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Harmonizing a Debtor’s Right to File for Bankruptcy Against a Creditor’s Desire to Protect Its Financial Interests
In the United States, a debtor’s ability to seek a fresh financial start through bankruptcy is constitutionally protected. Therefore, courts routinely invalidate restrictions designed to limit a debtor’s ability to file a voluntary bankruptcy petition as void against public policy. Nevertheless, it is not uncommon for a business entity’s governing documents to contain limitations or restrictive requirements that must be satisfied before bankruptcy protection can be sought. Oftentimes, these provisions allow a single person (or entity) to block a bankruptcy filing, whether by holding a “golden share” or simply by withholding consent. How to harmonize a debtor’s right to file against a creditor’s desire to protect its financial interests in that debtor has sparked a number of different judicial opinions.
A recent decision from U.S. Bankruptcy Court Judge David Cleary for the Northern District of Illinois addresses this issue head on and found that filing restrictions aren’t always per se violative. See, In re 301 W. North Avenue, Case No. 24 B 2741 (Bankr. N.D. Ill. Jan. 6, 2025). Cleary’s decision suggests that when certain protections for the debtor are in place, limitations imposed by creditors on seeking bankruptcy relief are permissible.
Debtor 301 W. North Avenue LLC (301 W. North or the debtor) owned a seven-story apartment building in Chicago with a $30 million business mortgage. As part of the loan package, the lender specifically required that 301 W. North have one independent manager that was acceptable to the lender, and that the entity be “bankruptcy remote.” As a result, 301 W. North entered into an LLC agreement (the LLC agreement), which required that it maintain a board consisting of two managers, including an independent manager satisfactory to the lender who would remain in place as long as the mortgage debt remained outstanding.
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