LEE GROUP HOLDING COMPANY, LLC. et al v. WALRO

Filing 13

ENTRY AFFIRMING the Bankruptcy Court's Judgment in favor of the Trustee and against Appellants. Signed by Judge Richard L. Young on 8/10/2015.(TMD)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION

LEE GROUP HOLDING
COMPANY, LLC.; LESTER L. LEE;
BRENDA R. LEE, DEBRA JO BROWN;
MELINDA GABBARD; and
LARRY L. LEE,
Appellants,
vs.
MICHAEL J. WALRO as Trustee of the
Bankruptcy Estate of Lester L. Lee,
Appellee.
In re:
LESTER L. LEE,
Debtor.

MICHAEL J. WALRO, as Trustee of the
Bankruptcy Estate of Lester L. Lee,
Plaintiff,
vs.
THE LEE GROUP HOLDING
COMPANY, LLC; LESTER L. LEE;
BRENDA R. LEE; DEBRA JO BROWN;
MELINDA GABBARD; AND LARRY L.
LEE,
Defendants.
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4:15-cv-00009-RLY-WGH

12-900007-JJG-7A

ADV. PROC. NO. 14-59011

APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
Appellants, the Lee Group Holding Company, LLC, Brenda R. Lee, Debra Jo
Brown, Melinda Gabbard, and Larry L. Lee, appeal 1 the Bankruptcy Court’s Findings of
Fact and Conclusions of Law and its Judgment granting the Trustee’s Motion for
Summary Judgment and denying the Appellants’ [Cross-] Motion for Summary
Judgment. For the reasons set forth below, the court AFFIRMS the Judgment of the
Bankruptcy Court.
I.

Statement of Facts
The undisputed material facts are as follows:
1. On January 3, 2012, the Debtor, Lester L. Lee, filed his voluntary petition for
relief under Chapter 7 of Title 11 of the United States Bankruptcy Code. (R. at
105).
2. The Trustee was appointed as the interim trustee under § 701 of the Bankruptcy
Code on the petition date, and in accordance with § 702(d) of the Bankruptcy
Code became the permanent trustee following the meeting of creditors held under
§ 341(a). Pursuant to 11 U.S.C. § 323 (a), the Trustee is the representative of the
Estate with full capacity to prosecute this action. (R. at 108).
3. Appellant, the Lee Group, is a limited liability company organized and existing
under the laws of the State of Indiana, with the Debtor as its Registered Agent.

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The Debtor did not join in this appeal.

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(R. at 105). On the petition date, the Debtor was also the manager of the Lee
Group, as set forth in Section 2.1 of the Operating Agreement. (R. at 17, 106).
4. Appellants, Brenda R. Lee, Debra Jo Brown, Melinda Gabbard, and Larry L. Lee
are members of the Lee Group. Brenda R. Lee (“Brenda”) is the owner of the Lee
Group and the wife of the Debtor. (R. at 105). Debra Jo Brown, Melinda Gabbard
and Larry L. Lee (the “Lee Children”) are their three adult children.
5. At all material times, the Lee Group has been governed by the Fourth Amended
Operating Agreement. (R. at 106).
6. On the petition date, Debtor held 51% voting rights with respect to the Lee Group,
which were not disclosed in his bankruptcy schedules. (Id.).
7. Section 3.1(D) of the Operating Agreement states, in part:
(D) Each member shall have the voting power and a share of the
Principal and income and profits and losses of the company as follows:
Member’s Name

