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Restriction Prohibiting LLC’s Bankruptcy Filing Held Void

In Intervention Energy Holdings, LLC, Case No. 16-11247, the United States Bankruptcy Court for the District of Delaware recently held that a provision inserted into a limited liability company’s operating agreement to restrict the filing of a bankruptcy is void as contrary to federal public policy. As part of a forbearance agreement with its lender, Debtor IE Holdings agreed to an amendment of its operating agreement whereby authorization to file bankruptcy required the unanimous approval of all holders of common unit interests and one common unit interest was sold to its lender for $1.00. Debtor IE Holdings filed bankruptcy absent the approval of its lender and the lender moved to dismiss the bankruptcy, arguing that the filing was unauthorized. In denying the lender’s motion to dismiss IE Holdings’ bankruptcy case, the bankruptcy court held that the amendment of the operating agreement was “tantamount to an absolute waiver” of the right to file bankruptcy, which, even if permitted by state law, contravenes federal public policy and is void.

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