PREVENTING VOLUNTARY AND INVOLUNTARY BANKRUPTCY PETITIONS BY LIMITED by lox59860

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PREVENTING VOLUNTARY AND INVOLUNTARY
    BANKRUPTCY PETITIONS BY LIMITED
         LIABILITY COMPANIES

                                          by
                                  Michael D. Fielding*


                                     INTRODUCTION

     The limited liability company (LLC) has recently become a very
“popular form of business organization”1 because it allows members
to participate in the company’s management without the exposure
                       2
of personal liability.     In other words, LLC members are not
personally liable for the debts, obligations, or liabilities of the LLC
simply because of their membership.3 Additionally, the IRS recently
promulgated regulations that allow LLCs to be taxed as partnerships
without meeting the four-part test formerly used to determine
whether the company should be taxed as a partnership or
             4
corporation. Thus, the corporate-like liability protection coupled
with the partnership-type taxation makes an LLC a highly preferable
business entity—particularly for small companies.
     Creditors often require LLCs (and other business entities) to
sign contractual provisions that make it difficult or practically
impossible for the debtor to declare bankruptcy. The purpose of
these provisions is to allow creditors to repossess all or a portion of
their collateral before bankruptcy is filed. While no one can legally
prohibit an LLC or other business entity from filing for bankruptcy,5

     * Associate, Blackwell Sanders Peper Martin, L.L.P., Kansas City, Missouri (Commercial
Litigation Creditor’s Rights Department); J.D., Brigham Young University, 2001; B.A.
Economics, Brigham Young University, 1998.
     1
         Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65, 71 (Bankr. E.D. Va. 1996).
     2
         Harold S. Novikoff & Barbara S. Kohl, Bankruptcy “Proofing”: Bankruptcy Remote Vehicles
and Bankruptcy Waivers, SE71 A.L.I.–A.B.A.1, 7 (Feb. 24, 2000).
     3
         See, e.g., KAN. STAT. ANN. § 17-7688 (2000); MO. ANN. STAT. § 347.057 (West 2001);
UTAH CODE ANN. § 48-2c-601 (2001).
     4
         Novikoff & Kohl, supra note 2, at 7.
     5
         See id. at 11; see also infra Part II.

                                              51
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there are a number of “hindrance mechanisms” that can be
employed to deter significantly a bankruptcy petition. A “hindrance
mechanism” is any sort of contractual device between the debtor
and creditor that creates a disincentive for the debtor to file
voluntarily for bankruptcy. As this Article illustrates, a number of
hindrance mechanisms are of questionable legality, regardless of the
business entity to which they are applied. However, in the case of an
LLC there is additional ambiguity because the relatively recent
advent of the LLC as a favorable form of business organization
means there is little bankruptcy law dealing specifically with LLC
issues.6 Thus, the application of hindrance mechanisms to LLCs
raises numerous questions for practitioners.
     As the title suggests, this Article examines various hindrance
mechanisms that may be employed to hinder significantly or
practically stop an unwanted bankruptcy filing by an LLC. Part I
discusses overarching issues that should be considered before
implementing any hindrance mechanism. Part II then examines
specific hindrance mechanisms that may be employed to deter an
LLC from filing a bankruptcy petition. Potential problems for both
creditors and debtors who employ these devices are also evaluated.
Finally, Part III considers bankruptcy posturing that both creditors
and debtors may make if an LLC ultimately files for bankruptcy—
either voluntarily or involuntarily.


      I. OVERARCHING STATUTES AND CASE LAW THAT MUST BE
      STRONGLY CONSIDERED BEFORE CREATING ANY BANKRUPTCY
                    HINDRANCE MECHANISM
     Before creating, accepting, or implementing any sort of
bankruptcy hindrance mechanism, creditors and debtors should
carefully consider the roles of anti-ipso facto clauses, state LLC laws,
and the debtor’s fiduciary duties. If not properly accounted for,
these overarching statutes and legal principles could render a
hindrance mechanism per se invalid without any consideration for
the actual contractual device.

