In re Intervention Energy Holdings, LLC

• Decision Date: 03 June 2016
• Docket Number: Case No. 16–11247KJC
• Citation: 553 B.R. 258
• Parties: In re: Intervention Energy Holdings, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

553 B.R. 258

In re: Intervention Energy Holdings, LLC, et al.¹ Debtors.

Case No. 16–11247KJC

United States Bankruptcy Court, D. Delaware.

Signed June 3, 2016

553 B.R. 259

Benjamin S. Boyd, DLA Piper LLP, Washington, DC, Stuart M. Brown, DLA Piper LLP, Wilmington, DE, Thomas R. Califano, Dienna Corrado, Jamila Justine Willis, DLA Piper LLP, New York, NY, for Debtors.

OPINION²

KEVIN J. CAREY, UNITED STATES BANKRUPTCY JUDGE.

BACKGROUND

Before the Court is the EIG Energy Fund XV–A, L.P. Motion to Dismiss the Chapter 11 Cases of Intervention Energy Holdings, LLC and Intervention Energy, LLC (the “EIG MTD”). (D.I.27.)

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Procedural Background

On May 20, 2016, Intervention Energy Holding, LLC (“IE Holdings”) and Intervention Energy, LLC (“IE”) (together, in these jointly administered proceedings, the “Debtors”) filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware (the “Voluntary Petition”).³ (D.I.1.) On May 24, 2016, EIG Energy Fund XV–A, L.P. (hereinafter referred to as “EIG”)⁴ filed the EIG MTD asserting, among other things, that IE Holdings was not authorized to file the Voluntary Petition. (EIG MTD ¶ 15.) EIG argues that, absent its consent to commence a chapter 11 case, IE Holdings lacked authority to file the Voluntary Petition under the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) (D.I.27, Ex. H), which requires “approval of all Common Members ... [to] commence a voluntary case under any bankruptcy” (EIG MTD ¶ 15). For purposes of disposition of this part of the EIG MTD, the material facts are not in dispute.⁵

At the May 26, 2016, hearing on first day motions, the Court scheduled briefing and argument, limited to the issue of whether IE Holdings lacked authority to file its chapter 11 petition. The Debtors filed their response to the EIG MTD (the “Debtors' Response”) on May 31, 2016. (D.I.52.) EIG filed its Reply in Support of the EIG MTD on June 1, 2016 (the “EIG Reply”). (D.I.58.) A hearing to consider the motion and response was held on June 2, 2006.

Factual Background

IE Holdings and IE are limited liability companies formed in 2007, and governed under the laws of the State of Delaware. (Zimmerman Decl. ¶ 9, Operating Agreement § 12.9.) They are private, non-operated oil and natural gas exploration and production companies, almost entirely located in North Dakota. (Zimmerman Decl. ¶ 9.) IE Holdings is owned as follows: 84.73%— Intervention Energy Investment Holdings, LLC (“IEIH”); 15.27%—various business and individual investors. (Zimmerman Decl. ¶ 21.) IE Holdings issued 22,000,001 Common Units: IEIH holds 22,000,0000 Common Units and EIG holds but one Common Unit. (Zimmerman Decl. ¶ 19.) IE is a wholly-owned subsidiary of IE Holdings. (Zimmerman Decl. ¶ 18.) EIG is an institutional investor specializing in private investments in global energy, resource, and

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related infrastructure projects and companies. (EIG MTD ¶ 11.)

On January 6, 2012, the Debtors and EIG entered into a Note Purchase Agreement (the “Note Purchase Agreement”), whereby EIG provided up to $200 million in senior secured notes (the “Secured Notes”). (Zimmerman Decl. ¶ 23, EIG MTD ¶ 14.) As of the date of the Voluntary Petition, the principal amount outstanding under the Secured Notes was approximately $140 million. (Zimmerman Decl. ¶ 24.) The Secured Notes are secured by liens on certain of the Debtors' assets, including, among other things, all inventory, accounts, equipment, fixtures, deposit accounts, and cash collateral. (Zimmerman Decl. ¶ 24, EIG MTD ¶ 14.) Specifically, with respect to cash collateral, the Debtors granted EIG a lien on all amounts held in any deposit account of the Debtors, as well as a lien on the Debtors' rights to payment under any contract. (Zimmerman Decl. ¶ 25, EIG MTD ¶ 14.)

