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Authority to File Chapter 11: A Matter of Contract or Public Policy?
If you think public policy favoring the freedom to file a Chapter 11 trumps the freedom to negotiate specific restrictions to such a filing, think again. On July 22, 2021, Bankruptcy Judge Michael Kaplan of the United States Bankruptcy Court for the District of New Jersey dismissed the Chapter 11 case of 3P Hightstown, LLC, finding that the debtor lacked the proper authority to commence its Chapter 11 due to its failure to comply with its LLC agreement. Unwilling to follow Judge Walrath's approach in a COVID-related Delaware Chapter 11 case, Judge Kaplan concluded that the governing LLC agreement — which contained a provision restricting the debtor's ability to commence a bankruptcy case — was not void as contrary to public policy. In making its determination, the court provided analysis that is helpful and instructive to anyone considering filing a bankruptcy petition for an LLC, particularly where the LLC is organized under Delaware law. This article explores Judge Kaplan's analysis and the basis for his opinion.
|Background
On April 9, 2021, 3P Hightstown, LLC filed a voluntary chapter 11 bankruptcy petition. Shortly thereafter, Hightstown Enterprises LLC, an entity claiming to be the preferred member of the debtor via an assignment, filed a motion seeking dismissal of the debtor's bankruptcy case. Specifically, Hightstown Enterprises asserted that, pursuant to the debtor's Limited Liability Company Agreement, the debtor lacked authority to file a bankruptcy petition absent certain prerequisites which had not occurred. The debtor opposed the motion.
|Debtor's Authority to File
The United States Supreme Court, in Price v. Gurney, 324 U.S. 100, 104 (1945), noted that, with respect to corporations, the entity vested with "the power of management" has the authority necessary to file a bankruptcy petition. If an entity without the "power of management" files a bankruptcy petition, the bankruptcy case must be dismissed. This principle also applies to cases filed by limited liability companies.
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