Share Votes

Debra Jo Brown

20%

10

Brenda R. Lee

40%

20

Larry L. Lee

20%

10

Melinda Gabbard

20%

10

Lester L. Lee

0%

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(R. at 22).
8. On January 31, 2014, counsel for the Trustee wrote a letter to counsel for the Lee
Group, advising that upon reviewing the Operating Agreement in connection with
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a deposition of the Lee Group, Trustee’s counsel became aware of the Debtor’s
51% voting rights as a member, and that pursuant to applicable law, “this noneconomic interest became property of the estate subject to control of the Trustee
on the filing of the petition pursuant to 11 U.S.C. § 541.” (R. at 106).
9. After January 31, 2014, Brenda and the Lee Children executed a Resolution of the
Members of the Lee Group Holding Company, LLC (the “First Resolution”)
wherein they purported to accept Debtor’s withdrawal from the Lee Group
pursuant to Section 3.7 of the Operating Agreement and recognized the immediate
termination of his voting rights pursuant to Section 3.5(C) of the Operating
Agreement. (R. at 36, 106).
10. The First Resolution also purported to accept the Debtor’s resignation of his
position as manager of the Lee Group effective December 31, 2013. (R. at 107).
11. On February 17, 2014, Brenda and the Lee Children executed an Addendum to the
Operating Agreement. (R. at 37, 106). The Addendum designated Larry Lee as
the new manager, redistributed voting rights, and purported to make the Lee
Group liable for the members’ income taxes resulting from its operations and to
impose a lien on the assets of the Lee Group for the purported tax liabilities. (R. at
37).
12. After January 31, 2014, Brenda and the Lee Children also executed a second
Resolution of the Members of the Lee Group Holding Company, LLC wherein
they agreed that the Debtor would remain with the Lee Group as a “consultant.”
(R. at 38, 107).
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13. On various dates after the petition date, Brenda and the Lee Children purported to
consent on behalf of “all members of the Lee Group Holding Company, LLC” to
the actions described in the documents attached to the Trustee’s Complaint as
Exhibits “E,” “F,” and “G.” (R. at 39-41, 107).
14. The Trustee was not given notice of the post-petition actions noted above prior to
the actions being taken. (R. at 107).
15. The Trustee did not vote with respect to any of the post-petition actions. (Id.).
16. On December 18, 2014, the Bankruptcy Court entered its Findings of Fact and
Conclusions of Law (R. at 224-38) and its Judgment (R. at 240-41), granting the
Trustee’s Motion for Summary Judgment and denying the Appellants’ [Cross]Motion for Summary Judgment. (R. at 238). The Bankruptcy Court concluded
that the Debtor’s voting rights were property of the estate as of the filing of the
Petition and that the Appellants’ actions purporting to terminate those voting
rights violated the automatic stay imposed by 11 U.S.C. § 362 and, therefore, had
no legal effect. (R. at 241).
II.

Standard of Review
Summary judgment is appropriate if the record “shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
FED. R. CIV. P. 56(a). The court reviews de novo a bankruptcy court’s grant of summary
judgment, viewing the facts and all reasonable inferences in the light most favorable to
the nonmoving party. Dick v. Conseco, Inc., 458 F.3d 573, 577 (7th Cir. 2006) (“In a
second appeal from a bankruptcy court’s decision, we apply the same standard of review
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as did the district court, which in the case of the bankruptcy court’s grant of summary
judgment, is de novo.”) (internal quotation marks omitted).
III.

Discussion
Appellants raise two arguments on appeal. First, they argue that the facts relied

upon by the Trustee in his summary judgment motion were not supported by admissible
evidence. Second, they argue the Debtor was not a member of the Lee Group, and that
his 51% voting rights arose from his position as manager. Consequently, the Debtor’s
voting rights were not property of the estate as of the Petition Date.
A.

The Facts

Appellants’ first argument warrants little discussion. The Trustee’s Statement of
Material Facts Not in Dispute were based on the parties’ Joint Pre-Trial Statement and
the documents attached to the Trustee’s Adversary Complaint, including the Operating
Agreement. (R. at 105-07). The Appellants did not challenge these facts. Indeed, in the
Appellants’ Cross-Motion for Summary Judgment, they relied upon the same
documentary evidence submitted to the court by the Trustee. (R. at 169-71).
Accordingly, the court rejects the Appellants’ request to reverse the judgment of the
Bankruptcy Court on that ground.
B.

