In re Intervention Energy Holdings, LLC
553 B.R. 258 (2016)
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Rule of Law:
A provision in a limited liability company's operating agreement, which grants a creditor a minority equity interest with the sole purpose and effect of giving it the power to block a bankruptcy filing, is unenforceable as it violates federal public policy protecting a debtor's right to seek bankruptcy relief.
Facts:
- Intervention Energy Holdings, LLC ('IE Holdings') and Intervention Energy, LLC ('IE') are Delaware limited liability companies in the oil and gas industry.
- In 2012, EIG Energy Fund XV-A, L.P. ('EIG') provided up to $200 million in financing to IE Holdings and IE through a Note Purchase Agreement.
- In October 2015, EIG declared an event of default after the Debtors failed to comply with certain financial covenants in the loan agreement.
- On December 28, 2015, the parties entered into a Forbearance Agreement to temporarily waive the defaults.
- As a condition of the Forbearance Agreement, IE Holdings amended its LLC agreement to require the unanimous consent of all common unit holders to file for bankruptcy.
- To effectuate this condition, IE Holdings issued a single common unit to EIG for a $1.00 capital contribution, making EIG a minority member with the power to block any bankruptcy filing.
Procedural Posture:
- On May 20, 2016, Intervention Energy Holdings, LLC and Intervention Energy, LLC (the 'Debtors') filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware.
- On May 24, 2016, EIG Energy Fund XV-A, L.P. ('EIG'), a creditor, filed a Motion to Dismiss the chapter 11 cases.
- EIG's motion argued, in part, that the Debtors lacked the corporate authority to file for bankruptcy without EIG's consent as a member of the LLC.
- The Bankruptcy Court bifurcated the issues and held a hearing solely on the question of the Debtors' authority to file the petition.
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Issue:
Does a provision in an LLC's operating agreement, which requires unanimous member consent to file for bankruptcy and was implemented as a condition for a creditor to forbear on a default, violate federal public policy and is therefore unenforceable?
Opinions:
Majority - Carey, J.
Yes. A provision in an LLC governance document that places the ultimate authority to block a bankruptcy filing into the hands of a single minority equity holder, whose primary relationship is that of a creditor and who owes no fiduciary duty to the LLC, is tantamount to an absolute waiver of the right to seek bankruptcy relief and is void as contrary to federal public policy. It is a well-settled principle that a debtor cannot contract away its right to file for bankruptcy. Agreements made pre-petition that purport to waive the benefits of the bankruptcy laws are wholly void. The court determined that the sole purpose of the unanimous consent provision and the issuance of a single 'golden share' to EIG was to prevent the Debtors from filing for bankruptcy. This arrangement was a 'circuity of arrangement' intended to circumvent the fundamental public policy that ensures access to bankruptcy relief. Therefore, the provision is unenforceable, and the Debtors had the authority to file their petition.
Analysis:
This decision reaffirms the robust federal public policy that protects a debtor's access to bankruptcy relief. It establishes that courts will look beyond the form of a contractual arrangement to its substance to prevent creditors from effectively creating an unenforceable waiver of bankruptcy rights. The ruling serves as a significant precedent against the use of 'golden shares' or blocking rights by creditors, making it clear that such mechanisms, designed solely to prevent a bankruptcy filing, will likely be invalidated. This impacts corporate finance and workout negotiations by limiting the tools creditors can use to control a distressed borrower's access to the bankruptcy system.