       6
          Novikoff & Kohl, supra note 2, at 7. Indeed, there are no Code provisions that deal
directly with the LLC and only a few cases that address LLC specific issues in bankruptcy. See,
e.g., In re Garrison-Ashburn, L.C., 253 B.R. 700 (E.D. Va. 2000); JTB Enters. v. D&B Venture,
L.C. (In re DeLuca), 194 B.R. 79 (Bankr. E.D. Va. 1996); In re DeLuca, 194 B.R. 65; In re
Daugherty Constr., Inc., 188 B.R. 607 (Bankr. D. Neb. 1995).
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2001]                         Limited Liability Companies                                      53

A. Anti-ipso Facto Clause Provisions
      As a rule of law, the Bankruptcy Code prohibits the operation
                        7
of ipso facto clauses. As such, any hindrance mechanism that
creates an ipso facto clause will be per se invalid. An ipso facto
clause is a “contract clause[] or state law[] designed to effect a
forfeiture or modification of the Debtor’s rights when a bankruptcy
is filed.”8 Certain provisions of the Code “render ineffective
contractual or statutory provisions which purport to modify or
terminate rights of the debtor based on bankruptcy or financial
condition.”9 The Bankruptcy Code makes ipso facto clauses
unenforceable in five different places: § 363(l)10 (trustee may use,
sell, or lease property despite any provision in a contract, a lease, or
applicable law that is conditioned on the bankruptcy or insolvency
of a debtor); § 365(e)(1)11 (executory contracts may not be

     7
          Hayhoe v. Cole (In re Cole), 226 B.R. 647, 652 (9th Cir. B.A.P. 1998).
     8
          Joyce A. Dixon & T. Randall Wright, Bankruptcy Issues in Partnership and Limited
Liability Company Cases, SD83 A.L.I. – A.B.A. 189, 194 (May 13, 1999).
      9
          Sally S. Neely, Partnerships and Partners and Limited Liability Companies and Members in
Bankruptcy: Proposals for Reform, 71 AM. BANKR. L. J., 271, 296-97 (1997).
     10
          11 U.S.C. § 363(l) (2000) provides:
      (l) Subject to the provisions of section 365, the trustee may use, sell, or lease
      property under subsection (b) or (c) of this section, or a plan under chapter 11, 12,
      or 13 of this title may provide for the use, sale, or lease of property, notwithstanding
      any provision in a contract, a lease, or applicable law that is conditioned on the
      insolvency or financial condition of the debtor, on the commencement of a case
      under this title concerning the debtor, or on the appointment of or the taking
      possession by a trustee in a case under this title or a custodian, and that effects, or
      gives an option to effect, a forfeiture, modification, or termination of the debtor’s
      interest in such property.
     11
          11 U.S.C. § 365(e) provides:
      (e) (1) Notwithstanding a provision in an executory contract or unexpired lease, or
      in applicable law, an executory contract or unexpired lease of the debtor may not
      be terminated or modified, and any right or obligation under such contract or lease
      may not be terminated or modified, at any time after the commencement of the
      case solely because of a provision in such contract or lease that is conditioned on—
            (A) the insolvency or financial condition of the debtor at any time before the
            closing of the case;
            (B) the commencement of a case under this title; or
            (C) the appointment of or taking possession by a trustee in a case under this
            title or a custodian before such commencement.
      (2) Paragraph (1) of this subsection does not apply to an executory contract or
      unexpired lease of the debtor, whether or not such contract or lease prohibits or
      restricts assignment of rights or delegation of duties, if—
            (A)(i) applicable law excuses a party, other than the debtor, to such contract
            or lease from accepting performance from or rendering performance to the
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terminated or modified because of a contract provision or the
                                           12
operation of applicable law); § 365(f)(1) (trustee may assign a
contract or lease despite contrary contractual or legal provisions);
§ 365(f)(3)13 (contracts cannot be modified because a trustee
                                      14
assumes them); and § 541(c)(1)(B) (an interest of the debtor
becomes property of the estate upon the filing of a bankruptcy
despite contrary contractual provisions).15      Despite these five
separate provisions, the practical prohibition of these clauses is
somewhat limited: three of the anti-ipso facto clause provisions deal
with restrictions based upon the appointment of a trustee, while the
other two deal with executory contracts and the debtor’s estate.

