The Arc of Bankruptcy Law Moving Against Bankruptcy Remoteness

If you are wondering which way the arc is bending in terms of bankruptcy remoteness, then please look at the quote from Judge Walrath on May 5, 2020, below. Note in particular the “constitutional right” to file for bankruptcy and ask how state laws and private contracts are likely to withstand that point of view. The COVID-19 recession is likely to put more pressure on bankruptcy courts to expand their jurisdiction and thus shrink all barriers to the exercise of bankruptcy power.

How the arc is bending on “remoteness:” 

“However, if Movants believed that an “independent” manager can serve on a board solely for the purpose of voting “no” to a bankruptcy filing because of the desires of a secured creditor, they were mistaken.  As the Delaware cases stress, directors and managers owe their duties to the corporation and, ordinarily, to the shareholders.”

In re Gen. Growth Properties, Inc., 409 B.R. 43, 64–65 (Bankr. S.D.N.Y. 2009)(Judge Gropper)

A consent right over bankruptcy filings held by a minority equity holder with a single common unit, “whose primary relationship with the debtor is that of creditor—not equity holder--…is void as contrary to federal public policy.” 

In re Intervention Energy Holdings, LLC, 553 B.R. 258, 265(Bankr. D. Del. 2016). (Judge Carey).

“I do recognize that there is no case directly on point, holding that a blocking right by a shareholder who is not a creditor is void as contrary to federal public policy that favors the constitutional right to file bankruptcy.  But…I am prepared to be the first court to do so, and therefore conclude that the motion to dismiss must be denied.”

In re Pace Industries, LLC,  Case No. 20-10927, Transcript of proceedings on Motion to Dismiss, May 5, 2020. Judge Mary Walrath.