Although a wealth of case law has found pre-petition bans on bankruptcy filings to be unenforceable as a matter of public policy, a recent unpublished decision from the Tenth Circuit Bankruptcy Appellate Panel (BAP) upheld a pre-petition ban included as an amendment to an operating agreement. [1] The debtor, DB Capital Holdings LLC, was organized under Colorado law as a manager-operated, limited liability company. The debtor was created to develop and sell a timeshare project in Aspen known as Dancing Bear Residences. The debtor had two members—a Class A member, Aspen HH Ventures LLC, and a Class B member, Dancing Bear Development LP (DB Development).
Background and Procedural History
The general partner of DB Development, Dancing Bear Management LLC (DB Management), operated the debtor pursuant to a pre-petition management agreement (the “Amended Operating Agreement”) between Aspen HH and DB Development, which was amended in May 2006. In February 2009, 14 months behind schedule and approximately $4 million over budget, the debtor completed construction of the first of two buildings planned for the project. Without further funds to continue construction, the debtor continued to operate for approximately one year, during which time it was in breach of its loan agreements with WestLB. In February 2010, the debtor notified Aspen HH that it had defaulted on its loans and was facing foreclosure or bankruptcy. One month later, at WestLB’s request, a Colorado state court appointed a receiver.
In May 2010, Aspen HH intervened in the court-receivership action and filed its own motion for appointment of a receiver. On May 27, 2010, the debtor filed for chapter 11 protection, immediately after Aspen HH obtained an order directing the debtor to return certain documents and setting Aspen HH’s request for appointment of a receiver for hearing on June 9, 2010. Thomas DiVenere is the sole owner of DB Management, and acting as the debtor’s de facto property manager, signed the debtor's bankruptcy petition as the “Member-Manager of Manager.”
DB Development contended that the Amended Operating Agreement provided the authorization for filing a chapter 11 petition. Aspen HH countered that Colorado law and the express language of the Amended Operating Agreement prohibited such a filing. The bankruptcy court agreed with Aspen HH and dismissed the debtor's case. The debtor appealed, and because neither party elected to have the district court hear the appeal, jurisdiction went to the Tenth Circuit BAP.
Tenth Circuit BAP Discussion and Analysis
The Tenth Circuit BAP framed the relevant issue as "whether or not [DB Management] had authority to file a Chapter 11 bankruptcy petition on Debtor's behalf." [2] After reviewing the Colorado Limited Liability Company Act, the operating agreement and the amendment, the BAP concluded that DB Management lacked the requisite authority to file the petition.
Looking to the Amended Operating Agreement as a whole, the BAP noted that the language of the Amendment’s language “expressly bars” the debtor from filing a bankruptcy petition. [3] Although the BAP acknowledged the multitude of decisions cited by the debtor forbidding contractual provisions that prospectively prohibit bankruptcy protection, the BAP found that none of the cited cases involved an agreement between members of an LLC not to file for bankruptcy. In the absence of a factually-analogous case (which the BAP conceded that it too was unable to find), the BAP found cases focusing on a debtor’s agreement with a third party to “waive the benefits of bankruptcy” to be unpersuasive as to the debtor’s appeal. [4]
Branching out from case law, the BAP then turned to the language of the Amended Operating Agreement prohibiting acts outside the ordinary course of business and restricting the ability of DB Management to operate the debtor. The BAP characterized the petition filing as an insurmountable impediment to the operation of business as usual, making it essentially “impossible” to operate the business as it was being conducted immediately prior to the petition filing. [5] The BAP carefully delineated between operating a business in chapter 11 and carrying on a company's “ordinary” business, parsing the words in a manner that potentially indicated that any departure from the “ordinary” could be viewed as a violation of the Amended Operating Agreement.
The BAP also inspected the provisions, ostensibly granting authority to DB Management to file for bankruptcy and found them wanting. Specifically, the BAP found that the Amended Operating Agreement’s grant of “all specific rights and powers required or appropriate to the management of the Company [sic] business” did not include the authority to file a chapter 11 petition. [6] Taking the analysis one step further, the BAP held that even if such language did not expressly prohibit the filing of a bankruptcy petition, the Amended Operating Agreement’s restrictions upon the authority of DB Management as manager precluded such a filing. Notably, the BAP clarified its view that In re Amdura Corp. [7] stands only for the proposition “that a debtor in possession is allowed to operate a business as would a trustee,” not that the act of filing bankruptcy itself could be viewed as within the ordinary course of business. [8]
Future Implications
The impact of DB Capital is uncertain for several reasons. First, the BAP’s issuance of its decision in unpublished form [9] indicates its potential reluctance to create a per se rule that limited liability companies may “bankruptcy proof” themselves via operating agreements. Further, the BAP expressly declined to opine on whether a similar provision, under the right set of facts (presumably coercion of the lender or duress on the part of the borrower), might be found to be unenforceable as an impermissible restraint upon the relevant entity’s ability to avail itself of the protections of bankruptcy.
Second, the BAP relied heavily on the relevant language of the Amended Operating Agreement barring a bankruptcy filing and presumed the parties’ mutual agreement thereto. Should the language of another operating agreement vary even slightly, it is not beyond peradventure that the BAP could find that the requisite authority for filing for bankruptcy existed. Similarly, it is by no means certain that another bankruptcy court, even under substantially similar circumstances, would follow DB Capital.
Third, DB Capital runs against the grain of well-established case law holding that pre-petition bans on filing for bankruptcy are impermissible as a matter of public policy. Although the BAP carefully set forth the facts, operating agreement language and case law relevant to its analysis, the decision is nonetheless but a single counterpoint to contrary case law. Accordingly, the future impact of DB Capital in sister jurisdictions remains, at best, uncertain.
1. DB Capital Holdings LLC v. Aspen HH Ventures (In re DB Capital Holdings LLC), No. 10-046, 2010 WL 4925311 (10th Cir. B.A.P. Dec. 6, 2010).
2. Id. at *2.
3. Id.
4. Id. (internal quotations omitted).
5. Id. at *3.
6. Id. at *4.
7. Amdura National Distribution Co. v. Amdura Corp. (In re Amdura Corp.), 75 F.3d 1447 (10th Cir. 1996).
8. Id. at *5.
9. See 10th Cir. B.A.P. L.R. 8018-6 ("This court's unpublished decisions may be cited for their persuasive value, but are not precedential except under the doctrines of law of the case, claim preclusion, and issue preclusion.").