            trustee or to an assignee of such contract or lease, whether or not such
            contract or lease prohibits or restricts assignment of rights or delegation of
            duties; and
            (ii) such party does not consent to such assumption or assignment; or
      (B) such contract is a contract to make a loan, or extend other debt financing or
      financial accommodations, to or for the benefit of the debtor, or to issue a security
      of the debtor.
     12
         11 U.S.C. § 365(f)(1) provides:
      (f)(1) Except as provided in subsection (c) of this section, notwithstanding a
      provision in an executory contract or unexpired lease of the debtor, or in
      applicable law, that prohibits, restricts, or conditions the assignment of such
      contract or lease, the trustee may assign such contract or lease under paragraph (2)
      of this subsection; except that the trustee may not assign an unexpired lease of
      nonresidential real property under which the debtor is an affected air carrier that is
      the lessee of an aircraft terminal or aircraft gate if there has occurred a termination
      event.
     13
         11 U.S.C. § 365(f)(3) provides:
      (f)(3) Notwithstanding a provision in an executory contract or unexpired lease of
      the debtor, or in applicable law that terminates or modifies, or permits a party
      other than the debtor to terminate or modify, such contract or lease or a right or
      obligation under such contract or lease on account of an assignment of such
      contract or lease, such contract, lease, right, or obligation may not be terminated or
      modified under such provision because of the assumption or assignment of such
      contract or lease by the trustee.
     14
         11 U.S.C. § 541(c)(1)(B) provides:
      (c)(1) Except as provided in paragraph (2) of this subsection, an interest of the
      debtor in property becomes property of the estate under subsection (a)(1), (a)(2),
      or (a)(5) of this section notwithstanding any provision in an agreement, transfer
      instrument, or applicable nonbankruptcy law—
            (A) that restricts or conditions transfer of such interest by the debtor; or
            (B) that is conditioned on the insolvency or financial condition of the debtor,
            on the commencement of a case under this title, or on the appointment of or
            taking possession by a trustee in a case under this title or a custodian before
            such commencement, and that effects or gives an option to effect a forfeiture,
            modification, or termination of the debtor’s interest in property.
     15
         See Dixon & Wright, supra note 8, at 194-95; Neely, supra note 9, at 295-96.
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2001]                        Limited Liability Companies                                     55

Although the anti-ipso facto provisions cannot be circumvented, the
scope of their impact can be avoided through a carefully crafted
hindrance mechanism.

B. State Laws
     State statutes governing LLCs typically provide unique
opportunities for implementing bankruptcy hindrance mechanisms.
From a creditor’s standpoint, one of the greatest benefits of dealing
with an LLC is that its entire governing structure can be easily
changed and manipulated. This is particularly true because LLCs
are not required to observe certain legal formalities required of
corporations.16 The malleability of the LLC stems from flexible state
laws that allow members to create business entities that may be run
as corporations, partnerships, or some hybrid of these two polar
extremes.17 This tremendous flexibility gives an imaginative creditor
virtually unlimited opportunity to implement creative controls on
LLCs. Furthermore, state laws allow LLC members to grant a
creditor greater influence over the company while the members
retain the power to operate the company below the creditor’s
overarching rules. Simply stated, LLCs give both creditors and
members greater flexibility in determining how the company will be
run and what liabilities the company will accept in return for much
needed capital.18
     A unique feature of the limited liability company is that some
state statutes allow members to determine the level of their fiduciary
duties.19 In contrast, other states do not expressly grant such wide

    16
         See, e.g., KAN. STAT. ANN. §§ 17-7627 to -76,142 (2000); MO. ANN. STAT. §§ 347.010-.189
(West 2001); UTAH CODE ANN. § 48-2c-101 to -1902 (2001).
     17
         Examples of various state laws governing the creation and self-government of LLCs
include KAN. STAT. ANN. § 17-7627 to -76,142 (2000); MO. ANN. STAT. §§ 347.010–.189 (West
2001); UTAH CODE ANN. § 48-2c-101 to -1902 (2001).
     18
         Given both the tremendous benefits and flexibility of an LLC, one would expect to
see future creditors strongly encouraging or even requiring companies to convert to an LLC
before loan proceeds are disbursed. Imposing the LLC conversion requirement would give
the creditor opportunities to obtain better leverage and protection than it might otherwise
get from a corporation or limited partnership.
     19
         See, e.g., KAN. STAT. ANN. § 17-76,134. Section 17-76,134 specifically states:
      (a) The rule that statutes in derogation of the common law are to be strictly
      construed shall have no application to this act.
      (b) It is the policy of this act to give the maximum effect to the principle of
      freedom of contract and to the enforceability of operating agreements.
      (c) To the extent that, at law or in equity, a member or manager or other person
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flexibility to LLC members.20 However, even in these more “limited”
states, LLC members still have wide latitude in determining the level
                                21
of their fiduciary obligations. Finally, some states appear to grant
relativlely less flexibility toward adjusting a member’s fiduciary
              22
obligations. The wide range in state treatment of fiduciary duties is
an extremely important consideration when determining which laws
to organize an LLC under and what controls a creditor may desire
to impose on a company.23 The flexibility of fiduciary duties is

