NY District Court Refuses to Hold Debtor Liable for Alleged Breach of Subsidiary’s Contract
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December 12, 2022, US District Court for Southern New York – The District Court for Southern New York affirmed a decision of the Southern New York Bankruptcy Court, which had dismissed Zelig Weiss’s complaint against Debtor All Year Holdings Ltd. and its subsidiary YGWV.
The District Court accepted the facts of the case as decided upon by the Bankruptcy Court. According to these facts, Zelig Weiss and YGWV were each member of an entity known as Wythe Berry Member LLC. YGWV was in turn solely owned by Debtor All Year Holdings. The membership agreement between Weiss and YGWV prohibited either member from transferring membership interest without the other party’s consent. However, All Year’s Chapter 11 plan provided for All Year’s interest in YGWV to be sold to a third party. Weiss had alleged that the transfer without Weiss’s consent amounted to a breach of contract. The Bankruptcy Court, and now the District Court, rejected Weiss’s allegation. The District Court noted that the membership agreement only restricted the members – defined in the agreement as Weiss and YGWV – from transferring their interest. The Court found that YGWV would remain a member since it is All Year which is transferring its interest in YGWV to a third party. The Court concluded that YGWV was not in breach of the membership agreement.
However, Weiss contended that All Year should be deemed a party to the membership agreement, claiming that All Year was an alter ego of YGWV. The Court held that Weiss’s alter ego allegations fail since it failed to allege that All Year exercised any domination or control over YGWV for the purported transfer of All Year’s interest in YGWV to a third party. The District Court ruled that a parent company can transfer its own shares in a subsidiary without latter’s involvement or assent.
Weiss had further alleged that All Year’s chapter 11 filing automatically terminated its membership interest in YGWV and led to YGWV’s immediate dissolution according to sections 603 and 701 of New York’s Limited Liability corporations Law. Both the Courts rejected this argument. The District Court emphasized that Section 701 expressly states that bankruptcy of a member will not automatically result in dissolution of the company “unless otherwise provided in the operating agreement”. The Court found that YGWV’s operating agreement does not identify All Year’s bankruptcy as a dissolution event. The District Court also agreed with the Bankruptcy Court in that All Year’s bankruptcy filing did not result into a transfer or assignment of its membership interest in YGWV to its bankruptcy estate. The District Court quoted the Supreme Court’s holding in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S. Ct. 1188, 1984 U.S. LEXIS 6, to hold that a pre-petition debtor and a post-petition debtor in possession are not legally distinct entities. Therefore, the District Court rejected Weiss’s section 603 argument which terminates a member’s membership interest when a member assigns or transfers its membership interest.
The District Court affirmed the Bankruptcy Court’s decision to dismiss Weiss’s complaint on multiple independently sufficient grounds.
Weiss v. All Year Holdings Ltd. (In re All Year Holdings Ltd.), 2022 U.S. Dist. LEXIS 223742, 2022 WL 17584254
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