Pasta Bar by Scotto II, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
PASTA BAR BY SCOTTO II, LLC,
Debtor.
NOT FOR PUBLICATION
Case No. 15-12766 (MG)
MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS
CHAPTER 11 CASE AND DENYING MOTION TO LIFT STAY
A P P E A R A N C E S:
COX PADMORE SKOLNICK & SHAKARCHY LLP
Attorneys for 750 Food LLC
630 Third Avenue, 19th Floor
New York, NY 10017
By: 	Stefan B. Kalina, Esq.
BORAH, GOLDSTEIN, ALTSCHULER NAHINS & GOIDEL, P.C.
Attorneys for the Landlord
377 Broadway
New York, NY 10013
By: 	Jeffrey C. Chancas, Esq.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
Attorneys for Debtor Pasta Bar by Scotto, LLC
61 Broadway
New York, NY 10006
By: 	Ralph E. Preite, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the Motion for an Order Dismissing the Debtor’s Bankruptcy
Petition (the “Dismissal Motion,” ECF Doc. # 7-1), filed by 750 Food LLC (“750 Food”). The
debtor, Pasta Bar by Scotto II, LLC (the “Debtor”), is a New York Limited Liability Company
(“LLC”). It is undisputed that John Scotto “Scotto”), the managing member of the Debtor, and
750 Food each hold a 50% membership interest in the LLC. The chapter 11 petition was filed on
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October 12, 2015, and was signed by Scotto. 750 Food moves to dismiss the chapter 11 case
under section 1112(b) of the Bankruptcy Code, arguing that the case must be dismissed because
the filing of the chapter 11 petition was a “Major Decision” under the express terms of the
Debtor’s Operating Agreement, which required a supermajority vote of 75% of the membership
interests, which was never obtained. The Dismissal Motion is supported by the declaration of
Hersel Torkian (“Torkian” and the “Torkian Declaration,” ECF Doc. # 7-2). The Debtor filed an
opposition to the Dismissal Motion. See Opposition by Debtor to Motion to Dismiss and Motion
for Stay Relief (the “Opposition,” ECF Doc. # 14).
There is also a pending motion to lift the automatic stay, filed by the Debtor’s landlord,
an entity related to 750 Food, to permit the landlord to move forward with a state court summary
nonpayment proceeding. (See Motion for an Order, inter alia, Pursuant to 11 U.S.C. Section
362 to Vacate Automatic Stay and for Payment of Use and Occupancy (“Lift Stay Motion,” ECF
Doc. # 5).) The landlord alleges prepetition rental arrears exceeding $380,000, as well as
postpetition rental arrears exceeding $124,000. The Debtor opposes the Lift Stay Motion as
well.
As explained below, the filing of the chapter 11 petition in this case was not properly
authorized. Therefore, the Dismissal Motion is GRANTED. Because the chapter 11 case is
dismissed, the Lift Stay Motion is DENIED as moot.
I. 	BACKGROUND
The Debtor is a New York limited liability company. (Dismissal Mot. at 1.) The
members of the Debtor are Scotto and 750 Food. (Id.) Scotto and 750 Food entered into an
operating agreement governing the Debtor (the “Operating Agreement,” ECF Doc. # 7-4). (Id.)
Torkian is the managing member of 750 Food. (Torkian Decl. ¶ 1.)
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The Operating Agreement states that Scotto and 750 Food each have a 50% ownership
interest in the Debtor. (Dismissal Mot. at 1 (citing Operating Agreement ¶ 3.1).) The Operating
Agreement designates Scotto as the manager of the Debtor. (Id. (citing Operating Agreement ¶
4.2).) Scotto filed the chapter 11 petition for the Debtor on October 12, 2015. (Id. (citing
Torkian Decl. Ex. C).) Attached to the petition is the “Statement Regarding Authority to Sign
and File Petition,” which states that Scotto’s filing of the petition of behalf of the Debtor “was
duly authorized, and is with the consent and knowledge of the Managing Member [Scotto] of this
company [i.e., the Debtor].” (Id.)
The Operating Agreement provides that “the Manager [Scotto] may not take any action
constituting a Major Decision without the prior unanimous written consent of the Members
holding at least seventy five (75%) percent of the Percentage Ownership Interest in the
Company.” (Id. at 3 (citing Operating Agreement ¶ 4.1(b).1 ) A Major Decision includes any
Material Action (as both are defined in the Operating Agreement). (Id. (citing (Operating
Agreement ¶ 4.1(e)(1)(iv)).) Under the Operating Agreement, a Material Action means the
following:
* * *
(B). 	commencing any case, proceeding or other action on behalf of the
Company under any existing or future law of any jurisdiction relating to
bankruptcy, insolvency, reorganization, or relief of debtors;
(C). 	instituting proceedings to have the Company adjudicated as bankrupt or
insolvent;
(D). 	filing a petition or consent to a petition seeking reorganization. . . or other
relief on behalf of the Company of its debts under any federal or state law
relating to bankruptcy;
1 	Paragraph 6.1 of the Operating Agreement similarly provides “Except for decisions that may be made by
the Managers as provided herein, all other decisions including Major Decisions shall require the vote of the
Members holding at least seventy five (75%) percent of the Percentage Ownership Interests.” (Id.)
