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Keywords

contractliabilityequitymotionbankruptcychapter 11 bankruptcylimited liability company (LLC)motion to dismiss
contractliabilityequitymotionbankruptcychapter 11 bankruptcymotion to dismiss

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In re Intervention Energy Holdings, LLC, 553 B.R. 258, 62 Bankr.Ct.Dec. 179

Facts

Intervention Energy Holdings, LLC and Intervention Energy, LLC filed for Chapter 11 bankruptcy on May 20, 2016. EIG Energy Fund XV–A, L.P., a creditor that held a single common unit in the LLC, moved to dismiss the case, arguing that the LLC was not authorized to file without its consent as per an amended limited liability company agreement. The agreement required unanimous consent from all common unit holders for any bankruptcy filing, which EIG claimed was not obtained. The court found that the consent requirement was void as it contravened federal public policy.

On May 20, 2016, Intervention Energy Holding, LLC (“IE Holdings”) and Intervention Energy, LLC (“IE”) (together, in these jointly administered proceedings, the “Debtors”) filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware (the “Voluntary Petition”).

Issue

Whether the limited liability company (LLC) was authorized to file a Chapter 11 bankruptcy petition without the unanimous consent of all common unit holders as required by the amended limited liability company agreement.

EIG argues that, absent its consent to commence a chapter 11 case, IE Holdings lacked authority to file the Voluntary Petition under the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) (D.I.27, Ex. H), which requires “approval of all Common Members … [to] commence a voluntary case under any bankruptcy.”

Rule

An agreement that waives the right to seek bankruptcy relief is unenforceable as it contradicts federal public policy, which ensures access to bankruptcy protections.

It has been said many times and many ways. “[P]repetition agreements purporting to interfere with a debtor's rights under the Bankruptcy Code are not enforceable.”

Analysis

The court analyzed the consent provision in the context of federal bankruptcy law, determining that allowing a single minority equity holder to block a bankruptcy filing would undermine the fundamental purpose of the Bankruptcy Code. The court noted that the consent requirement effectively constituted an absolute waiver of the LLC's right to seek bankruptcy relief, which is not permissible under federal law. The court emphasized that such contractual provisions cannot restrict a debtor's access to bankruptcy protections.

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.

Conclusion

The court concluded that the Debtors possessed the necessary authority to commence their Chapter 11 proceedings, and thus denied the motion to dismiss.

For the reasons set forth above, the Motion to Dismiss is denied, in part.

Who won?

The Debtors prevailed in the case because the court found that the consent provision requiring unanimous approval for bankruptcy filings was void as against public policy, allowing them to proceed with their bankruptcy.

The court found that the consent provision effectively constituted an absolute waiver of the LLC's right to seek bankruptcy relief, which is not permissible under federal law.

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