Can Lenders Prevent LLC Bankruptcy Filings? A Recent Decision Highlights the Debate

Summary:  On December 6, 2010, in an unpublished opinion, the Bankruptcy Appellate Panel of the Tenth Circuit Court of Appeals addressed significant issues with respect to commonly found provisions in limited partnership and limited liability company agreements limiting the authority of such entities to file bankruptcy petitions. The Court declined to invalidate provisions of a limited liability company operating agreement that restricted the right of a manager, without unanimous consent of the LLC’s members, to take steps to institute a bankruptcy.

The opinion is the latest in a long line of decisions considering who is authorized to file bankruptcy petitions on behalf of business entities. While the decision fails to break new ground, discussing it provides a good opportunity to review organizational document drafting considerations relevant to secured lenders and others seeking to limit exposure to bankrupt entities of this type.

Opinion:  DB Capital Holdings, LLC v. Aspen HH Ventures, LLC, and WestLB AG, BAP No. CO-10-046 (B.A.P. 10th Cir. December 6, 2010).