United States District Court, W.D. Virginia, Charlottesville Division
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Virginia Broadband, LLC, Appellant, Debtor: Richard Clifford Maxwell, LEAD ATTORNEY, Woods Rogers PLC, Roanoke, VA.
For Warren Manuel, Appellee: Ann Elizabeth Schmitt, LEAD ATTORNEY, Culbert and Schmitt, PLLC, Leesburg, VA.
Hon. Glen E. Conrad, Chief United States District Judge.
In this appeal from the United States Bankruptcy Court for the Western District of Virginia, Appellant Virginia Broadband, LLC (" VABB" or " the Company" ), a Chapter 11 debtor, seeks review of the bankruptcy court's memorandum opinion and order allowing three claims filed by Appellee Warren Manuel, VABB's former CEO and board member, and denying VABB's request for recharacterization or, in the alternative, equitable subordination of those claims. For the following reasons, the court will affirm the bankruptcy court's decision in full.
I. History of the Company
In 2003, Robert Sullivan and Hunter Chapman formed VABB, a manager-managed Virginia limited liability company that provides wireless internet services in and around Culpeper and Rappahannock counties and along Virginia's Northern Neck. In late 2004, Manuel joined the Company's board of managers. Sullivan, Chapman, and Manuel each made capital contributions and served on the Company's board in its early years. Manuel also worked as VABB's Chief Executive Officer (" CEO" ) during two periods -- from 2004 until October 2010 and again from February 2011 until August 2012. Manuel was also VABB's largest shareholder, owning 28.994% equity in the Company.
VABB's history is fraught with tension and financial trouble. In 2006, Chapman and Manuel made loans to VABB; Middleburg Bank also loaned money to the Company, guaranteed by Chapman and Manuel. Thereafter, Sullivan reduced his membership interest in the Company from 26% to 10%, resulting in his removal from the board. From 2007 to 2011, membership on the board varied. During this period, the Company obtained loans from Manuel, Chapman, Mark Davis, the Huggins Family Trust, Tom Huggins, and EVB Bank. VABB issued notes for each
loan, and all of these loans, save EVB's, were unsecured. The Company also sought a loan from the U.S. Department of Agriculture Rural Development for Rural Utility Services (RUS), as well as a separate loan to pay for audit services. RUS declined VABB's application, citing an inability to determine the financial feasibility of the project due to the Company's failure to provide audited financial statements. In October 2010, the board voted to remove Manuel as CEO. In February 2011, however, Manuel was restored to the board and reappointed CEO. VABB subsequently borrowed additional money from Tom Huggins; it also refinanced the EVB loan, resulting in issuance of a new note.
In January 2012, the board discussed approval of a note to Manuel in the amount of $1,194,649.00 for unpaid salary, bonuses, and expenses; however, the board did not approve the note that Manuel presented at that meeting. In February 2012, the board approved the minutes of the January meeting, which had authorized formalizing the indebtedness to Manuel. That month, Larry Chang, chairman of the board at that time, issued a note to Manuel. In April 2012, the board reviewed the February note payable to Manuel and decided to make no changes to the note. In August 2012, the board removed Manuel from the board and as CEO. Thereafter, Sullivan was reappointed to the board.
II. History of the Bankruptcy
In November 2012, VABB filed its Chapter 11 petition in the United States Bankruptcy Court for the Western District of Virginia, Lynchburg Division. It filed a proposed Chapter 11 plan, under which unsecured creditors holding claims up to $50,000 are to be paid cash equal to 5% of the allowed amount of those claims within twelve months of the distribution date. Unsecured creditors over $50,000 will receive an equity membership in the new, reorganized entity in proportion to the amount of their claim. Under this treatment, many of the former managers will participate in management of the new entity, as they are unsecured creditors. VABB has predicted, however, that it " cannot survive as an operating company if  Manuel is involved in the management." Docket No. 2, Ex. 8. In March 2014, VABB filed its Second Amended Plan of Reorganization under Chapter 11 in which Class 8 claims consisted of all claims of Manuel. The plan stated that Manuel " shall receive no payment on his claims or equity in exchange for his claims." Docket No. 2, Ex. 9. Manuel objected to this treatment and, in June 2014, VABB filed objections to Manuel's three proofs of claim.
