Bankruptcy Court Holds That LLC Agreement Requirement That a Convertible

Bankruptcy Court Holds That LLC Agreement Requirement That a Convertible

Loan Creditor Approve a Bankruptcy Petition Is Unenforceable In In re Roberson Cartridge, Co., LLC, a creditor challenged a bankruptcy petition by invoking a provision in the debtor’s Limited Liability Company Agreement that required the creditor’s written consent for any action that resulted in a liquidation or dissolution of the Company. The bankruptcy court ruled that the provision was against public policy and thus unenforceable (see attached PDF).

The court noted that the enforceability of contractual provisions which restrict the right to file for bankruptcy depend on who has them: “If it is creditors, they are generally unenforceable. If it is equity interest holders, they are generally enforceable.” In this case, although the creditor’s loan was convertible into equity, the creditor had not exercised such right prior to the authorization of the bankruptcy filing.

The owner of the company had also pledged his membership interests as collateral, and the pledge agreement provided that the owner’s voting rights would immediately cease and vest in the creditor in the event of default. However, even if the owner had been stripped of his voting rights prior to authorizing the bankruptcy petition, the court reasoned that the owner, in his capacity as sole manager, had the authority under the LLC Agreement to authorize the filing.

Finally, the court also rejected the creditor’s request to convert the Chapter 7 liquidation into a small business reorganization case under Subchapter V of Chapter 11. Although a creditor may request to convert a chase to a regular Chapter 11, the court concluded that only the debtor may request to proceed under Subchapter V.