      has duties (including fiduciary duties) and liabilities relating thereto to a limited
      liability company or to another member or manager:
            (1) Any such member or manager or other person acting under an operating
            agreement shall not be liable to the limited liability company or to any such
            other member or manager for the member’s or manager’s or other person’s
            good faith reliance on the provisions of the operating agreement; and
            (2) The member’s or manager’s or other person’s duties and liabilities may be
            expanded or restricted by provisions in an operating agreement.
The Kansas Limited Liability Company Act was patterned after the Delaware Limited Liability
Company Act. Edwin W. Hecker, Jr., The Kansas Revised Limited Liability Company Act, 69 J.
KAN. BAR ASS’N 16, 16 (2000).
     20
         See, e.g., UTAH CODE ANN. §§ 48-2c-101 to –1902 (2001); MO. ANN. STAT. §§ 347.010 –
.189 (West 2001). In Utah, for example, it appears that LLC members would have a difficult
time escaping from certain fiduciary obligations. The Utah Code defines a “fiduciary” in
relevant part as a “assignee for the benefit of creditors, partner, agent, officer of a
corporation, public or private. . .and any other person acting in a fiduciary capacity for any
person.” UTAH CODE ANN. § 22-1-1 (1998).
     21
         See, e.g., MO. ANN. STAT. §§ 347.081, 347.088. It should be noted that the flexibility
given to Missouri LLCs is more akin to that of Kansas than Utah.
     22
         See, e.g., UTAH CODE ANN. §§ 48-2(c)-403, -502, –602-03. A review of these statutes
indicates that there is no statutory leeway to alter fiduciary duties owed to creditors. In
contrast, members may be able to restructure in the operating agreement the fiduciary duties
that are owed to one another.
     23
         While the Kansas LLC statutes allow significant fiduciary flexibility, at least one
commentator believes that the fiduciary obligations of LLC members to each other will
continue to remain. Hecker, supra note 19, at 32-34. Hecker notes:
      The essence of a fiduciary relationship is a situation in which a person transacts
      business or handles money or other property, not primarily for his or her own
      benefit, but for the benefit of another. It is a relationship that involves
      discretionary authority on the part of the fiduciary and dependency and reliance on
      the part of the beneficiary.
Id. at 32. He then analyzes fiduciary duties in partnerships, limited partnerships, and
corporations. Id. at 33. He applies this analogous law to LLCs:
      If the LLC is member-managed, all members would be agents of the LLC and
      would occupy a fiduciary relationship to the LLC and to each other similar to that
      of partners in a general partnership. If exclusive management power is vested in
      managers, the managers (whether or not they also are members) would be subject
      to fiduciary duties akin to those of corporate officers and directors or general
      partners of limited partnerships. The nonmanaging members, whose position is
      analogous to that of shareholders or limited partners, generally would not be
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2001]                       Limited Liability Companies                                   57

important because these duties can be structured to create positive
or negative incentives that will influence how a particular member
acts in a given situation.
     Before implementing any bankruptcy hindrance mechanism, a
creditor should also carefully consider the fiduciary role that a
debtor LLC will owe to a third-party creditor. It is almost universally
agreed that corporate directors owe a fiduciary duty to the
corporation’s general creditors when the company becomes
insolvent.24 While there is scant case law dealing directly with
LLCs,25 it is reasonable to infer that courts would hold that LLC
members also have a fiduciary duty to the company’s general
creditors once it becomes insolvent.          Thus, any bankruptcy
hindrance mechanism must consider potential ramifications for
both the creditor and the debtor if the mechanism strongly
encourages the debtor to breach a fiduciary duty owed to a third-
party creditor.
     Finally, in considering which state law to organize an LLC
under, practitioners must carefully consider the recent tax changes
and how state statutes have (or have not) been modified to reflect
these new laws. Prior to 1997, the IRS followed the Kinter
Regulations to determine whether a business entity would be taxed
as a partnership or corporation.26 Under this scheme, a limited
liability company would be taxed as a partnership if it had, at most,
two of the four corporate characteristics (i.e., continuous life,
centralized management, limited liability, and interests that could
                        27
be freely transferred). As a result of these regulations, many (if not



