'Cleverly Insidious' Bankruptcy Waiver In SPE Operating Agreement Unenforceable As Matter Of Public Policy

It is generally recognized that an outright contractual waiver of an entity's right to file for bankruptcy is invalid as a matter of public policy. Nevertheless, lenders sometimes attempt to prevent a borrower from seeking bankruptcy protection by, for example, providing for a waiver of the automatic stay or a bankruptcy discharge in a loan agreement, or conditioning a loan or other financing on a covenant, by-law or corporate charter provision that prohibits a bankruptcy filing or restricts the power of the borrower's governing body to authorize such a filing.

One such restriction was recently addressed by the U.S. Bankruptcy Court for the District of Oregon in In re Bay Club Partners-472, LLC, 2014 BL 125871 (Bankr. D. Or. May 6, 2014). The court ruled that a creditor possessed standing to seek dismissal of a chapter 11 case on the basis that the debtor— a limited liability company established as a special purpose entity ("SPE")— was not properly authorized to file for bankruptcy. The court went on to rule, however, that a restrictive covenant added at the creditor's insistence to the debtor's operating agreement prohibiting a bankruptcy filing was unenforceable and that the debtor accordingly was duly authorized to file for chapter 11 protection.

Waiver of Bankruptcy, "Cause" to Dismiss and Standing

The enforceability of prepetition waivers of the right to seek bankruptcy protection or specific bankruptcy benefits (such as the automatic stay) has been the subject of substantial litigation. under case law dating back to at least the 1930s, the maxim that a waiver of the right to file for bankruptcy is unenforceable because it violates public policy has long been the general rule. See In re Weitzen, 3 f. supp. 698, 698 (s.d.n.y. 1933); accord Continental Ins. Co. v. Thorpe Insulation Co. (In Re Thorpe Insulation Co.), 671 f.3d 1011, 1026 (9th cir. 2012); Wank v. Gordon (In re Wank), 505 b.r. 878, 887-88 (9th Cir. bap 2014); NW. Bank & Trust Co. v. Edwards (In re Edwards), 439 b.r. 870, 874 (Bankr. c.d. ill. 2010); Double v. Cole (In re Cole), 428 b.r. 747, 752 (bankr. n.d. ohio 2009); see also In Re Madison, 184 b.r. 686 (bankr. e.d. pa. 1995) (agreement not to file bankruptcy for certain time period is not binding). If the law were otherwise, "astute creditors would require their debtors to waive." Bank of China v. Huang (In re Huang), 275 f.3d 173, 1177 (9th cir. 2002). By contrast, pre-bankruptcy waivers of the automatic stay are sometimes enforceable. See, e.g., In re DB Capital Holdings, LLC, 454 b.r. 804 (Bankr. d. Colo. 2011); In re Bryan Road, LLC, 382 b.r. 844, 848 (Bankr. s.d. Fla. 2008). But see Ostano Commerzanstalt v. Telewide Systems, Inc., 790 f.2d 206, 207 (2d cir. 1986) (stating that "[s]ince the purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay.").

Section 1112(b) of...