Bankruptcy Remote Provisions of LLC’s Operating Agreement Again Struck Down

Bankruptcy Remote Provisions of LLC’s Operating Agreement Again Struck Down

In a recent decision from the Bankruptcy Court for the Western District of Kentucky, it was (again) held that provisions in an operating agreement intended to bar seeking protection under the Bankruptcy Code will not be enforced. In re Insight Terminal Solutions, LLC, Case No. 19-32231(1)(11), 2019 Bankr. LEXIS 2949, 2019 WL 4640773 (Bankr. W.D. Ky. Sept. 23, 2019).

The debtors in this action, Insight Terminal Solutions, LLC and Insight Terminal Holdings, LLC, were each organized as a Delaware limited liability company. After a loan from Autumn Wind Lending, LLC was going sideways, a “Bankruptcy Rights Waiver” was entered into requiring, in effect, that Autumn Wind have a veto right with respect to the debtors’ bankruptcy filing. Ultimately the debtors, without that approval, did file for bankruptcy protection, whereupon Autumn Wind challenged the validity of those filings.

The filing would be upheld by the Bankruptcy Court.

Responding to Autumn Wind’s argument that the bankruptcy filings was ineffective, the Court wrote that the waiver of the right to seek bankruptcy is “against public policy and invalid.” In the support of this determination, the court cited a number of affiliates including In re Lexington Hospitality Group, LLC, 577 B.R. 676, 683 (Bankr. E.D. Ky. 2017), In Re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016) and In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899, 912 (Bankr. N.D. Ill. 2016).

While there is limited authority to the contrary, this decision is one in a long line of courts striking down efforts by attorneys and their clients to by contract effect a waiver of the right to seek protection under the Bankruptcy Code.