577 B.R. 676
Bankr. E.D. Ky.2017Background
- Lexington Hospitality Group, LLC (LHG) was manager-managed; Janee Hotel Corporation (Janee) was named Company Manager in the operating agreement; Kenneth Moore is Janee’s president.
- PCG provided financing for LHG’s hotel acquisition and, contemporaneously, the Amended Operating Agreement admitted 5532 Athens (controlled by PCG) as a 30% member (an "Equity Kicker") and added provisions restricting LHG’s ability to file bankruptcy (the "Bankruptcy Restrictions").
- Addendum No. 1 required authorization from an "Independent Manager" and a 75% member vote to file bankruptcy, and also included a separate provision requiring advance written approval of the Lender (PCG) and all members—creating conflicting veto mechanisms.
- After defaults, LHG entered a Forbearance Agreement and Addendum No. 2; PCG obtained additional economic and governance concessions but did not effectuate a formal transfer of management before LHG filed chapter 11 on August 3, 2017, with the petition signed by Kenneth Moore/Janee as Manager.
- PCG moved to dismiss, arguing the Bankruptcy Restrictions were controlling and that Janee lacked authority under the Amended Operating Agreement and Kentucky law to file without required consents; LHG argued the restrictions were unenforceable as contrary to federal public policy and, if excised, Janee had authority under the agreement and Kentucky law.
Issues
| Issue | PCG's Argument | LHG's Argument | Held |
|---|---|---|---|
| Are the Bankruptcy Restrictions enforceable so as to bar LHG from filing chapter 11? | The restrictions are valid contractual limits; petition must be dismissed for lack of required consents. | The restrictions were imposed by the lender and effectively waive bankruptcy rights; they are void as contrary to federal public policy. | The Bankruptcy Restrictions are unenforceable as contrary to federal public policy. |
| Did PCG, via 5532 Athens and addenda, effectively control member votes such that consent was required? | The Equity Kicker and addenda properly gave PCG-controlled interests veto power over filings. | The structure shows the restrictions were creditor-imposed and designed to block bankruptcy; therefore void. | The agreements show PCG control; that control reinforces the public-policy defect in the restrictions. |
| If restrictions are excised, did Janee (the Company Manager) have authority to file under the Amended Operating Agreement? | Manager powers limited to day-to-day matters; filing bankruptcy is outside ordinary course and requires additional member approval. | The operating agreement vests broad management authority in the Manager and is silent on bankruptcy once unenforceable provisions are severed; Kentucky law supports managerial authority to manage business affairs, including filing. | Janee had authority to file under the Amended Operating Agreement and Kentucky law. |
| Did Janee cease to be Manager before filing due to Forbearance/Addendum actions/defaults? | Forbearance/Addendum required Janee to transfer management on default; thus she lacked authority at filing. | Transfers were not self-executing and no actions were taken; Janee remained Manager. | Janee remained Manager; no effective transfer of management occurred before the petition. |
Key Cases Cited
- In re East End Dev., LLC, 491 B.R. 633 (Bankr. E.D. N.Y.) (state law governs entity authority to file bankruptcy)
- In re D & W Ltd., LLC, 467 B.R. 427 (Bankr. E.D. Mich.) (operating agreement controls manager authority unless unenforceable)
- In re ComScape Telecomms., Inc., 423 B.R. 816 (Bankr. S.D. Ohio) (state law determines entity authorization to file)
- The Bank of China v. Huang, 275 F.3d 1173 (9th Cir.) (contractual waivers of bankruptcy rights unenforceable)
- Hayhoe v. Cole (In re Cole), 226 B.R. 647 (9th Cir. BAP) (prepetition agreements that unreasonably restrict bankruptcy rights are void)
- In re 203 N. LaSalle St. P’ship, 246 B.R. 325 (Bankr. N.D. Ill.) (allowing contracts to negate Code protections defeats the Bankruptcy Code)
- In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del.) (creditor-imposed governance terms that effectively vest a creditor with absolute veto over bankruptcy are void)
- In re Lake Michigan Beach Pottawattamie Resort, LLC, 547 B.R. 899 (Bankr. N.D. Ill.) (rejecting blocking structures lacking fiduciary safeguards)
- DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), 463 B.R. 142 (B.A.P. 10th Cir.) (distinguishing member agreements among owners from creditor-forced terms)
- In re Loverin Ranch, 492 B.R. 545 (Bankr. D. Or.) (filing bankruptcy is typically an action outside ordinary course but may be a business decision connected to company affairs)