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Bankruptcy Judge Rejects LLC Owners’ Attempt to Use Federal Courts to Defeat State Court Judgment

Miami_FL_newer_courthouseFiling bankruptcy may serve as a needed maneuver for some businesses. The federal bankruptcy courts, however, are not a viable means of addressing an unfavorable state court ruling. A majority group of members of a South Florida LLC learned this the hard way as a federal bankruptcy judge threw out their Chapter 11 petition because the Florida state courts had already determined that they lacked the two-thirds supermajority required by their company’s operating agreements in order to make the sort of major decisions they were trying to execute.

Docassist LLC operated as a document management company based in Miramar. A corporate governance dispute came to a head after a group of majority members attempted to make changes to the governance of the LLC that would have snuffed out the interests of two minority owners, Rolando and Alex Barberis. The Barberis brothers sued in state court, with the trial court ruling that the company had taken several actions that were void.

Specifically, the court determined that the changes the majority members desired qualified as “major decisions” under the company’s operating agreements. This meant that the action needed a supermajority of 66.67% to pass. Since the Barberis brothers controlled 33.84% of Docassist, the necessary supermajority was not present, making the changes invalid. The majority members took the case to the state court of appeals in Miami, but, in July, that court affirmed the judgment of the trial court.

Less than two weeks later, Docassist filed a Chapter 11 bankruptcy petition. The Barberis brothers filed an objection and asked the bankruptcy court to throw out the petition. The bankruptcy petition, they argued, was the majority members’ attempt to complete an end run around the state court rulings.

The bankruptcy court sided with the minority members. Federal law prohibits “state-court losers complaining of injuries caused by state-court judgments” from using the federal court system as a means of overturning state courts. In the case of Docassist, the bankruptcy petition would, in the opinion of the bankruptcy court, “effectively nullify” the decisions of the state courts if allowed to proceed.

Another problem for the majority members was that they were attempting to use the bankruptcy court to re-try the exact same issues that the state courts decided. Under the doctrine of collateral estoppel, parties are not allowed to relitigate the same issues against the same opposing parties. In Florida, this doctrine applies if the issues in the previous case were identical to those in the current case, the parties received a “full and fair opportunity to litigate” their case, the parties in the previous case were identical, and the issues were actually resolved by the previous judgment. All of these elements were present in Docassist’s state court litigation.

Additionally, the bankruptcy court concluded that the initiation of the bankruptcy action itself was forbidden by the company’s operating agreements. Just as the governance changes were major decisions requiring a two-thirds supermajority, deciding to declare Chapter 11 bankruptcy and borrowing $100,000 in post-petition financing were also major decisions. Since the majority members only had a 66.16% majority, their actions were invalid.

Whether your business is embroiled in a control dispute or is contemplating bankruptcy, you should ensure that you have knowledgeable, experienced counsel assisting you in your business. For reliable advice and representation, reach out to the Florida commercial litigation and bankruptcy attorneys at Stok Folk + Kon. Our attorneys can help you ensure that your interests are fully protected.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More Blog Posts:

Third District Court of Appeal Clarifies Standard for Allowing Direct Lawsuits by Shareholders, Florida Business Lawyers Blog, Aug. 27, 2014

The New Florida LLC Act, Florida Business Lawyers Blog, Aug. 27, 2014

Photo credit: Ebyabe at Wikimedia Commons.