Business & Corporate
Border Control: The Enforceability of Contractual Restraints on Bankruptcy Filings, Part 2
As discussed in part one of this two-part article, there is a general premise in bankruptcy law that waiving or contracting away the right to file for relief under the Bankruptcy Code is contrary to public policy. Thus, contractual waivers of such rights are generally deemed invalid. Nevertheless, as the case law has developed over the years, a number of courts have held that operating agreement provisions that set limits on the authority of members or managers of a limited liability company to file a bankruptcy case are enforceable. In recent years, lenders have become more creative in seeking to reduce or eliminate their bankruptcy risk. In this regard, a common approach is to create a bankruptcy-remote limited liability company by obtaining, either directly or through a nominee, a so-called golden share in their borrower. Contemporaneously, the lender insists that its borrower incorporate various blocking provisions into their operating agreement such that it can utilize a bankruptcy approval requirement to effectively preclude a bankruptcy filing. When a bankruptcy is filed notwithstanding the inclusion of such provisions, challenging issues are raised. Part two of this article will discuss how courts have dealt with such issues.