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Bankruptcy Court Sidesteps Corporate Governance Issue, Deciding Motion to Dismiss Chapter 11 Cases on Other Grounds

In re Intervention Energy Holdings, LLC, No. 16-11247 (KJC), 2016 WL 3185576 (Bankr. D. Del. June 3, 2016)

In this Opinion, Judge Kevin J. Carey denies a secured creditor and common member’s motion to dismiss the Chapter 11 cases of two Delaware limited liability companies for lack of corporate authority, siding with other federal courts that have “consistently refused to enforce waivers of federal bankruptcy rights.”  Op. at *10.  In doing so, the Court declines “the parties’ invitation to decide what may well be a question of first impression of state law (i.e., determining the scope of LLC members’ freedom to contract under applicable state law provisions) when an alternate ground for decision is present.”  Id. at *6.

Intervention Energy Holdings, LLC (“IE Holdings”) and its wholly-owned subsidiary, Intervention Energy, LLC (“IE”, and together with IE Holdings, the “Debtors”), filed voluntary Chapter 11 bankruptcy petitions without the consent of all of its common members.  EIG Energy Fund XV-A, L.P. (“EIG”), a secured creditor and holder of one common unit of IE Holdings, moved to dismiss the voluntary petition, arguing that IE Holdings was not authorized to file the voluntary bankruptcy petition absent its consent.

Prior to the bankruptcy filing, EIG provided up to $200 million in senior secured notes to the Debtors.  Following an event of default, the parties entered into a forbearance agreement that required as a condition to effectiveness, an amendment to the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) to (i) admit EIG as a member of IE Holdings with one common unit and (ii) require approval of each holder of common units of IE Holdings prior to any voluntary bankruptcy filing.  Consistent therewith, IE Holdings amended the Operating Agreement to include the unanimous consent requirement to file bankruptcy (the “Consent Provision”) and issued a single common unit to EIG for a common capital contribution of $1.00, making EIG a common member.

In deciding the motion to dismiss, Judge Carey did not address the parties’ arguments with respect to state law and contractual treatment of fiduciary obligations.  Rather, the Court’s decision was grounded in federal public policy and “the right of a person, including a business entity [such as an LLC], to seek federal bankruptcy relief as authorized by the Constitution and enacted by Congress.”  Op. at *9 (footnote omitted).  The parties’ intent here was clear—to contract away the right to seek bankruptcy relief.  Indeed, the Consent Provision was a waiver by IE Holdings of its right to seek (and a reservation by EIG to decide whether the LLC should seek) federal bankruptcy protection.  In finding that the Debtors possessed the necessary authority to commence their chapter 11 proceedings, the Court held that:

“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.”

Id.  The movant’s status as a creditor and holder of one “golden share” was fatal to its motion, and the result may well have been different if the movant was solely an equity holder, or even a majority equity holder wearing two hats.