OPINION2
KEVIN J. CAREY, UNITED STATES BANKRUPTCY JUDGE.
BACKGROUND
Before the Court is the EIG Energy Fund XV-A, L.P. Motion to Dismiss the Chapter 11 Cases of Intervention Energy Holdings, LLC and Intervention Energy, LLC (the "EIG MTD"). (D.I.27.)
Procedural Background
On May 20, 2016, Intervention Energy Holding, LLC ("IE Holdings") and Intervention Energy, LLC ("IE") (together, in these jointly administered proceedings, the "Debtors") filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware (the "Voluntary Petition").3 (D.I.1.) On May 24, 2016, EIG Energy Fund XV-A, L.P. (hereinafter referred to as "EIG")4 filed the EIG MTD asserting, among other things, that IE Holdings was not authorized to file the Voluntary Petition. (EIG MTD ¶ 15.) 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" (EIG MTD ¶ 15). For purposes of disposition of this part of the EIG MTD, the material facts are not in dispute.5
At the May 26, 2016, hearing on first day motions, the Court scheduled briefing and argument, limited to the issue of whether IE Holdings lacked authority to file its chapter 11 petition. The Debtors filed their response to the EIG MTD (the "Debtors' Response") on May 31, 2016. (D.I.52.) EIG filed its Reply in Support of the EIG MTD on June 1, 2016 (the "EIG Reply"). (D.I.58.) A hearing to consider the motion and response was held on June 2, 2006.
Factual Background
IE Holdings and IE are limited liability companies formed in 2007, and governed under the laws of the State of Delaware. (Zimmerman Decl. ¶ 9, Operating Agreement § 12.9.) They are private, non-operated oil and natural gas exploration and production companies, almost entirely located in North Dakota. (Zimmerman Decl. ¶ 9.) IE Holdings is owned as follows: 84.73% — Intervention Energy Investment Holdings, LLC ("IEIH"); 15.27% — various business and individual investors. (Zimmerman Decl. ¶ 21.) IE Holdings issued 22,000,001 Common Units: IEIH holds 22,000,0000 Common Units and EIG holds but one Common Unit. (Zimmerman Decl. ¶ 19.) IE is a wholly-owned subsidiary of IE Holdings. (Zimmerman Decl. ¶ 18.) EIG is an institutional investor specializing in private investments in global energy, resource, and related infrastructure projects and companies. (EIG MTD ¶ 11.)
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"). (Zimmerman Decl. ¶ 23, EIG MTD ¶ 14.) As of the date of the Voluntary Petition, the principal amount outstanding under the Secured Notes was approximately $140 million. (Zimmerman Decl. ¶ 24.) The Secured Notes are secured by liens on certain of the Debtors' assets, including, among other things, all inventory, accounts, equipment, fixtures, deposit accounts, and cash collateral. (Zimmerman Decl. ¶ 24, EIG MTD ¶ 14.) Specifically, with respect to cash collateral, the Debtors granted EIG a lien on all amounts held in any deposit account of the Debtors, as well as a lien on the Debtors' rights to payment under any contract. (Zimmerman Decl. ¶ 25, EIG MTD ¶ 14.)
On September 15, 2014, the Debtors and EIG entered into Amendment No. 3 to the Note Purchase Agreement (the "Third Amendment") to expand EIG's funding commitment from $110 million to $150 million. (Zimmerman Decl. ¶ 32, EIG MTD ¶ 18.) In connection with the Third Amendment, the parties amended certain elements of the positive debt covenant calculations (the "Maintenance Covenants"). (Zimmerman Decl. ¶ 32, EIG MTD ¶ 19.) In October 2015, EIG declared an event of default based on the Debtors' failure to comply with the Maintenance Covenants. (Zimmerman Decl. ¶ 33, EIG MTD ¶ 20.)