On September 15, 2014, the Debtors and EIG entered into Amendment No. 3 to the Note Purchase Agreement (the “Third Amendment”) to expand EIG's funding commitment from $110 million to $150 million. (Zimmerman Decl. ¶ 32, EIG MTD ¶ 18.) In connection with the Third Amendment, the parties amended certain elements of the positive debt covenant calculations (the “Maintenance Covenants”). (Zimmerman Decl. ¶ 32, EIG MTD ¶ 19.) In October 2015, EIG declared an event of default based on the Debtors' failure to comply with the Maintenance Covenants. (Zimmerman Decl. ¶ 33, EIG MTD ¶ 20.)

On December 28, 2015, the Debtors and EIG negotiated and entered into Amendment No. 5, Forbearance Agreement and Contingent Waiver (the “Forbearance Agreement”). (Zimmerman Decl. ¶ 34, EIG MTD ¶ 21, D.I. 27, Ex. N.) The Forbearance Agreement provided that EIG would waive all defaults if the Debtors raised $30 million of equity capital to pay down a portion of the existing Secured Notes by June 1, 2016. (Zimmerman Decl. ¶ 34, EIG MTD ¶ 22.) As a condition to the effectiveness of the Forbearance Agreement, the Debtors were required to fulfill the following conditions precedent:

The Administrative Agent shall have received a fully executed amendment to the limited liability company agreement of the Parent in form and substance satisfactory to the Administrative Agent (i) admitting EIG or its Affiliate as a member of the Parent with one common unit and (ii) amending such limited liability company agreement to require approval of each holder of common units of the Parent prior to any voluntary filing for bankruptcy protection for the Parent of the Company.

(Forbearance Agreement § 7(b).) Also on December 28, 2015, IE Holdings enacted Amendment No. 1 to the Intervention Energy Holdings, LLC Second Amended and Restated Limited Liability Company Agreement (the “Amendment”)⁶ to include the unanimous consent requirement to file bankruptcy (the “Consent Provision”). (Zimmerman Decl. ¶ 34, EIG MTD ¶ 23, Amendment ¶ 4, D.I. 27, Ex. L.) To give effect to the Consent Provision, IE Holdings then issued a single common unit to EIG for a common capital contribution of $1.00, making EIG a common member. (Zimmerman Decl. ¶ 34, EIG MTD ¶ 23, Amendment, Schedule A.)

It is not disputed that, but for the Amendment, IE Holdings would have been authorized to seek federal bankruptcy relief.

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DISCUSSION

The parties have made several interesting arguments with respect to state law and contractual treatment of fiduciary obligations. EIG argues that an LLC that has abrogated its fiduciary responsibilities to the extent permitted by Delaware law may contract away its right to file bankruptcy at will.⁷ (EIG MTD ¶ 32.) EIG cites to cases in which courts have upheld consent provisions among LLC members.⁸ (EIG MTD ¶¶ 34–35 & n.55.) In contrast, the Debtors, relying upon the recent case of In re Lake Michigan Beach Pottawat t amie Resort LLC, draw a parallel between the “golden share”⁹ given to EIG and a blocking director installed on the board of a special purpose entity (SPE), arguing that abrogating fiduciary duties is exactly what is fatal to EIG's argument—that the blocking member (or, in this case, holder of the “golden share”) must retain a duty to vote in the best interest of the potential debtor to comport with federal bankruptcy policy.¹⁰ (Debtors' Response 11–14.)

In light of my disposition of the federal public policy issue which follows, and reluctant to accept the parties' invitation to decide what may well be a question of first impression of state law (i.e., determining the scope of LLC members' freedom to contract under applicable state law provisions)

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when an alternate ground for decision is present, I find it unnecessary to address these arguments.

The Debtors note in their Response that it is axiomatic that a debtor may not contract away the right to a discharge in bankruptcy.¹¹ (Debtor's Response 8.) It has been said many times and many ways. “[P]repetition agreements purporting to interfere with a debtor's rights under the Bankruptcy Code are not enforceable.”¹² “If any terms in the Consent Agreement ... exist that restrict the right of the debtor parties to file bankruptcy, such terms are not enforceable.”¹³ “[A]ny attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor's future bankruptcy filing is generally unenforceable. The Bankruptcy Code pre-empts the private right to contract around its essential provisions.”¹⁴ “[I]t would defeat the purpose of the Code to allow parties to provide by contract that the provisions of the Code should not apply.”¹⁵ “It is a well settled principal that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.”¹⁶

The rule is not new:

The agreement to waive the benefit of bankruptcy is unenforceable. To sustain a contractual obligation of this character would frustrate the object of the Bankruptcy Act, particularly of section 17 (11 U.S.C. § 35). This was held by the Supreme Judicial Court of

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