Pub. 10 2015-2016 Issue 5

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. I T IS SETTLED CASE LAW THAT AN agreement purporting to waive the right to file or otherwise pro - hibiting the filing of a voluntary petition for relief under 11 U.S.C. §§ 101 et seq. is void as against public policy and therefore unenforceable. Instead, lenders have traditionally relied upon “bankruptcy-remoteness” provisions to at least reduce the possibility of a borrower becoming the subject of a bankruptcy proceeding. In brief, such provisions are drafted into the bor- rower’s organic documents to shape the borrower’s conduct in two principal ways: (a) limit the permitted business activities of the borrower to only those activities reasonably necessary or es- sential for the borrower to meet its ob- ligations to the lender; and (b) cause the borrower to act in a manner that serves to reinforce the borrower’s corporate identity as being distinct from its equity owners and other affiliates. In the first instance, the lender seeks to reduce or eliminate the potential for the borrower to incur liabilities (other than those owed to the lender) that might result in the borrower becoming insolvent. In the second instance, the lender seeks to reduce or eliminate those bases that a creditor of an owner or affiliate of the borrower might use to reach assets of the borrower under equitable doc- trines such as “piercing corporate veil,” “alter ego,” etc., or, should such equity owner or affiliate become the subject of a bankruptcy proceeding, substantive consolidation of the borrower and its assets with the bankruptcy estate of its debtor affiliate. Lastly, a lender may re - quire that the borrower’s organic docu- ments provide for an “independent” director or manager whose affirmative vote must be obtained before the bor- rower may undertake an actionmaterial to the business affairs of the borrower, such as the filing for bankruptcy by the borrower. “Bankruptcy remote” does not mean “bankruptcy proof.” Bankruptcy-remote borrowers can, and do, file voluntary COUNSELOR’S CORNER Bankruptcy Restrictions in LLC Operating Agreements A Case Law Update Thomas Roubidoux, Kutak Rock LLP petitions for relief. However, where it can be shown that such a bankruptcy fil - ing lacked corporate authority, a matter properly determined under applicable state law, jurisdictional issues arise that may require the bankruptcy case to be dismissed by the court. Lenders do not have an unbroken string of successes in maneuvering their debtors into an effective bankruptcy-remote status. Following are some of the cases on this topic from the last few years. In re Lake County Grapevine Nursery Operations, 441 B.R. 653 (Bankr. N.D. Cal. 2010) In In re Lake County, the creditor entered into a settlement agreement with two California limited liability companies. To secure the LLCs’ indebt- edness to the creditor, the members of the two LLCs pledged their membership interests in each of the LLCs to the credi- tor. Together, the pledging members owned 100 percent of the LLC interests. Under the terms of the security agree- ment, following a payment default, the members’ voting and distribution rights in the two LLCs would vest in the credi- tor. Additionally, the creditor would be entitled to step into the members’ in- terests or, alternatively at the creditor’s option, sell the membership interests in a private or public sale. The LLCs defaulted, filed suit against the creditor for breach of the underlying settlement agreement, and obtained a preliminary injunction preventing the creditor from exercising remedies respecting the LLC interests pledged by the members. The LLCs then filed their petitions for relief, signed by the then-controlling member of the LLCs. The creditormoved to have the bank- ruptcy cases dismissed on the basis that the pledge of the LLCmember interests was self-executing as to the voting rights and management rights, which, according to the creditor, immediately stripped the then-controlling member of its authority to make the bankruptcy filings on behalf of the debtor LLCs. In denying the creditor’s motion to dismiss, the court first concluded that, under relevant California statutes, the