Bankruptcy Judge Refuses To Enforce Company’s Waiver of Right To Seek Bankruptcy Relief

June 13, 2016Alerts Financial Restructuring & Bankruptcy Alert

A secured creditor cannot be given a “golden” share that grants it the power to block the filing of a bankruptcy because such an arrangement amounts to an absolute waiver by the company of its right to seek bankruptcy relief, a Delaware bankruptcy judge has ruled.

In his June 3, 2016, decision in In re Intervention Energy Holdings, LLC, U.S. Bankruptcy Judge Kevin J. Carey held that such an absolute waiver violates public policy and is therefore invalid.

The facts of the case are straightforward. Intervention Energy Holding and Intervention Energy LLC filed voluntary Chapter 11 bankruptcy petitions on May 20, 2016, in the U.S. Bankruptcy Court for the District of Delaware. Four days later, their secured creditor EIG Energy Fund XV-A, LP, moved to dismiss the cases on the grounds that the parent debtor was not authorized to file a voluntary bankruptcy petition without EIG’s consent.

EIG’s motion pointed to an amended and restated limited liability agreement which required the approval of all members to commence a voluntary bankruptcy case.

More than four years earlier, in January 2012, the Debtors and EIG had entered into a note purchase agreement whereby EIG provided up to $200 million in senior secured notes. As of the bankruptcy filing, the principal amount outstanding under the secured notes was approximately $140 million. The notes were secured by liens on certain of the debtors’ assets.

On Dec. 28, 2015, the Debtors and EIG negotiated and entered into a forbearance agreement and contingent waiver which provided, among other things, that EIG would waive all defaults if the Debtors raised $30 million of equity capital to pay down a portion of the existing secured notes by June 1, 2016.

As a condition to the effectiveness of the forbearance agreement, the Debtors were required to execute an amendment to its limited liability company agreement that admitted EIG as a member of the parent with one common unit and requiring approval of each holder of common units of the parent to consent to the filing of a bankruptcy.

The Debtors relied on a recent case out of the Northern District of Illinois, In re Lake Michigan Beach Pottawattamie Resort LLC, in which a bankruptcy court declared void as against public policy a corporate provision calling for the debtor’s secured creditor to appoint a director whose consent would be required to effectuate a voluntary bankruptcy filing.

Judge Carey noted that it was well settled that an advance agreement to waive the benefits conferred by the bankruptcy laws is void as against public policy. He also found that the parties had contracted away the right of the entities to seek bankruptcy relief absent unanimous consent.

The federal public policy to be promoted, Judge Carey found, was assuring the right of a person to seek federal bankruptcy relief as authorized and guaranteed by the Constitution and enacted by Congress. He concluded that a provision in the limited liability agreement, the sole purpose and effect of which is to place into the hands of a single minority equity holder the ultimate authority to preclude the right of that entity to seek federal bankruptcy relief, is void as contrary to federal public policy.

The effect of Judge Carey’s ruling could be widespread because he was interpreting Delaware corporate law, and it may therefore impact many cases in the future. Secured creditors may now be reluctant to enter into forbearance agreements containing such provisions and borrowers may be emboldened by the newly found leverage they have.