Case Summary:
Debtor was a four-member LLC. Two of its managers adopted a resolution authorizing themselves to file bankruptcy on behalf of the Debtor. Another member, holding 50% of the membership interests, filed a motion to dismiss the bankruptcy based on a lack of corporate authority. He argued that the operating agreement of the Debtor only authorized managers to perform ordinary course or day-to-day activities, and that majority-member consent was required to undertake an activity such as bankruptcy. In response, the Debtor argued that the activities requiring majority-member consent in the operating agreement were exhaustive, and in contrast, management’s authority under the agreement was explicitly open-ended, and thus the managers were empowered to cause the Debtor to file bankruptcy. Ruling against the Debtor, the Court first established that the operating agreement was ambiguous. Next, in interpreting the agreement, it was clear that the managers were only authorized to perform ordinary course or day-to-day activities. The Debtor offered extrinsic evidence in an attempt to show that managers had acted with broad authority in the past, but the evidence was unpersuasive. Almost all the examples of past broad authority were in fact authorized by a majority of the members, or were ordinary course activities for businesses in the Debtor’s industry.
Statute/Rule Reference:
11 U.S.C. § 1112(b)
Key Terms:
Corporate Authority to File Bankruptcy
Ordinary Course