      subject to fiduciary obligations. If the LLC has adopted a hybrid structure, under
      which it has managers but certain managerial decisions are reserved to the
      members at large, each group would be subject to fiduciary responsibility within the
      sphere of its managerial authority. This is the general approach taken by the
      drafters of the Uniform Limited Liability Company Act and which may, over time,
      recommend itself to the Kansas courts.
Id. at 33 (citation omitted).
     24
         See In re Kingston Square Assocs., 214 B.R. 713, 735 (Bankr. S.D.N.Y. 1997).
     25
         The following are some of the few reported cases dealing directly with LLC issues in
bankruptcy. See generally In re Garrison-Ashburn, L.C., 253 B.R. 700 (Bankr. E.D. Va. 2000);
JTB Enters. L.C. v. D&B Venture, L.C. (In re DeLuca), 194 B.R. 79 (Bankr. E.D. Va. 1996);
Broyhill v. DeLuca (In re DeLuca), 194 B.R. 65 (Bankr. E.D. Va. 1996); In re Daugherty
Constr., Inc., 188 B.R. 607 (Bankr. D. Neb. 1995).
     26
         See Neely, supra note 9, at 280.
     27
         Id.
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all) state LLC laws were structured so that an LLC would be entitled
                                   28
to the preferential tax treatment.
      In 1997, however, the IRS adopted new regulations that
enabled business entities (including LLCs) to be taxed as a
partnership without regard to the four “corporate” characteristics.29
Yet despite these “advances” in tax regulation, not all state
legislatures have modified their existing LLC laws.30 The net result
is that although federal tax laws are now more favorable toward
LLCs, some state provisions are structured as if the old tax
regulations were still in effect. Thus, when considering any sort of
hindrance mechanism, a practitioner should look at state LLC laws
in multiple states to find which law provides greater flexibility.

C. Kingston Square
     The In re Kingston Square Associates31 decision raises a warning
flag, not only to anyone considering the use of a bankruptcy remote
        32
vehicle in an LLC, but also to those employing any bankruptcy
hindrance mechanism that implicates fiduciary duties. At issue in
Kingston Square was whether the bankruptcy petitions of eleven
separate debtors33 should have been dismissed as bad faith filings.34
The lenders35 had previously loaned approximately $277 million to
thirty-eight separate entities that were all wholly or partially
                                                   36
controlled by one individual—Morton Ginsberg. At the time of
the Kingston Square decision all thirty-eight entities were in


    28
        See, e.g., In re Garrison-Ashburn, 253 B.R. at 706 (noting that prior to 1997 state laws
were often structured such that an LLC only had one corporate characteristic—centralized
management).
    29
        Neely, supra note 9, at 280. The current tax regulations defining the classification of a
business entity for tax purposes are located at 26 C.F.R. §§ 301.7701-1 to -4 (2001).
    30
        Compare In re Garrison-Ashburn, 253 B.R. at 706 (noting that Virginia LLC law was
changed to reflect current tax regulations) with Missouri Revised Statutes §§ 347.010–.185,
which still contain provisions reflecting the Kinter regulations (e.g., MO. ANN. STAT. §§
347.115 and 347.185 (West 2001)).
    31
        See generally In re Kingston Square Assocs., 214 B.R. 713 (Bankr. S.D.N.Y. 1997).
    32
        “Bankruptcy remote vehicles” (a method to prevent or hinder a bankruptcy by adding
provisions to a company’s articles of incorporation that make filing bankruptcy almost
impossible) are discussed in greater detail in Part II.B, infra.
    33
        Each debtor was wholly or partially controlled by the same individual. 214 B.R. at 715.
    34
        Id.
    35
        The lenders were Chase Manhattan Bank, N.A., and REFG Investor Two, Inc. Id.
    36
        Id. at 715-16.
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2001]                       Limited Liability Companies                                   59