Manuel's three proofs of claims were as follows:
Claim 24, for $516,645.44, was based on a number of promissory notes pursuant to which Manuel loaned money to VABB. Manuel attached 11 promissory notes to this claim, along with resolutions from the VABB board authorizing each loan. VABB objected, asserting that this claim should be subordinated to the claims of other unsecured creditors, because Manuel controlled VABB at the time the notes were to have been paid and solely maintained the records regarding sums due under the notes.
Claim 25, for $1,248,830.00, was based on the February 2012 promissory note signed by Larry Chang, purportedly for " money loaned" by Manuel. Docket No. 2, Ex. 57. Manuel also provided a copy of the January 2012 board meeting minutes reflecting that the board resolved to formalize " agreements for the loans granted to the company by ... Manuel in the amount of $1,194,649.00," as well as an
itemization for the claim (principal plus interest from the note's maturity date). Docket No. 2, Ex. 58. VABB objected to this claim, asserting that the claim was based on a note issued when the company's operations " were not sustainable." Docket No. 2, Ex. 23. VABB also asserted that the basis for the note was not a loan, but was " deferred salary, bonuses, and other amounts." Id. VABB claimed that these sums were not authorized by the full board, and that Manuel " cannot show that the note that is the basis of [Claim 25] was inherently fair or entered into in good faith." Id.
Claim 26, originally for $83,818.87, was based on " business expenses [incurred] for the debtor," and is evidenced by several pages of expense report ledgers containing handwritten notations editing the figures contained therein. Docket No. 2, Ex. 59. VABB objected to this claim, noting that Manuel solely maintained the records and lacked " proper and complete documentation" for these supposed loans to VABB. Docket No. 2, Ex. 24. VABB also argued that portions of the claim were barred by the statute of limitations. After VABB filed its objection, Manuel amended his claim twice. First he reduced the claim to $49,118.16. Then, he increased the claim by $48,668.31, bringing the total to $97,806.47. The increase purportedly pertained to unpaid salary accrued when VABB placed stop payment orders on several outstanding salary checks to Manuel. VABB objected to the increase, arguing that the claim was untimely to the extent that it added claims unrelated to the original claim, and was amended after the bar date for filing proofs of claim.
VABB's disclosure statement further objected to Manuel's treatment as an unsecured creditor. VABB argued that all of Manuel's claims should be equitably subordinated to the claims of other unsecured creditors, because Manuel caused " wide ranging damage" to VABB, including (1) his failure to pay personal property taxes for four years; (2) his payment of health insurance for a former VABB employee for five years after that employee left the company, costing $60,000; (3) his failure to provide sufficient information to permit auditing of VABB's books and records; (4) his execution of a lease without the board's approval; (5) his authorization of $120,000 in bonus payments to himself without the board's approval; (6) his authorization of a salary for himself " far in excess" of the amount justifiable by the company's financial condition; and (7) his acceptance of the February 2012 note signed by Chung without the full board's approval. Docket No. 2, Ex. 8. VABB contends that all these actions constituted a breach of Manuel's fiduciary duty to the company. Alternatively, VABB suggests that the bankruptcy court should have recharacterized Manuel's claims as equity in the company.
The bankruptcy court heard evidence on these issues. Thereafter, on November 5, 2014, the bankruptcy court issued an opinion in which the court overruled VABB's objections with respect to Claim 24 and Claim 25, overruled in part and sustained in part VABB's objections to Claim 26, and rejected VABB's arguments for equitable subordination and recharacterization of Manuel's claims. See Bankr. Docket No. 593. VABB timely appealed the bankruptcy court's decision regarding the allowance of Claims 25 and 26, and its decision to not subordinate or recharacterize all three claims. VABB did not appeal the bankruptcy court's decision regarding the allowance of Claim 24. Furthermore, Manuel did not appeal the bankruptcy ...