October 01, 2019

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Bankruptcy Waiver Unenforceable

By Michael Enright

Another Bankruptcy Court has concluded that a broad public policy against the enforcement of bankruptcy waivers requires the denial of a secured creditor’s motion to dismiss its borrower’s Chapter 11 case. In re Insight Terminal Solutions, LLC, Case No. 19-32231 (Bankr. W.D. Ky. Sept. 23, 2019). The secured creditor held a perfected security interest in the member interests in the operating debtor, but as of the petition date it had not completed a strict foreclosure under the terms of the UCC because the 20 day objection period had not yet run.  The secured creditor had negotiated and implemented bankruptcy waivers and restrictive LLC governance provisions intended to eliminate the possibility of a voluntary petition by the borrower just prior to the petition date.  After initially observing that under Delaware law the LLC operating agreement authorized the debtor’s manager to execute the petition, the court found instead that public policy controlled.  The court noted that the public policy considerations of the enforceability of bankruptcy waivers and restrictions was a question of federal law.  The court relied primarily on In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016) in refusing to enforce the waivers.  The longstanding policy against enforcement of such waivers “continues to apply although ‘resourceful attorneys have continued that tradition’ of attempting to circumvent the bankruptcy laws by ‘circuitry of arrangement.’” (Citing National Bank of Newport v. Nat’l Herkimer County Bank, 225 U.S. 178 (1912).  No doubt, despite new decisions defeating such efforts on public policy grounds, creditors will continue to experiment with intricate structures designed to prevent an authorized filing by their borrower.  The particular route to that end chosen here can be added to the fruitless detour list.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.