Membership in the LLC

Section 541(a)(1) of the Bankruptcy Code defines “property of the estate” broadly
as “all legal or equitable interests of the debtor in property as of the commencement of
the case.” In determining whether the Debtor’s voting rights were property of the estate,
the court considers the express terms of the Operating Agreement and the relevant
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provisions of the Indiana Business Flexibility Act, Indiana Code §§ 23-18-1-1, et seq.
(the “Act”). In this regard, the Act defines a “member” of a limited liability company as
“a person admitted to membership in a limited liability company under IC 23-18-6-1 and
as to whom an event of dissociation has not occurred.” The Act further provides that a
person may become a member by “acquiring an interest directly from the limited liability
company, upon compliance with the operating agreement or if the operating agreement
does not provide in writing, upon the written consent of all members.” Ind. Code § 2318-6-1. And the Act defines “interest” as follows:
“Interest” means a member’s economic rights in the limited liability
company, including the member’s share of the profits and losses of the
limited liability company and the right to receive distributions from the
limited liability company.
Ind. Code § 23-18-1-10. With that background in mind, the court turns to the Appellants’
arguments.
First, Appellants argue the Debtor could not be a member because he had no
ownership or economic interest in the Lee Group. As the Bankruptcy Court observed, the
definition of “interest” is not confined to a member’s share of the company’s profits and
losses or its distributions. Rather, it appears to encompass any economic right in the
company. Moreover, the Act contemplates that persons can be members without having
any economic interest if the operating agreement so provides. For instance, Indiana Code
§§ 23-18-6-4(e) and 23-18-6-4.1(e) state that a member ceases to be a member if he
assigns his “entire interest” to someone else, “unless otherwise provided in the written
operating agreement.” Thus, the Act contemplates that a person may assign his entire
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economic interest to someone else yet remain a member in the company. And further,
case law recognizes that membership in a limited liability company may confer both
economic and non-economic rights that fall within § 541(a)’s definition of property of the
estate. See, e.g., In re Ellis, No. 10-16998-AJM-7A, 2011 WL 5147551, *2 (Bankr. S.D.
Ind. Oct. 27, 2011).
Even if having economic rights in a company is a prerequisite for membership, the
Debtor did receive economic rights through his majority voting rights. For instance, as
the holder of majority voting rights, the Debtor could ensure his continued employment
as manager, since § 2.4 of the Operating Agreement requires “a majority vote of the
members of the company” for removal. In addition, pursuant to §§ 2.5 and 2.6, he had
control over the business affairs of the company in which his wife holds a 40% interest,
and could receive “incentives and bonuses” as manager approved by the members, as
well as indemnification of expenses, legal fees, and liability in any proceeding to which
the manager may be named as a party.
The Debtor also received an economic benefit from § 3.8(G) of the Operating
Agreement, which states:
In the event of dissolution of marriage, or notice of a Member of his or her
intention to dissolve a marriage (the “Divorcing Member”), the remaining
Members, or the LLC, shall have the right to purchase the interest of the
Divorcing Member for an amount equal to twenty-five percent (25%) of the
book value of the LLC on the 31st day of December of the year
immediately preceding the dissolution or notice of intention to dissolve.
Pursuant to this provision, if Brenda were to divorce the Debtor, he could purchase her
40% interest in the company for a 15% discount. The Debtor would have the largest
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economic interest of any member, along with majority voting rights. As the Trustee
noted at the summary judgment stage, “it would appear this particular economic benefit
was uniquely tailored to apply to Brenda Lee’s membership interest, since all other
members of the company each own 20% ownership shares, and hence the provision to
purchase them for 25% of the company’s value would impose a premium rather than a
discount price.” (R. at 188-89, 232-33).
Second, the Appellants find error in Conclusions of Law No. 8, which states:
Based on the clear and unambiguous terms of § 3.1(D) of the Operating
Agreement, the Court concludes that Debtor was a member of the Lee
Group as of the Petition Date and that Debtor’s voting rights were
conferred as an incident to that membership. Contrary to the Defendants’
argument, nothing in the Operating Report [sic] supports the Defendants’
argument that Debtor’s voting rights derived from his role as manager, as
the provisions of the Operating Agreement relevant to management make
no mention of voting rights.
(R. at 231).
Section 3.1(D) of the Operating Agreement is located in the “Members” section,
and provides:
Each member shall have the voting power and a share of the principal and
income and profits and losses of the company as follows:
Member’s Name