receivership with pending foreclosure proceedings.37 The eleven
entities that had filed for bankruptcy each owned a single parcel of
                                                              38
multi-family real property in either New York or Florida.        The
lenders loaned money to all thirty-eight entities on condition that
each debtor (whether a corporation or partnership) amend its
bylaws to include a “bankruptcy remote” or “bankruptcy proof”
provision.39 The amendment required that unanimous consent be
given by either the corporate board or by the corporate general
partner (for partnerships) before the company could file for
bankruptcy.40 To ensure that a bankruptcy was never filed, the
lenders required that an “independent director” be appointed as a
corporate director for the corporation or for the corporate general
partner.41 Aside from receiving $25,000 per year from the lenders
                                      42
for his role in the corporations, the independent director
apparently did not perform any other corporate duties or
responsibilities.43
     In 1994, the lenders issued notices of default and commenced
                                           44
legal proceedings against each property.      By 1996, the lenders
obtained approximately $370 million in judgments and they
                                                           45
commenced foreclosure against all thirty-eight properties. Despite
the legal proceedings, the directors of each entity took no action to
oppose the foreclosure because they believed that the “independent
director” would thwart their attempts.46 It was estimated that the
properties contained equity that would be lost at foreclosure; thus
the unsecured creditors and limited partners would not receive
anything unless bankruptcy was filed for each entity.47
     At the beckoning of Ginsberg, six creditors48 finally filed an
involuntary petition against the eleven debtors.49 The lenders

    37
        Id. at 715.
    38
        Id. at 715-16.
     39
        Id. at 716.
     40
        Id.
     41
        Id. at 716-17.
     42
        Id. at 717.
     43
        Id. at 721.
     44
        Id. at 717.
     45
        Id.
     46
        Id. at 720-21.
     47
        Id. at 719.
     48
        The six creditors included one trade creditor. Id. at 726. The other five “came from
the battery of professionals that the Debtors employed to fight the [lenders] in the numerous
state court actions.” Id.; see also id. at 718.
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subsequently moved to dismiss the claims as constituting bad faith
                                                                50
filings because the petitions had been induced by Ginsberg. The
bankruptcy court concluded that although the debtors orchestrated
the filing, they believed bankruptcy was a viable alternative and they
had not violated any laws or court orders in seeking the involuntary
petitions.51 However, the court appointed chapter 11 trustees for
each bankrupt entity because the evidence suggested that the
                                                         52
directors had abdicated their fiduciary responsibilities.
     In its analysis, the bankruptcy court was particularly critical of
the independent director. It noted that the independent director
had not taken an interest in any of the properties.53 Despite this
complete neglect of his corporate responsibilities, the independent
director often inquired about his late fees owed to him by a lender.54
When the bankruptcy court strongly suggested that the corporate
                                 55
directors hold a board meeting, the independent director engaged
in various stall tactics to prevent ratification of the bankruptcy
        56
filings. Once the independent director learned that the lender
(under whose direction he operated) had foreclosed on all of the
proceedings, he inquired of the lender to determine if he should
resign.57 In short, the court concluded that the independent
director largely (if not wholly) ignored his fiduciary duties and
corporate loyalties that stemmed from his corporate role.58
     The court also approved Ginsberg’s actions in seeking
                                                                      59
bankruptcy given the impediments of the independent director.
The court cited with approval Management Technologies, Inc. v.
       60                               61
Morris and In re Spanish Cay Co. for the proposition that
“corporate action taken by an insider without board or shareholder
authority may later be found to have been appropriate in

     49
          Id. at 726.
     50
          Id. at 714.
     51
          Id. at 714-15, 738-39.
     52
          Id. at 715, 738-39.
     53
          Id. at 721.
     54
          Id.
     55
          Id. at 722.
     56
          Id.
     57
          Id. at 722-23.
     58
          Id. at 730.
     59
          Id. at 731.
     60
          See Mgmt. Techs., Inc. v. Morris, 961 F. Supp. 640, 647-49 (S.D.N.Y. 1997).
     61
          See In re Spanish Cay Co., 161 B.R. 715, 722-23 (Bankr. S.D. Fla. 1993).
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2001]                        Limited Liability Companies                                      61

circumstances where the existence of the corporation is very much
         62
at risk.”    In other words, the court approved the actions of
Ginsberg, an insider, to seek a bankruptcy where his actions
apparently saved the debtors from financial ruin.63
     The lessons of Kingston Square should be considered carefully by
both creditors and debtors. Creditors must carefully determine
whether their bankruptcy hindrance mechanisms directly or
indirectly force LLC members to breach either contractual or legally
imposed fiduciary duties. On the other hand, debtors caught
between “a rock and a hard place” because of a hindrance
mechanism have precedent on which to seek an involuntary
bankruptcy filing.64    However, a carefully crafted bankruptcy
hindrance mechanism could make even this remedy difficult to
obtain.


