In Re: All Year Holdings Limited

Background

Zelig Weiss appealed the bankruptcy court’s dismissal of his amended complaint in All Year Holdings Limited’s chapter 11 bankruptcy case. Weiss operates the William Vale Hotel through various entities and owns 50% of Wythe Berry Member LLC (Member LLC). YGWV LLC owned the other 50% of Member LLC and served as its managing member. All Year Holdings Limited owned 100% of YGWV.

Weiss and YGWV were the only parties to the Member LLC Agreement. The agreement used Delaware law and defined “Members” as YGWV and Weiss. It prohibited a Member from transferring its interest in Member LLC without the other Member’s written consent. The agreement identified All Year as a lender and a third-party beneficiary of specified provisions, but not as a Member or party. It also stated that All Year and YGWV were separate entities.

All Year filed for chapter 11 protection and continued operating as a debtor in possession. Its proposed reorganization plan provided for the sale of All Year’s interest in YGWV to Paragraph Partners LLC. Weiss alleged that this transaction violated the Member LLC Agreement and sought to stop it. He also alleged that All Year’s bankruptcy automatically terminated its interest in YGWV under New York’s Limited Liability Company Law, causing YGWV to dissolve and allowing Weiss to take management control of Member LLC and the entity owning the hotel.

Bankruptcy Court Decision and Standard of Review

The bankruptcy court dismissed the amended complaint in its entirety. The district court reviewed the dismissal of the complaint, treating well-pleaded, nonconclusory factual allegations as true and reviewing the bankruptcy court’s legal conclusions independently.

Contract and Alter-Ego Claims

The district court affirmed dismissal of Weiss’s claims seeking a declaration and injunction based on the agreement’s anti-assignment provision. The court concluded that YGWV could not have breached the provision because Weiss did not allege that YGWV had agreed to transfer its interest in Member LLC. The challenged transaction involved All Year’s transfer of its own interest in YGWV, not YGWV’s transfer of its interest in Member LLC.

The court also rejected Weiss’s attempt to bind All Year to the agreement through an alter-ego theory. Under New York law, that theory requires allegations that the parent exercised complete control over the subsidiary concerning the challenged transaction and used that control to commit a fraud or other actionable wrong that injured the plaintiff. The court accepted that Weiss pleaded facts supporting general control of YGWV by All Year, but held that he did not plausibly allege that All Year used that control in connection with the challenged transfer. All Year could transfer its own interest in YGWV without YGWV taking any action. The court further held that the alleged contract breach was not the type of fraud or wrongful act required for alter-ego liability under the circumstances alleged.

The court separately held that All Year did not manifest an intent to be bound by the Member LLC Agreement. Under Delaware law, a non-signatory generally cannot be sued for breach of a contract unless the contract or other facts show that the non-signatory agreed to be bound. The agreement identified only Weiss and YGWV as Members, identified All Year as a lender and limited third-party beneficiary, and expressly treated All Year as separate from YGWV. The court held that All Year’s participation in negotiating the agreement did not change those terms.

The court also affirmed dismissal of Weiss’s implied-covenant claim against YGWV. Delaware’s implied duty of good faith and fair dealing applies narrowly and cannot be used to add terms that the parties addressed but did not include. Because the agreement expressly addressed transfers of Member LLC interests and restricted only transfers by a Member, the implied covenant could not create a restriction on All Year’s indirect transfer of its interest in YGWV. The court additionally agreed that the implied-covenant claim was duplicative of the contract claim because both relied on the same allegations and sought the same relief.

Bankruptcy, Dissolution, and Preemption Claims

The court affirmed dismissal of Weiss’s claims that All Year’s chapter 11 filing automatically ended its membership interest in YGWV and dissolved YGWV. The court read section 701(b) of New York’s Limited Liability Company Law as preserving an LLC after an event that might terminate a member’s interest, unless the operating agreement provides otherwise and the required dissolution action occurs. YGWV’s operating agreement provided for dissolution only if All Year decided to dissolve it or a court entered a dissolution decree. Neither event had occurred.

The court also held that the chapter 11 filing did not assign or transfer All Year’s interest in YGWV to the bankruptcy estate. A debtor in possession and the pre-bankruptcy debtor are the same legal entity, so no transfer occurred merely because the bankruptcy case and estate were created. The court further stated that the New York statute’s reference to assignment did not establish that a bankruptcy filing automatically divested All Year of its interest.

Finally, the court agreed that, even if Weiss’s reading of the New York statute were correct, section 541(c) of the Bankruptcy Code would preempt it. Section 541(c) provides that a debtor’s property becomes property of the bankruptcy estate despite nonbankruptcy laws that restrict transfer or require forfeiture, modification, or termination of the property because of bankruptcy. The court concluded that this federal rule prevented termination of All Year’s interest solely because it filed for chapter 11 protection.

Disposition

Because Weiss’s underlying claims were dismissed, the court also affirmed dismissal of his requests for injunctive relief. An injunction is a remedy, not an independent claim. Judge Colleen McMahon affirmed the bankruptcy court’s order dismissing the amended complaint in its entirety.