Pre-Petition Waiver Of Right To File Bankruptcy—Is It Enforceable? (In re Roberson)

By: Donald L Swanson

Question: Can a creditor prevent its debtor from filing bankruptcy by pre-petition contract terms?

Answer: No . . . according to In re Roberson Cartridge Co., LLC, Case No. 22-20192 in the Northern Texas Bankruptcy Court (03/07/2023, opinion at Doc. 77).

Facts

The In re Roberson Cartridge Debtor is a limited liability company under Texas law that, prior to filing Chapter 7, manufactured cartridges for ammunition.

Debtor’s sole owner, Mr. Roberson, holds 94,000 of Debtor’s ownership Units. He’s also Debtor’s sole manager.

Matador Brass Partners, LLC, is Debtor’s lender with a $4.4 million claim.  Here are their contract terms:

• Matador can convert its loan into Debtor’s ownership Units—but has no ownership interest in Debtor until doing so;
• Mr. Roberson personally pledges his ownership Units to secure the Matador loan;
• Upon a loan default, Mr. Roberson’s ownership voting rights immediately transfer to and vest in Matador; and
• Debtor must obtain Matador’s written consent before taking “any action that results in a liquidation or dissolution” of Debtor.

Debtor defaults on the Matador loan, but Matador does not (i) exercise its conversion rights, or (ii) foreclose on Mr. Roberson’s ownership Units.

Bankruptcy

Without Matador’s consent, Mr. Roberson puts Debtor into Chapter 7 bankruptcy.

Matador moves to dismiss the bankruptcy, alleging that Mr. Roberson had no bankruptcy filing authority because:

• Debtor’s default stripped Mr. Roberson of his ownership voting rights; and
• Matador’s approval for a bankruptcy filing is required by the loan documents.

Debtor and Chapter 7 Trustee oppose the motion to dismiss. 

In the bankruptcy, Debtor schedules personal property asset values at >$11 million.  But that number includes these speculative amounts:

• $5 million for a “patent pending” asset; and
• $4.3 million for a lender liability claim against Matador.

One asset has significant equity: a 40,000-square-foot commercial building where cartridges were manufactured, situated on a 23-acre tract of land and subject to a $1.3 million lien.  Offers to buy the land and building from Debtor are in the range of $1.8 million.

Scheduled claims against Debtor include $5,654,835 secured and $2,895,762 unsecured.  Regarding unsecured claims:

• one is for >$2.6 million—but the creditor has not filed a proof of claim, and the claims deadline has expired; and
• 500 claims (from $200 to $600 each, with some at $1,000 each) are by customers who paid deposits when orders were made—these claims might have priority under § 507(a)(7).

Court Ruling / the Question

The Bankruptcy Court denies Matador’s motion to dismiss. 

In doing so, it declares the question to be this—whether Mr. Roberson had authority to put Debtor into bankruptcy: 

• If he did not, the case must be dismissed; and
• The issue of authority is determined by state law.  

–Voting rights

Matador argues that, upon Debtor’s default, Mr. Roberson’s voting rights vested in Matador and, as a result, Mr. Roberson lost any right to file Debtor’s bankruptcy.

The Bankruptcy Court rejects this argument because:

• While ownership interests in a limited liability company may be assigned under Texas law, the assignment does not give the assignee any management rights—the assignee only receives economic attributes, such as income, gain, loss and distributions;
• Both the loan documents and Texas statutes specify that no owner has the power to act for or bind the Debtor—only Debtor’s managers have such authority, and Mr. Roberson is Debtor’s sole manager; and
• Even if Mr. Roberson’s ownership voting rights immediately divested at default, he retains authority to act for Debtor as its sole manager—including authority to liquidate.

–Blocking Provision

Matador argues that Debtor did not properly file the bankruptcy because loan documents require Matador’s approval for a bankruptcy filing—which approval Matador did not give.

The Bankruptcy Court rejects this argument because:

• enforceability of such a blocking requirement depends on who holds the right—(i) creditors generally cannot enforce such a right, but (ii) owners generally can;
• In this case, Matador has a convertible loan—but did not convert that loan into ownership; and
• Matador’s contract right to veto Debtor’s bankruptcy is, therefore, void as against public policy.

As to rationale for its void ruling, the Bankruptcy Court explains:

• Precedent:
  • Courts find such blocking provisions to be void when a creditor, without an ownership interest, tries to block a bankruptcy filing—the idea is that a debtor cannot contract away the right to bankruptcy benefits; and
  • One court even finds blocking provisions void when the creditor has a nominal ownership interest.
• Reason: a void rule “has to be the law,” lest astute creditors routinely require such a waiver.

Conclusion

The Bankruptcy Court concludes with this:

• Debtor complied with the loan document provisions and governing Texas law when it filed bankruptcy; and
• Accordingly, Matador’s motion to dismiss is denied.

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