CURRENT MONTH (September 2019)

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.


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