Gibson Dunn explains Delaware Decision Invalidating Attempt to Prevent Bankruptcy Through “Golden Share”

A Delaware bankruptcy court has invalidated a lender’s attempt to prevent a borrower from filing bankruptcy by having the borrower amend its operating agreement to require unanimous consent among its members to file bankruptcy and then issuing one “golden share” to the lender.

In In re Intervention Energy Holdings, LLC,[1] the borrower had defaulted under a senior secured loan and subsequently entered into a forbearance agreement with its lender.  As part of the forbearance agreement, the lender required the borrower to agree to (a) amend its operating agreement to require approval of each holder of common units prior to any voluntary bankruptcy filing and (b) issue one share of common units to the lender.[2]  The borrower and its parent holding company filed voluntary chapter 11 petitions approximately five months later without the lender’s consent.[3]

Almost immediately, the lender filed a motion to dismiss the chapter 11 cases, arguing that the borrower lacked authority to seek bankruptcy protection because the lender, as the holder of a common unit, had not approved the bankruptcy filing.[4]  Two of the primary cases relied on by the lender were In re Global Ship Systems, LLC,[5] and DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC).[6]

In Global Ship Systems, a creditor held Class B equity interests valued at 20% of the debtor, and the debtor’s operating agreement required consent of the Class B shareholder.[7]  In granting the creditor’s motion to dismiss the chapter 11 case, the Georgia court held that the creditor wore “two hats” in the case, and “as a Class B shareholder, it [had] the unquestioned right to prevent, by withholding consent, a voluntary bankruptcy case.”[8]

In DB Capital, one of the LLC members moved to dismiss the chapter 11 case because the operating agreement had been amended to remove any authority to commence a bankruptcy proceeding.[9]  The debtor argued that the bankruptcy restriction was unenforceable because it “was executed at the demand, and for the sole benefit of” the debtor’s main secured creditor.[10]  The court, however, upheld the restriction and dismissed the case, noting that the debtor had failed to “point to any record evidence that the [amendment to the operating agreement] was coerced by a creditor.”[11]  The court “decline[d] to opine whether, under the right set of facts, an LLC’s operating agreement containing terms coerced by a creditor would be unenforceable.”[12]

Not persuaded by these cases, Bankruptcy Judge Kevin Carey, the Delaware judge presiding over the Intervention Energy case, distinguished Global Ship Systems because “the method by which the creditor . . . received its equity interests was not subject to question or analysis.”[13]  Thus, “[t]here is no way to compare that creditor’s interests [in Global Ship Systems] to [the Intervention Energy lender’s] contracting for one golden share solely for the purpose to control any potential filing.”[14]  The Delaware court also refused to follow DB Capital, rejecting the notion that an entity can waive its right to seek bankruptcy protection so long as there is no evidence of coercion.[15]

Rather, the Delaware court emphasized the need to guard federal public policy, which “assure[s] access to the right of a person, including a business entity, to seek federal bankruptcy relief as authorized by the Constitution and enacted by Congress.”[16]  The court, therefore, refused to recognize the lender’s consent right, holding:

“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.”[17]

If other courts follow the decision and reasoning in Intervention Energy, it may prove extremely difficult for a lender to prevent its borrower from seeking bankruptcy protection in circumstances where the principal, if not the only, connection of the lender to the borrower is as a creditor.  At the same time, boards should take note that decision making regarding filing for bankruptcy protection should not necessarily be dictated by a lender holding an alleged blocking vote.

While the court’s reasoning suggests that a different result may have been reached if the transaction had been structured so that the lender not only was a creditor but also was an equity investor, this would appear to require a more than immaterial actual equity investment by the lender.

Despite the creative structures that parties may develop to prevent a bankruptcy filing, a lender should be cautious in relying on such protections.  A bankruptcy court may look past the parties’ structures and invalidate such restrictions if the intent is to allow the lender to prevent or control the borrower’s ability to seek bankruptcy protection.


   [1]   Case No. 16-11247 (KJC) __ B.R. __, 2016 WL 3185576, at *2 (Bankr. D. Del. June 3, 2016).

   [2]   Id.

   [3]   Id. at *1.

   [4]   Id.

   [5]   391 B.R. 193 (Bankr. S.D. Ga. 2007).

   [6]   Case No. 10-046, 2010 WL 4925811 (10th Cir. BAP Dec. 6, 2010).

   [7]   In re Glob. Ship Sys., LLC, 391 B.R. at 199.

   [8]   Id. at 203.

   [9]   In re DB Capital Holdings, LLC, 2010 WL 4925811, at *2.

  [10]   Id. at *3.

  [11]   Id.

  [12]   Id.

  [13]   In re Intervention Energy Holdings, LLC, 2016 WL 3185576, at *6 n.25.

  [14]   Id.

  [15]   Id.

  [16]   Id. at *6.  The court cited several cases with similar holdings: In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899, 912 (Bankr. N.D. Ill. 2016) (“In the same way that individuals may not contract away their bankruptcy rights, corporations should be similarly constrained.”) (LLC debtor); In re Bay Club Partners–472, LLC, 2014 WL 1796688, at *4-5 (Bankr. D. Or. May 6, 2014) (holding prepetition waivers of bankruptcy protection are unenforceable as against public policy) (LLC debtor); In re Shady Grove Tech Ctr. Assocs. Ltd. P’ship, 216 B.R. 386, 390 (Bankr. D. Md. 1998) supplemented, 227 B.R. 422 (Bankr. D. Md. 1998) (corporate contractual “prohibitions against the filing of a bankruptcy case are unenforceable”) (partnership debtor).

  [17]   Id.

This post comes to us from Gibson, Dunn & Crutcher LLP. It is based on the firm’s memorandum, “Delaware Court Invalidates Lender’s Attempt to Prevent Bankruptcy Through Issuance of ‘Golden Share’,” dated August 8, 2016, and available here.