Recently on June 6, 2016, the Delaware Bankruptcy Court considered a motion to dismiss the Intervention Energy Holdings, LLC, et al. bankruptcy proceeding.  On May 20, 2016, Intervention Energy Holding, LLC (“IE Holdings”) and Intervention Energy, LLC (“IE”) filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware (the “Voluntary Petition”).  For a link to a post summarizing the bankruptcy filing, click here.

Background

On May 24, 2016, EIG Energy Fund XV-A, L.P. filed a motion to dismiss asserting that IE Holdings was not authorized to file the Voluntary Petition. EIG argues that, absent its consent to commence a chapter 11 case, IE Holdings lacked authority to file the Voluntary Petition under the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) (D.I. 27, Ex. H), which requires “approval of all Common Members . . . [to] commence a voluntary case under any bankruptcy”.

On January 6, 2012, the Debtors and EIG entered into a Note Purchase Agreement (the “Note Purchase Agreement”), whereby EIG provided up to $200 million in senior secured notes (the “Secured Notes”).  EIG and the Debtors then entered into a string of amendments to the Note Purchase Agreement.  The parties then entered into a forbearance agreement on Dec. 28, 2015, and on the same date, IE Holdings enacted Amendment No. 1 to the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Amendment”) to include the unanimous consent requirement to file bankruptcy (the “Consent Provision”). To give effect to the Consent Provision, IE Holdings then issued a single common unit to EIG for a common capital contribution of $1.00, making EIG a common member.  But for the Amendment, IE Holdings would have been authorized to file for bankruptcy.

Analysis

In denying EIG’s motion to dismiss in part, Judge Carey stated:

A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder—and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.

A copy of Judge Carey’s June 6, 2016 decision can be found here. In addition, a newly-published Alert on the decision penned by my colleague Raymond Patella can be found on the Fox Rothschild website.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Summary

In a 10-page decision dated June 6, 2016, Judge Carey of the Delaware Bankruptcy Court denied a motion to dismiss filed by a holder of a “Golden Share” of Intervention Energy Holdings, LLC (the “Debtor”).  Judge Carey’s opinion is available here (the “Opinion”).  A “Golden Share” is “A type of share that gives its shareholder veto power over changes to the company’s charter. A golden share holds special voting rights, giving its holder the ability to block another shareholder from taking more than a ratio of ordinary shares. Ordinary shares are equal to other ordinary shares in profits and voting rights. These shares also have the ability to block a takeover or acquisition by another company.” Opinion at n.9 (quoting Investopedia – Golden Share, INVESTOPEDIA, http://www.investopedia.com/terms/g/goldenshare.asp.

In this case, the holder of the Golden Share was EIG Energy Fund XV-A, L.P. (“EIG”).  EIG had provided multiple rounds of debt financing to the Debtors.  However, the Debtors were unable to service their loans and eventually defaulted on their payments.  In exchange for EIG entering into a forbearance agreement, EIG was granted a single common unit (a share of an LLC), and the Debtors revised their LLC Agreement to require unanimous consent in order to file bankruptcy.  Opinion at *4.  The Debtors filed bankruptcy without EIG’s consent, and EIG responded by filing its motion to dismiss.  The Opinion ruled on EIG’s motion to dismiss.

While Delaware is well known for allowing companies liberal freedom of contract when creating an LLC agreement, there are some rights that courts have not allowed entities to give up.  Opinion at n.7.  Numerous courts have held that “an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.”  Opinion at *6.  Judge Carey held that because the forbearance agreement required “that [the Debtor] both amend its LLC Agreement to institute the unanimous Consent Provision and grant the blocking share, the intent of the parties is unmistakable.”  Opinion at *8.

Thus, because it was the intent of the parties to take action that is against public policy, Judge Carey denied EIG’s motion to dismiss the bankruptcy and held that the Debtors had authority to file for bankruptcy.  Judge Carey opined (in a rather lengthy sentence), “A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder—and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.”  Opinion at *9.

While Bankruptcy is an issue of law many people don’t think about until they hit rock bottom, given the success statistics for companies in the U.S., particularly new companies, it is worth taking a page out of the playbook of the doomsday preppers – preparing for the worst, while hoping for the best.

In addition, a newly-published Alert on the decision penned by my colleague Raymond Patella can be found on the Fox Rothschild website.