On December 28, 2015, the Debtors and EIG negotiated and entered into Amendment No. 5, Forbearance Agreement and Contingent Waiver (the "Forbearance Agreement"). (Zimmerman Decl. ¶ 34, EIG MTD ¶ 21, D.I. 27, Ex. N.) The Forbearance Agreement provided that EIG would waive all defaults if the Debtors raised $30 million of equity capital to pay down a portion of the existing Secured Notes by June 1, 2016. (Zimmerman Decl. ¶ 34, EIG MTD ¶ 22.) As a condition to the effectiveness of the Forbearance Agreement, the Debtors were required to fulfill the following conditions precedent:
The Administrative Agent shall have received a fully executed amendment to the limited liability company agreement of the Parent in form and substance satisfactory to the Administrative Agent (i) admitting EIG or its Affiliate as a member of the Parent with one common unit and (ii) amending such limited liability company agreement to require approval of each holder of common units of the Parent prior to any voluntary filing for bankruptcy protection for the Parent of the Company.
(Forbearance Agreement § 7(b).) Also on December 28, 2015, IE Holdings enacted Amendment No. 1 to the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the "Amendment")6 to include the unanimous consent requirement to file bankruptcy (the "Consent Provision"). (Zimmerman Decl. ¶ 34, EIG MTD ¶ 23, Amendment ¶ 4, D.I. 27, Ex. L.) 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. (Zimmerman Decl. ¶ 34, EIG MTD ¶ 23, Amendment, Schedule A.)
It is not disputed that, but for the Amendment, IE Holdings would have been authorized to seek federal bankruptcy relief.
DISCUSSION
The parties have made several interesting arguments with respect to state law and contractual treatment of fiduciary obligations. EIG argues that an LLC that has abrogated its fiduciary responsibilities to the extent permitted by Delaware law may contract away its right to file bankruptcy at will.7 (EIG MTD ¶ 32.) EIG cites to cases in which courts have upheld consent provisions among LLC members.8 (EIG MTD ¶¶ 34-35 & n.55.) In contrast, the Debtors, relying upon the recent case of In re Lake Michigan Beach Pottawattamie Resort LLC, draw a parallel between the "golden share"9 given to EIG and a blocking director installed on the board of a special purpose entity (SPE), arguing that abrogating fiduciary duties is exactly what is fatal to EIG's argument — that the blocking member (or, in this case, holder of the "golden share") must retain a duty to vote in the best interest of the potential debtor to comport with federal bankruptcy policy.10 (Debtors' Response 11-14.)
In light of my disposition of the federal public policy issue which follows, and reluctant to accept the parties' invitation to decide what may well be a question of first impression of state law (i.e., determining the scope of LLC members' freedom to contract under applicable state law provisions) when an alternate ground for decision is present, I find it unnecessary to address these arguments.
The Debtors note in their Response that it is axiomatic that a debtor may not contract away the right to a discharge in bankruptcy.11 (Debtor's Response 8.) It has been said many times and many ways. "[P]repetition agreements purporting to interfere with a debtor's rights under the Bankruptcy Code are not enforceable."12 "If any terms in the Consent Agreement ... exist that restrict the right of the debtor parties to file bankruptcy, such terms are not enforceable."13 "[A]ny attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor's future bankruptcy filing is generally unenforceable. The Bankruptcy Code pre-empts the private right to contract around its essential provisions."14 "[I]t would defeat the purpose of the Code to allow parties to provide by contract that the provisions of the Code should not apply."15 "It is a well settled principal that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy."16
The rule is not new:
The agreement to waive the benefit of bankruptcy is unenforceable. To sustain a contractual obligation of this character would frustrate the object of the Bankruptcy Act, particularly of section 17 (11 U.S.C. § 35). This was held by the Supreme Judicial Court of Massachusetts, Federal Nat. Bank v. Koppel, 253 Mass. 157, 148 N.E. 379, 380 (Mass. 1925), where it was said: "It would be repugnant to the purpose of the Bankruptcy Act to permit the circumvention of its object by the simple device of a clause in the agreement, out of which the provable debt springs, stipulating that a discharge in bankruptcy will not be pleaded by the debtor. The Bankruptcy Act would in the natural course of business be nullified in the vast majority of debts arising out of contracts, if this were permissible. It would be vain to enact a bankruptcy law with all its elaborate machinery for settlement of the estates of bankrupt debtors, which could so easily be rendered of no effect. The bar of the discharge under the terms of the Bankruptcy Act is not restricted to those instances where the debtor has not waived his right to plead it. It is universal and unqualified in terms. It affects all debts within the scope of its words. It would be contrary to the letter of section 17 of the Bankruptcy Act as we interpret it to uphold the waiver embodied in this note. So to do would be incompatible with the spirit of that section. Its aim would largely be defeated."
