Wednesday, September 14, 2016

Lender Made an LLC Member to Preclude Future Bankruptcy Filing Violated Public Policy

In In re: Intervention Energy Holdings, LLC, 2016 WL 3185576 (Bankr. D. Del. 2016),, the United States Bankruptcy Court for the District of Delaware held that provisions in a limited liability company operating agreement, granting the company’s lender absolute power to prevent the company from filing a bankruptcy petition were unenforceable as a matter of public policy. 
In the case a lender agreed to forbear suit  on the condition that the debtors amended an operating agreements to include a provision admitting the lender as a member and  requiring the unanimous consent of the members of the parent for any voluntary filing for bankruptcy by either the parent or the subsidiary. The debtors later filed chapter 11 petitions without the consent of the lender, and the lender filed a motion to dismiss the petitions as filed without authority.
The bankruptcy court determined ruled that such an LLC  provision violated public policy and was unenforceable:
“A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor-not equity holder-and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.”
The court relied on Klingman v. Levinson, 831 F.2d 1291 (7th Cir. 1987) (“for public policy reasons, a debtor may not contract away the right to a discharge in bankruptcy.”). MBNA Am. Bank. N.A. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 275 B.R. 712 (Bankr. D. Del. 2002) (“prepetition agreements purporting to interfere with a debtor’s rights under the Bankruptcy Code are not enforceable.”). In re Pease, 195 B.R. 431 (Bankr. D. Neb. 1996) (“the Bankruptcy Code pre-empts the private right to contract around its essential provision.”). The court believed such provisions would frustrate the object of the Bankruptcy Code and be repugnant to its purposes.