                        II. HINDRANCE MECHANISMS:
                                                    65
                      BANKRUPTCY PROOFING STRATEGIES
    Although it is almost universally agreed that an entity cannot
absolutely waive the right to file a voluntary bankruptcy petition,66
                                67
numerous pre-petition waivers (or hindrance mechanisms) have
been devised to make a voluntary filing difficult.68 While this


    62
          In re Kingston Square, 214 B.R. at 731.
    63
          See id.
     64
          See Part III, infra, for a discussion regarding voluntary and involuntary bankruptcy
filings, particularly involuntary filings by corporations and LLCs.
     65
          Although not directly covered in this Article, there are a number of “bankruptcy-
proofing” strategies that can be implemented in a franchisor-franchisee context. See generally
Dean T. Fournaris & Craig R. Tractenberg, “Bankruptcy-Proofing” Franchise Contracts to Reduce
Debtor-Related Risks, 6 LEADER’S FRANCHISING BUSINESS & LAW ALERT 1 (Mar. 2000).
     66
          See Novikoff & Kohl, supra note 2, at 11.
     67
          As used in this Article, a “pre-petition waiver” constitutes a contract entered into by
the debtor and a creditor where the debtor voluntarily waives a right guaranteed in
bankruptcy in exchange for consideration by the creditor.
     68
          See, e.g., Hayhoe v. Cole (In re Cole), 226 B.R. 647, 651 n.6 (9th Cir. B.A.P. 1998)
(noting that numerous trial courts have held pre-petition waivers of the bankruptcy discharge
unenforceable) (citing Giaimo v. Detrano (In re Detrano), 222 B.R. 685, 688 (Bankr. E.D.N.Y.
1998); Minor v. Chilcoat (In re Minor), 115 B.R. 690, 694-96 (D. Colo. 1990); Doug Howle’s
Paces Ferry Dodge, Inc. v. Ethridge (In re Ethridge), 80 B.R. 581, 586 (Bankr. M.D. Ga. 1987);
First Ga. Bank v. Halpern (In re Halpern), 50 B.R. 260, 262 (Bankr. N.D. Ga. 1985), aff’d, 810
F.2d 1061 (11th Cir. 1987); Bisbach v. Bisbach (In re Bisbach), 36 B.R. 350, 352 (Bankr. W.D.
Wis. 1984); Johnson v. Kriger (In re Kriger), 2 B.R. 19, 23 (Bankr. D. Or. 1979)).
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62                   BANKRUPTCY DEVELOPMENTS JOURNAL                                   [Vol. 18

strategy does not completely eliminate the risk of bankruptcy, it
reduces the probability of an unwanted filing.
     Before proceeding with an analysis of hindrance mechanisms, it
should be noted that several courts have held as void various pre-
                                                69
petition waivers of certain bankruptcy rights. The rationale for
prohibiting contractual waivers of bankruptcy provisions was
succinctly summed up in the recent In re 203 North LaSalle Street
Partnership decision; “[s]ince bankruptcy is designed to produce a
system of reorganization and distribution different from what would
obtain under nonbankruptcy law, it would defeat the purpose of the
Code to allow parties to provide by contract that the provisions of
the Code should not apply.”70 Given this rationale, one would
assume that most or all hindrance mechanisms (or pre-petition
agreements) would be void as against public policy because they
attempt to give a creditor a better position than he would otherwise

