In reaching its decision, the court analyzed whether the independent manager’s resignation, submitted after the bankruptcy filing and backdated, could be interpreted as approval or ratification of the filing.
A recent decision from the U.S. Bankruptcy Court for the Northern District of Illinois in In re 301 W North Avenue, LLC, 666 B.R. 583 (Bankr. N.D. Ill. 2025) highlights the importance of following proper corporate authorization in bankruptcy filings. The bankruptcy court dismissed a Chapter 11 bankruptcy case for “cause” under Section 1112(b) of the Bankruptcy Code on the grounds that the debtor failed to obtain the requisite independent manager’s consent in accordance with the debtor’s own internal, corporate governance agreement.
Background
Debtor 301 W North Avenue LLC’s primary asset was a mixed-use real estate development property known as the North Park Pointe Apartments, located at 301 West North Avenue in Chicago, Illinois. The debtor entered into a loan for $26 million, which was secured by the property. A loan term sheet required the debtor to be a “bankruptcy remote entity” and to have “one acceptable independent director.”
At or about the time debtor agreed to the loan, its members signed the limited liability company operating agreement, which contained, among other things, specific provisions designed to make the debtor “bankruptcy remote,” including a requirement that any bankruptcy filing be authorized by an independent manager appointed as part of the company’s governance structure. Accordingly, debtor designated an individual as the independent manager.
In December 2023, the secured lender commenced foreclosure proceedings due to loan defaults by the debtor. On February 27, 2024, the day before the foreclosure hearing in that proceeding, the debtor filed for bankruptcy. But the debtor did so without first obtaining the independent manager’s consent as required by the operating agreement. Oddly, the independent director did not learn of the bankruptcy filing until late April 2024, after which the independent manager resigned on April 30, 2024, backdating the notice to August 31, 2022.
The lender moved to dismiss the bankruptcy case, arguing that the filing was unauthorized and should be deemed invalid because the debtor failed to obtain requisite consent prior to filing.
Bankruptcy Court’s Ruling
Following a detailed review of the LLC operating agreement, the bankruptcy court granted the lender’s motion and dismissed the case for “cause” under Section 1112(b) of the Bankruptcy Code, holding that the operating agreement explicitly required independent manager approval for a bankruptcy filing and that approval was not first obtained. In reaching its decision, the court analyzed whether the independent manager’s resignation, submitted after the bankruptcy filing and backdated, could be interpreted as approval or ratification of the filing. The court rejected this, emphasizing that the independent manager’s lack of participation in the decision to file for bankruptcy and resignation after the fact did not constitute approval. The court also noted that requiring independent manager approval created a justifiable corporate governance mechanism to ensure proper oversight.
Conclusion and Commentary
The ruling in In re 301 W North Avenue, LLC is an important one for both lenders seeking to enforce bankruptcy-remote provisions and would-be debtors in making sure they adhere to their internal governance documents prior to taking the plunge into bankruptcy. By upholding the validity and enforceability of independent manager provisions, the court seemingly reinforced the ability of lenders to structure loans in a way that provides some protection from future bankruptcy. However, parties must ensure that the bankruptcy-remote provisions are drafted carefully. Courts will closely scrutinize these provisions to ensure they do not function as waivers of bankruptcy protections.
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