547 B.R. 899
Bankr. N.D. Ill.2016Background
- Debtor: Lake Michigan Beach Pottawattamie Resort LLC owns a resort property (15.5 acres) and granted a mortgage and assignment of rents to BCL-Bridge Funding LLC to secure a loan and line of credit; BCL recorded the mortgage.
- Debtor defaulted; executed a Forbearance Agreement (stating a monetary default of ~$2.64M) and a Third Amendment that named BCL as a "Special Member" with veto power over defined "Material Actions," including filing for bankruptcy.
- Debtor missed the forbearance payoff; BCL scheduled nonjudicial foreclosure (sale date Dec. 17, 2015). Debtor filed Chapter 11 on Dec. 16, 2015 (no signature from BCL); four other members signed consent.
- Debtor’s schedules and broker opinions indicate substantial equity in the Property; BCL’s debt appears unsecured by value and BCL had not filed a claim.
- BCL moved to dismiss under 11 U.S.C. § 1112(b), alleging bad-faith filing (eve-of-foreclosure tactic) and that the petition was unauthorized because the Third Amendment required BCL’s consent.
Issues
| Issue | Plaintiff's Argument (BCL) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Whether petition was filed in bad faith justifying dismissal under §1112(b) | Filing on eve of foreclosure, single-asset case, few creditors shows abusive filing | Petition preserved equity; there is at least some unsecured creditors and reorganization is possible | Court: No bad faith; Tekena factors examined but totality does not show abusive filing; denial of dismissal |
| Whether petition was unauthorized under the operating agreement because BCL (Special Member) did not consent | Third Amendment requires BCL consent to file bankruptcy, so petition is invalid without it | Third Amendment’s blocking provision is unenforceable; majority members’ consent suffices under state law absent valid restriction | Court: Petition valid — blocking provision void; consent of remaining members authorized filing |
| Enforceability of a blocking-member/director provision that eliminates fiduciary duties | Such provisions can lawfully create a blocking member to protect lender interests | Provisions that eliminate fiduciary duties or bar bankruptcy are against public policy and state law limits; fiduciary duties cannot be waived to permit absolute blocking | Court: Provision void because it disclaims duties and allows Special Member to consider only its own interests; blocking construct fails here |
| Whether reorganization is possible or case is essentially a two-party dispute | BCL: case is a two-party dispute between BCL and Debtor; no realistic reorganizing prospects | Debtor: schedules show other creditors and equity; refinancing or sale could resolve claims; premature to dismiss | Court: Reorganization possibility exists; premature to find no possibility of reorganization |
Key Cases Cited
- In re Woodbrook Assocs., 19 F.3d 312 (7th Cir.) (party seeking dismissal bears burden by preponderance of evidence)
- In re Madison Hotel Assocs., 749 F.2d 410 (7th Cir.) (lack of good faith can constitute cause to dismiss chapter 11)
- In re Tekena USA, LLC, 419 B.R. 341 (Bankr. N.D. Ill.) (multi-factor test often used to assess good-faith filing)
- Gen. Growth Props., Inc. v. 409 B.R. 43 (Bankr. S.D.N.Y.) (blocking-director structures cannot insulate a party from fiduciary duties or automatically bar bankruptcy relief)