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Secured Lenders, LLCs and Preventing Bankruptcy

Generally Bankruptcy courts have maintained that waiving or contracting away the right to file for relief under the Bankruptcy Code is contrary to public policy.  Not so fast my friends as developing case law recognizes the contractual rights and limiting authority agreed to by members of a limited liability company in their controlling operating agreement.  Secured lenders have recognized this and are becoming more creative to reduce their bankruptcy risk.  Acquiring a membership interest and requiring certain blocking provisions in the operating agreement regarding the filing of bankruptcy as a condition of the loan is one such approach.

State law determines who has the legal right to sign and file a bankruptcy petition on behalf of an entity. In fact, the U.S. Supreme Court has determined that “[t]he authority to file a bankruptcy petition must be found in the corporation’s instruments and in applicable state law.”[21] As such, courts have held that a bankruptcy case filed on behalf of an entity by one without requisite authority under state law is improper and must be dismissed for, among other reasons, lack of jurisdiction.[22]

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