There are other grounds for sustaining the action of the referee, but the one mentioned is enough.17
Even so long ago as 1912, the United States Supreme Court was forced to address parties attempting to circumvent the bankruptcy laws by "circuity of arrangement."18 Today's resourceful attorneys have continued that tradition.19
Yet, to contract away the right to seek bankruptcy relief is precisely what both parties here have attempted to accomplish. EIG "specifically negotiated Intervention's ability to file a voluntary bankruptcy proceeding." (EIG MTD ¶ 23.) Throughout the EIG MTD, EIG emphasizes and insists upon its "contracted-for protections, including the Consent Provision" indisputably meant to block any voluntary bankruptcy filing. (EIG MTD ¶ 32.) In its Reply, EIG again emphasizes that "EIG [] bought and paid for its Common Unit (including all rights related thereto)...." (EIG Reply ¶ 14.) Because § 7(b) of the Forbearance Agreement requires, as a condition to the effectiveness of the agreement, that IE both amend its LLC Agreement to institute the unanimous Consent Provision and grant the blocking share, the intent of the parties is unmistakable.
Both parties argue that, were I to decide this issue for the other side, systemic disruption will follow. EIG warns that if I were to declare the Consent Provision here void as contrary to federal public policy, not only would I vitiate the will of state legislatures that LLC members be free to contract, but also that confusion will reign about the breadth of an LLC's right to contract.20
The Debtors, on the other hand, argue that if I permit the enforcement of the Consent Provision, the landscape in debtor-creditor relations will be dramatically altered — that lenders will henceforth demand such a provision in every loan/forbearance agreement.21 True, lenders usually are not reticent to demand provisions that borrowers may often consider oppressive, but, as EIG's counsel replied at argument, as unwelcome as the consequence of doing so may be, a borrower can always say, "No." A borrower can also choose to seek bankruptcy relief sooner than it would prefer, rather than agree to any provision in a forbearance agreement that a borrower finds unacceptable.
The federal public policy to be guarded here is to assure access to the right of a person, including a business entity,22 to seek federal bankruptcy relief as authorized by the Constitution and enacted by Congress. It is beyond cavil that a state cannot deny to an individual such a right.23 I agree with those courts that hold the same applies to a "corporate" or business entity, in this case an LLC.24
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.25 Under the undisputed facts before me, to characterize the Consent Provision here as anything but an absolute waiver by the LLC of its right to seek federal bankruptcy relief would directly contradict the unequivocal intention of EIG to reserve for itself the decision of whether the LLC should seek federal bankruptcy relief. Federal courts have consistently refused to enforce waivers of federal bankruptcy rights. I now join them, and conclude that the Debtors possessed the necessary authority to commence their chapter 11 proceedings.
CONCLUSION
For the reasons set forth above, the Motion to Dismiss is denied, in part.
An appropriate order will follow.
In re: INTERVENTION ENERGY HOLDINGS, LLC, et al.,1 Debtors.
ORDER
AND NOW, this 3rd day June, 2016, upon consideration of the Motion to Dismiss the Chapter 11 Cases of Intervention Energy Holdings, LLC and Intervention Energy, LLC of EIG Energy Fund XV-A, L.P. (the "EIG MTD") (D.I.27), and the Debtors' Response thereto, and the EIG Reply, and after oral argument and a hearing thereon, and for the reasons set forth in the foregoing Opinion, it is hereby ORDERED that:
the EIG MTD is DENIED, in part, with the respect to the issue of the Debtors' authority to file the chapter 11 cases;
AND, it is further ORDERED that a status hearing will be held on June 7, 2016, at 10:00am in Bankruptcy Courtroom No. 5, 824 Market St., Fifth Floor, Wilmington, Delaware, to consider further scheduling and the remaining needs of the parties. cc: Stuart M. Brown, Esquire2
