553 B.R. 258
Bankr. D. Del.2016Background
- Debtors Intervention Energy Holdings, LLC and Intervention Energy, LLC (Delaware LLCs) filed Chapter 11 on May 20, 2016; EIG moved to dismiss asserting the parent (IE Holdings) lacked authority to file.
- IE Holdings’ operating agreement issued 22,000,001 common units; EIG received a single common unit (the "golden unit") after a forbearance amendment and an LLC amendment that added a unanimous-consent-to-file-bankruptcy provision (the Consent Provision).
- The Consent Provision was adopted as a condition of a Forbearance Agreement resolving defaults under EIG’s secured note financing (approx. $140M outstanding).
- EIG argued the operating agreement and consent provision lawfully prevented IE Holdings from filing without EIG’s approval; Debtors argued prepetition waivers of bankruptcy rights are unenforceable as contrary to federal public policy.
- The court limited decision to whether IE Holdings had authority to file and, finding federal public policy barred enforcement of an absolute prepetition waiver of the right to seek bankruptcy, held the Debtors had authority to commence Chapter 11.
Issues
| Issue | EIG's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether an LLC may contract (prepetition) to require unanimous member consent before filing bankruptcy | Contracting parties (EIG) may set LLC governance rights; the Consent Provision is a valid exercise of state-law freedom to contract and membership rights | Prepetition contractual waivers or provisions that effectively bar access to bankruptcy are unenforceable as against federal public policy | The Consent Provision is void as contrary to federal public policy; Debtors had authority to file Chapter 11 |
| Whether a minority "golden unit" held by a creditor-member can bar filing | EIG: its purchased common unit (and related rights) legitimately gives veto power over filings | Debtors: a creditor-held golden unit obtained to block filings is an absolute waiver of bankruptcy rights and unenforceable | Court found the golden unit here operated as an absolute waiver and could not be enforced |
| Whether state-law LLC freedom to contract preempts federal bankruptcy rights | EIG: upholding Consent Provision respects state law and business expectations | Debtors: federal bankruptcy policy protects access to bankruptcy; state contracts cannot circumvent Title 11 rights | Federal public policy governs; state-law consent provisions cannot bar access to bankruptcy in this context |
| Whether courts should decide scope of state-law fiduciary/LLC issues here | EIG sought state-law analysis to uphold the provision | Debtors argued federal policy controls and state-law defense inappropriate | Court declined to resolve novel state-law fiduciary questions, deciding on federal public policy grounds |
Key Cases Cited
- Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987) (public policy: debtor may not contract away the right to a bankruptcy discharge)
- Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012) (prepetition waivers of bankruptcy protections are contrary to public policy)
- MBNA Am. Bank, N.A. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 275 B.R. 712 (Bankr. D. Del. 2002) (bankruptcy rights of corporate debtors cannot be contractually waived prepetition)
- In re 203 N. LaSalle St. P’ship, 246 B.R. 325 (Bankr. N.D. Ill. 2000) (prepetition agreements limiting bankruptcy remedies unenforceable)
- Nat’l Bank of Newport v. Nat’l Herkimer Cnty. Bank, 225 U.S. 178 (1912) (doctrine against circumvention of creditor/debtor law and forbidding "circuity of arrangement")
- In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016) (corporate/LLC debtors cannot contract away bankruptcy rights)