Questions on Bankruptcy Remoteness Certified to Fifth Circuit

Questions on Bankruptcy Remoteness Certified to Fifth Circuit

      Earlier this year, the United States Bankruptcy Court for the Southern District of Mississippi certified certain questions to the Fifth Circuit Court of Appeals, all relating to the ability to organize a venture as “bankruptcy remote.” In re: Franchise Services of North America, Inc., Case No. 1702316EE (Bankr. S.D. Miss. Jan. 17, 2018).

      For a number of years, there has existed a question of whether a particular business entity can structure itself as being “bankruptcy remote” with the effect that those remoteness provisions will be upheld. This reflects the tension between the law generally holding that it is against public policy to contract away the right to receive bankruptcy protections in contrast to the ability of participants in a business venture to, by contract, structure their relationship as they see fit. In a pair of 2016 decisions, In Re: Lake Michigan Beach Pottawattamie Resort, LLC and In Re: Intervention Energy Holdings, various bankruptcy remote structures were struck down. HERE is a link to my review of the In Re: Lake Michigan decision and HERE is a link to my review of the In Re: Intervention Energy Holdings decision. Most recently, Judge Schaff, in  In Re Lexington Hospitality Group, LLC, 2017 WL 4118117 (Bankr. E.D. Ky. Sept. 15, 2017) held that another bankruptcy remote structure was unenforceable.

      In this case, the bankruptcy court is asking the Court of Appeals to pass upon a certain bankruptcy remoteness structure referred to as a “Golden Share.” In the Golden Share structure, the right to veto a bankruptcy filing is held by an equity owner. This is in contrast to many of the other structures in which case the right to limit bankruptcy was vested in a creditor.