In 2006, eagle woods, llc, a missouri limited liability company (“eagle woods”), entered into a ten‑year lease (the “lease”) with flex financial holding company (“flex”) for a commercial building in olathe, kansas. In 2012, eagle woods sued flex for delinquent rent in kansas district court. Flex filed for chapter 11 bankruptcy protection in june 2013, and a claims bar date of february 28, 2014 was established. On february 13, 2014, eagle woods filed its proof of claim asserting a nonpriority unsecured claim for $1,340,614.91 for flex’s prepetition breach of the lease. Flex objected, claiming, among other things, that kansas law bars actions by unregistered companies doing business in kansas and that since eagle woods owned income‑producing property in kansas but was not registered to do business in the state, it qualified as a foreign company and was prohibited from bringing any action against flex. Flex’s objection further claimed that flex was entitled to any available defenses under 11 u.s.c. § 502(b)(1) and § 558. Eagle woods did not register with the kansas secretary of state as a foreign limited liability company until july 1, 2014. Eagle woods thereafter responded to the objection, arguing, in part, that it met all requirements of kansas law necessary to do business retroactive to january 2006 (preceding the date of the lease) and retained authority to prosecute its bankruptcy claim.
In ruling on flex’s objection to the proof of claim, the united states bankruptcy court for the district of kansas (the “court”) first examined the impact of eagle woods’ delay in registration under kansas law and then considered whether the delay either provided flex a viable defense under 11 u.s.c. § 502(b)(1) or § 558 in bankruptcy court or precluded the court from considering the proof of claim under bankruptcy law.
In reviewing the facts of the case, the court noted that eagle woods originally did not comply with kansas’ registration requirement. The court determined, however, that although eagle woods lacked the capacity to bring the suit in kansas district court, the defect would have been cured within the five‑year statute of limitations applicable to written contracts when eagle woods registered on july 1, 2014. Since the defect would have been cured without violating the statute of limitations, the court held that “the delay in registration would not have provided a defense to flex if eagle woods’ claim were being litigated in state court.” Furthermore, the court ruled, “[t]o the extent that eagle woods’ claim against debtor in bankruptcy court is determined under state law, the delay in registration does not provide a defense under § 502(b)(1) or § 558.”
After determining that the delay in registration did not provide flex with any viable defenses, the court next considered whether eagle woods’ “failure to register as a foreign limited liability company as of the time it filed its proof of claim and continuing until after the claims bar date in bankruptcy court, requires a finding that eagle woods lacked the capacity to file its proof of claim.” The court found that “federal rules of procedure govern the capacities of entities in bankruptcy court litigation, and under those rules, eagle woods has the capacity to engage in claims litigation.” In coming to that conclusion, the court determined that flex’s objection to eagle woods’ proof of claim constituted a contested matter under bankruptcy rule 9014, which provides that bankruptcy rule 7017 is instructive in this instance bankruptcy rule 7017(b)(3)(a) states that “a partnership or other unincorporated association with no such capacity under that state’s law may sue or be sued in its common name to enforce a substantive right existing under the united states constitution or laws.” The court relied on in re fantastik, inc., 49 b.r. 510 (bankr. D. Nev. 1985), to conclude that bankruptcy rule 7017 was applicable to corporations in claims litigation. It further found that although bankruptcy rule 7017 does not expressly address the capacity of limited liability companies, federal courts other than bankruptcy courts have held that rule 7017(b)(3) or civil rule 17(b)(3), its equivalent in the federal rules, guides the capacity inquiry for limited liability companies. See in re dairy farmers of am., inc., cheese antitrust litig., 767 f. Supp. 2d 880, 892 (n.d. ill. 2014). Therefore, the court held pursuant to bankruptcy rule 7017(b)(3)(a) that although eagle woods was not registered to do business as a foreign limited liability company until after the claims bar date, it had the capacity to engage in litigation of its claims against flex in bankruptcy court. In re flex financial holding co., 518 b.r. 891, 2014 bankr. Lexis 4548 (bankr. D. Kansas 2014).