Share Votes

Debra Jo Brown

20%

10

Brenda R. Lee

40%

20

Larry L. Lee

20%

10

Melinda Gabbard

20%

10

9

Lester L. Lee

0%

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(R. at 21-22) (emphasis added). As the Bankruptcy Court correctly concluded, the intent
of this Section was to define the interests and voting rights of the Lee Group’s members.
Thus, according to § 3.1(D), the Debtor held the majority voting rights with respect to the
members of the Lee Group. He held 51 votes, and the other members collectively held
50 votes. Furthermore, after the bankruptcy petition was filed, the members of the Lee
Group executed the First Resolution purporting to accept the Debtor’s withdrawal from
the Lee Group “pursuant to Section 3.7 of the Operating Agreement,” which is the
section of the Operating Agreement covering “Withdrawal of Members.” (R. at 25, 106).
Finally, § 3.5(C) of the “Members” section states that “[t]he voting rights of Lester L.
Lee shall expire upon his withdrawal from the company or his demise.” (R. at 23-24).
Notwithstanding the plain language of § 3.1(D) of the Operating Agreement,
Appellants maintain the Bankruptcy Court erred because § 2.1, entitled “Managers,”
addresses the Debtor’s voting rights derived from his position as manager. In support of
their position, Appellants refer the court to § 2.1(G) (providing procedures in the event a
manager dissents to company action voted on at meeting of managers); § 2.1(K) (stating
“the act of the majority of the managers present at any meeting at which there is a
quorum shall be the act of the managers”); § 2.1(O) (requiring resolution of majority of
managers to obtain loans), § 2.1(P) (requiring approval of majority of managers for
company to lend or borrow from manager or member) and § 2.2(E) (replacing managers

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“shall be made by the unanimous decision of all other managers or, if there are none, by
unanimous consent of all members”).
Section 2.1 identifies the Debtor as the sole manager of the company, see § 2.1(A)
and (B). None of the subparts relied upon by the Appellants purports to give the Debtor
voting rights in his role as manager. This makes sense, as the Debtor was the only
manager vested with control of the company’s business and affairs. Thus, granting him
voting rights would serve no purpose. Moreover, the subparts relied upon by the
Appellants are inapplicable to the present case, as they presuppose the employment of
more than one manager. Accordingly, the court finds Conclusion of Law No. 8 is not
clearly erroneous.
Finally, Appellants find error in Conclusion of Law No. 9:
The Court further notes that according to the [First] Resolution, the Family
Defendants 2, in purportedly terminating Debtor’s membership in the Lee
Group, cited § 3.7 of the Operating Agreement. That section is entitled
“Withdrawal of Members” (italics added). Furthermore, it appears that
Debtor openly acted as a member, as demonstrated by the Signature Page
attached to the Operating Agreement. There is nothing in the record to
suggest that the Family Defendants ever resisted that action or any other
action taken by Debtor as a member.
(R. at 231-32). Appellants argue the Bankruptcy Court erred because “there is nothing to
suggest that Debtor acted as a Member” and “[t]here is nothing to suggest he signed the
Operating Agreement as a member as opposed to a Manager.” (Filing No. 9 at 17).
Appellants’ argument is belied by the designated evidence.

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The Bankruptcy Court defined the Family Defendants as Brenda R. Lee, Debra Jo Brown,
Melinda Gabbard and Larry L. Lee.

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The Operating Agreement at issue begins by stating:
THIS AMENDMENT to the Operating Agreement of The Lee Group
Holding Company, LLC, an Indiana limited liability company (the “LLC”),
is made this 4th day of January, 2011, by and among the Members of The
Lee Group Holding Company, LLC pursuant to § 5.1 of the Operating
Agreement.
The Members intend this amended operating agreement and the attached
certificate of formation to result in the transfer of one member’s interest to
another member of the Limited Liability Company.
(R. at 16) (emphasis added). In order to amend the Operating Agreement, § 5.1 requires
approval “by a vote of the majority of the members.” (R. at 27-28). The signature pages
for each member – including the Debtor – state that each “executes this agreement for the
purpose of withdrawal of a member.” (R. at 30-34). That member was Meegan L.
Collier, who also signed a signature page “for the purpose of withdrawing as a member . .
. .” (R. at 35). The evidence therefore shows that the Debtor signed the amended
Operating Agreement along with the other members of the Lee Group as provided in §
5.1, and they collectively approved the withdrawal of Meegan Collier as a member.
Accordingly, the court finds Conclusion of Law No. 9 is not clearly erroneous, and that
the Debtor’s voting rights were property of the estate at the time he filed his bankruptcy
petition.
IV.

Conclusion
Appellants have failed to establish that the Bankruptcy Court erred in granting the

Trustee’s Motion for Summary Judgment and denying the Appellants’ [Cross-] Motion

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for Summary Judgment. Therefore, the Bankruptcy Court’s Judgment in favor of the
Trustee and against the Appellants is AFFIRMED.

SO ORDERED this 10th day of August 2015.

_________________________________
__________________________________
RICHARD L. YOUNG, CHIEF JUDGE
RICHARD L. YOUNG,Court JUDGE
United States District CHIEF
United States District Court
Southern District of Indiana
Southern District of Indiana

Distributed Electronically to Registered Counsel of Record.

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