch on the issue in the
present case, the court there did conclude that an entity became
a member of an LLC through the assent of all its members. And
Han even concedes that she “is not suggesting that Mr. Kim be
made an ‘involuntary member.’”    Appellant’s Br. at 12.     Her
argument that the remaining members’ assent to the 2005
Operating Agreement is meaningless without Kim’s inclusion is
belied by the remaining members’ conduct--they never sought
Kim’s input on decisionmaking or his consent to the 2009 Sale.
Simply put, there is no indication they actually intended for
Kim to be a true member. Cf. In re Williams, 455 B.R. 485, 496
(Bankr. E.D. Va. 2011).

                                           9
then.       J.A. 1757–64; J.A. 1823–27.                      And no testimony or other

evidence suggested otherwise.                         Thus, because Kim was never a

member of Grand Centreville, the 2005 Operating Agreement became

effective without his agreement. 5

                                                 C.

       Finally, Han argues that the lower court erred by holding

that       the    transfer    was        null    and     void.           She       contends       that

violations of the 2005 Operating Agreement only rendered the

transaction voidable, which would allow her to raise equitable

defenses such as estoppel.                  See Richard L. Deal & Assoc., Inc.

v. Commonwealth, 299 S.E.2d 346, 349 (Va. 1983).                                   In particular,

she argues that an operating agreement is merely an agreement

among      its     members,    and        that    just       as    the    Debtors       could       be

estopped         from   denying      they       had    the    power       to       consummate      the

2009 Sale, so too can the Trustee.                      We disagree.

       Under       Virginia        law,     an    operating         agreement          binds       the

parties to the agreement.                   Mission Residential, LLC v. Triple

Net    Props.,      LLC,     654 S.E.2d 888,    891       (Va.    2008).           And    the

members can, through the operating agreement, “provide rights to

any    person,      including        a    person       who    is    not        a    party   to    the

       5
       By not arguing it on appeal, Han waived any contention
that the 2005 Operating Agreement was not effective because of a
missing signature page for Grand Equity.    We therefore do not
address that argument further.

                                                 10
operating agreement, to the extent set forth in the operating

agreement.”   Va. Code § 13.1-1023(A)(1).

     Here,    Han    concedes      that   the         restrictions    in   the

2005 Operating Agreement were designed to benefit the lender.

Appellant’s Br. at 13.      She also concedes that “[t]he transfer

would have violated the transfer of control provisions contained

in the 2005 operating agreement.”         Id.     And yet, without citing

any authority, she argues that the violations would only give

the lender the right to void the 2009 Sale, not render it null

and void.     Although few courts appear to have spoken on the

issue, the courts that have addressed it conclude that actions

that violate an LLC’s operating agreement are null and void.

See, e.g., Kapila v. Deutsche Bank AG (In re Louis J. Pearlman

Enters., Inc.), 398 B.R. 59, 65 (Bankr. M.D. Fla. 2008) (“The

purported transfer is void and of no effect pursuant to the

Operating Agreement.”).

     We are likewise persuaded that such actions are without

legal    effect   because   they    exceed      the     scope   of   authority

conferred by the operating agreement. 6               As the district court

     6 Han’s reliance upon News-Register Co. v. Rockingham Pub.
Co., 86 S.E. 874 (Va. 1915), to argue otherwise is misplaced.
First, News-Register Co. pre-dated the existence of LLCs, and
concerned two corporations that entered into a partnership
agreement.   Second, as the court there stated, “[t]he main,
indeed the sole, contention in this case centers upon the
question whether, under the laws of Virginia, two corporations
(Continued)
                                    11
recognized, operating agreements define the authority of LLCs,

and   companies   that   engage   in   transactions   with   an   LLC

appropriately look to these agreements during the due-diligence

process to determine such authority.     Actions taken outside the

authority conferred by the operating agreement are thus ultra

vires and without legal effect. 7      Because there is no dispute

that the 2009 Sale violated the 2005 Operating Agreement, it is

null and void.

can form a partnership.” Id. at 876. The court concluded that
the two corporations could validly form a partnership, and only
suggested in dicta that a corporate actor could be estopped from
arguing that it was without power to enter into such an
agreement after amending its corporate charter to expressly
allow it to do so and undertaking the transaction in good faith.
Among the other factors making the case inapposite, the
transaction here was not undertaken in good faith, but expressly
designed to obscure the fact that it violated the 2005 Operating
Agreement. See J.A. 1728.
      7As the Trustee argues, the Fifth Circuit’s decision in
Kinwood Capital Group, LLC v. BankPlus (In re Northlake Dev.,
LLC), 643 F.3d 448 (5th Cir. 2011), further supports this
conclusion. In BankPlus, a minority member of an LLC purported
to transfer the LLC’s property to another company that he
created, without any authority under the LLC’s operating
agreement. He then used that property as collateral to obtain a
loan for his new company, and the bank sought to retain the
property after the new company filed for bankruptcy. Relying on
an opinion from the Mississippi Supreme Court, the Fifth Circuit
concluded that the purported transfer was void and of no legal
effect because the minority member, as an agent of the LLC,
acted without authority. Id. at 451.

                                  12
                                  III.

     For   the   foregoing   reasons,    we   affirm   the   order    of   the

district court. 8

                                                                     AFFIRMED

     8 We dispensed with oral argument because the facts and
legal conclusions are adequately presented in the materials
before this court and argument would not aid in the decisional
process.

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