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Bankruptcy "Blocking Director" of Michigan LLC Rejected

A Bankruptcy Court recently voided an operating agreement provision requiring the consent of a secured lender-placed "special member" for a Michigan LLC to file a bankruptcy petition. In In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016), the "blocking director" provision was inserted as an amendment to the debtor's operating agreement in connection with a forbearance agreement. The provision granted the special member the right to approve or disapprove various LLC actions, including filing a bankruptcy petition. The amendment was clear that the blocking director provision was for the express benefit of the lender, and that the special member was relieved of any fiduciary duties to the debtor and its members. The debtor filed a voluntary bankruptcy petition without the consent of the special member, and the secured lender moved to dismiss the filing as unauthorized. The court held that the blocking director provision was void under both bankruptcy and Michigan law, and that the bankruptcy was authorized because the remaining members voted in favor of the filing.

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