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(E). 	filing a petition or consent to a petition seeking reorganization,
arrangement, adjustment, winding-up, dissolution, composition,
liquidation or other relief on behalf of the Company of its debts under any
federal or state law relating to bankruptcy;
(F). 	seeking or consenting to the appointment of a receiver, liquidator,
assignee, trustee, sequestator, custodian or any similar official for the
Company . . . .
* * *
(I). 	taking any action or causing the Company to take any action in
furtherance of any of the forgoing.
(Id. 3–4 (citing Operating Agreement ¶ 4.1(e)(2)(B), (C), (D), (E), (F), and (I)).)
750 Food contends that the Operating Agreement controls the actions of the
members, and since it specifically requires a 75% supermajority vote to approve the filing
of a chapter 11 petition, absent a supermajority, no such filing is authorized under the
Operating Agreement. (Id.) It is undisputed that Scotto does not own 75% of the
Percentage Ownership Interests (as defined in the Operating Agreement). (Id.) Hence,
750 Food argues, Scotto could not make a Major Decision or take a Material Action
without the written consent of 750 Food. (Id.) Tokian denies that 750 Food’s consent
was ever given. (Id.) That fact is undisputed.
The Debtor’s Opposition argues that Torkian is an “insider and interested party” because
of the common ownership in both 750 Landlord and 750 Food. (Opposition ¶ 10–11.) The
Debtor argues that Torkian’s attempt to dismiss the case violates Torkian’s fiduciary duty of
loyalty to the Debtor. (Id. ¶ 10.) The Debtor argues that Torkian will receive a financial benefit
if either the stay is lifted or the case is dismissed because such relief would result in the eviction
of the Debtor and allow 750 Landlord to replace the Debtor with a higher-paying tenant. (Id. ¶
17.) The Debtor also argues that Torkian may not assert the business judgment rule because Mr.
Torkian has a conflicting interest. (Id. ¶ 15.)
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In a twist of sorts, the Debtor also argues that “[m]oving to dismiss is a major decision
requiring both 750 Food and Mr. Scotto to approve. Since Mr. Scotto hasn’t approved of the
dismissal motion transaction, it is made before this Court without authority.” (Id. ¶ 18.) In
addition, the Debtor argues that the movant has failed to show “cause” pursuant to section
1112(b) of the Bankruptcy Code because the Debtor failed to provide “any analysis” of whether
“cause” exists. (Id. ¶¶ 20, 23.)
II. 	DISCUSSION
“[T]he Bankruptcy Code does not establish express rules relating to authority to file a
voluntary petition for relief. In order to determine authority to file, courts initially look to the
state law governing the entity.” In re Quad-C Funding LLC, 496 B.R. 135, 141 (Bankr.
S.D.N.Y. 2013) (citations omitted). New York law is the applicable law with respect to the
Debtor. Under New York law, the LLC’s operating agreement governs the parties’ conduct. In
re E. End Dev., LLC, 491 B.R. 633, 638 (Bankr. E.D.N.Y. 2013). “[I]f the Managing Member
did not have the authority to file the petition pursuant to applicable state law, then the Debtor’s
case is subject to dismissal.” Id. (citation omitted).
N.Y. Limited Liability Company Law § 417(a) provides that the members of a limited
liability company must adopt an operating agreement “that contains any provisions not inconsistent
with law or the articles of organization relating to (i) the business of the limited liability company,
(ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of
its members, managers, employees or agents, as the case may be.” Here, the Operating Agreement
leaves no open issues of fact or law whether the filing of a bankruptcy petition is a major
decision requiring a supermajority vote to authorize the filing. The Debtor provides no authority
that the requirement of a supermajority vote to authorize a chapter 11 filing is inconsistent with
law. Similar provisions in operating agreements have been enforced in other states. See In re
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Avalon Hotel Partners, LLC, 302 B.R. 377 (Bankr. D. Or. 2003) (considering an operating agreement
that provided “Major Decisions,” including the filing of a bankruptcy petition, required the approval
of members holding “in excess of 75% of the Ownership Interests,” and stating that “filing of a
bankruptcy petition by [the debtor’s] manager without member approval [was] not authorized either
by [state] law or the Operating Agreement”).
The Debtor’s argument that Torkian breached his fiduciary duty by failing to authorize
the bankruptcy filing cannot save the Debtor’s bankruptcy petition from dismissal. As Judge
Gropper stated in Quad-C Funding LLC, 496 B.R. at 142, “[t]he filing of a bankruptcy petition
by a business enterprise is designed to be a short and simple process that allows debtors to
protect creditors and/or start rehabilitation immediately. . . . In enacting chapter 11, Congress
intended to avoid the costly and lengthy litigation that once surrounded the filing . . . .” Here, the
Operating Agreement makes clear what is required before a bankruptcy petition may be filed. It
is undisputed that the supermajority vote requirement was not satisfied. A bankruptcy court need
not investigate the bona fides of each member’s decision to vote or withhold a vote to authorize a
bankruptcy filing. Id. at 144.
It is obvious that Scotto and Torkian have been engaged in a business dispute for some
time. The bankruptcy court is not the proper venue for Scotto and Torkian to sort out their
business affairs. Dismissing the bankruptcy case does not prevent the parties from attempting to
reach a business solution to their business dispute.
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III. 	CONCLUSION
For the reasons explained above, the Dismissal Motion is GRANTED. The
separate motion filed by the landlord to lift the automatic stay is DENIED because it is
moot. The Clerk is directed to close the case.
IT IS SO ORDERED.
Dated: 	November 19, 2015
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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