In re Intervention Energy Holdings, LLC

United States Bankruptcy Court for the District of Delaware · 2016 · Corporations

CorporationsLLC governanceBankruptcy filing authorityPrepetition waiverDelaware LLCgolden sharebankruptcy vetoconsent provision

Facts

IE Holdings, a Delaware LLC, amended its operating agreement as a condition of a forbearance deal with EIG, its secured creditor, to require unanimous consent of all common members before filing bankruptcy. To implement that provision, IE Holdings issued EIG a single common unit for $1, making EIG a common member while the overwhelming majority of common units remained with another member. The parties' agreement expressly required both the amendment and EIG's admission as a member so EIG could block any voluntary bankruptcy filing. It was undisputed that, absent this amendment, IE Holdings would have been authorized to seek bankruptcy relief.

Issue

Whether IE Holdings lacked authority to file its Chapter 11 petition because its amended LLC agreement required unanimous consent of all common members, including EIG, a secured creditor holding one common unit issued solely in connection with the forbearance agreement. More specifically, the question was whether that consent provision was enforceable or void as contrary to federal public policy.

Rule

A provision in an LLC governance document obtained by contract is void as contrary to federal public policy when its sole purpose and effect is to place in a single minority equity holder the power to block the entity's access to federal bankruptcy relief, where that holder's primary relationship to the debtor is as creditor rather than true equity owner and it owes no duty to anyone but itself regarding the bankruptcy decision. Such a provision is tantamount to an absolute waiver of the right to seek bankruptcy relief, and federal courts do not enforce prepetition waivers of rights under the Bankruptcy Code.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Mesa Ridge Drilling, LLC, a Delaware LLC based in Tulsa, defaulted on a secured note held by Red Clay Credit Partners. In a forbearance agreement, Red Clay required Mesa Ridge to issue it one voting unit for $1 and amend the operating agreement so that any voluntary bankruptcy filing required approval of every common member; Red Clay owed no duty to any other member when voting.

If Mesa Ridge files Chapter 11 without Red Clay's consent, is a court most likely to treat the consent provision as enforceable?

Explanation. The majority opinion held void a governance provision obtained by contract whose sole purpose and effect was to give a single minority equity holder, primarily a creditor, power to block bankruptcy while owing duties only to itself. That arrangement is treated as an absolute waiver of bankruptcy rights, which federal courts do not enforce. (Derived from In re Intervention Energy Holdings, LLC (n.d.).)