     69
         Two recent cases cite several examples where courts questioned the validity of pre-
petition waivers. See In re Cole, 226 B.R. at 651 n.7 (citing In re Shady Grove Tech Ctr. Assocs ,
216 B.R. 386, 390 (Bankr. D. Md. 1998) (holding that automatic stay waivers are
unenforceable); In re Madison, 184 B.R. 686, 690 (Bankr. E.D. Pa. 1995) (pre-petition
contract where debtor agreed not to file bankruptcy for 180 days was void as against public
policy); In re Gulf Beach Dev. Corp., 48 B.R. 40, 43 (Bankr. M.D. Fla. 1985) (“the Debtor
cannot be precluded from exercising its right to file Bankruptcy and any contractual provision
to the contrary is unenforceable as a matter of law”); In re Tru Block Concrete Prods., Inc., 27
B.R. 486, 492 (Bankr. S.D. Cal. 1983) (an agreement that had the same intention of a chapter
11 proceeding but contained a provision prohibiting the filing of bankruptcy was deemed
void as against public policy)) and Minn. Corn Processors, Inc. v. American Sweeteners, Inc.
(In re American Sweeteners, Inc.), 248 B.R. 271, 278 n. 6 (Bankr. E.D. Pa. 2000) (citing In re
Fallick, 369 F.2d 899, 904 (2d Cir. 1966) (“[T]he bankruptcy [code] expresses a strong
legislative desire that deserving debtors be allowed to get a fresh start . . . . [A]n advance
agreement to waive the benefits of the [Code] would be void.”); Bank of America v. N.
LaSalle St. L.P. (In re 203 N. LaSalle St. P’ship), 246 B.R. 325, 331 (Bankr. N.D. Ill. 2000) (“It
is generally understood that pre-bankruptcy agreements do not override contrary provisions
of the Bankruptcy Code.” The court held that a pre-petition subordination agreement would
not be enforced. “[I]t would defeat the purpose of the [Bankruptcy] Code to allow parties to
provide by contract that the provisions of the Code should not apply.”); In re Heward Bros.,
210 B.R. 475, 479 (Bankr. D. Idaho 1997) (“[A] prepetition agreement to waive a benefit of
bankruptcy is void as against public policy.”); In re Pease, 195 B.R. 431, 435 (Bankr. D. Neb.
1996) (Pre-petition waivers of the automatic stay are per se unenforceable. “[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 court then noted that
the Bankruptcy Code offers many remedies to protect a creditor’s interest such that there was
“no need or justification” for enforcing a pre-petition agreement.)).
         It is important to note that although the cases above are cited for the proposition that
a company cannot waive the right to file for bankruptcy, many of the cases upheld waivers of
certain bankruptcy petitions.
     70
         In re 203 N. LaSalle St. P’ship, 246 B.R. at 331.
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2001]                         Limited Liability Companies                                       63

have.71 Indeed, the Bankruptcy Code provides various remedies that
                                                           72
are designed to protect a creditor’s interest sufficiently. Despite
these reasons, some courts have continued to allow certain pre-
petition waivers.73 Until the Bankruptcy Code is revised or a
definitive Supreme Court decision is handed down, one can expect
to find courts affirming the use of pre-petition agreements. Indeed,
creditors who fail to employ such devices may be compromising
their future position to a more aggressive creditor who has
implemented contractual devices that create an implicit special
preference in bankruptcy. Thus, all creditors must know and


    71
         A bankruptcy filing is analogous to a lifeboat in the ocean. The secured creditors are
the people who sit in the boat, while the unsecured creditors are those in the water
desperately clinging to the vessel. The boat itself represents the company that is barely staying
above water. The goal of the bankruptcy filing is to preserve the interest of as many creditors
as possible. Oftentimes, this requires keeping the boat together so that all may have
something to cling to (i.e., the whole is greater than the sum of the parts). In other more rare
occasions, the boat must be torn apart leaving each creditor to fend for himself according to
what he has his hands on. Regardless of whether the boat is kept together or torn apart, the
goal of bankruptcy is the same: treat each of the creditors the same with preferences toward
the secured creditors. Despite this attempted equality, certain creditors (like survivors
clinging for life) will attempt to preserve their own self-interest at the expense of the other
creditors. Indeed, this “every man for himself” attitude necessarily requires that each creditor
engage in shrewd tactics to gain an advantage over the other creditors. The increased
competition for boat space creates at least two problems. First, the boat itself is subjected to
unnecessary pulling and tugging as creditors vie and posture to get a better position. The
rampant self-interest puts the boat under greater strain (which may ultimately be too much to
handle). Ultimately one creditor may obtain a significant portion of the boat at the expense
of other creditors (and even at the expense of the boat itself). Instead of barely saving each of
the creditors, the net result is that one creditor is saved in comfort while many others have
lost any benefit that the boat may have once offered to them. Second, even if the boat
survives the tugging and pulling of the creditors, the majority of the creditors will likely be
worse off than when they started because significant time and energy has been expended
simply fighting to stay alive. If there were rules that prohibited attempts to grab more of the
boat, then less energy would be expended and the boat could focus on how to better stay
afloat.
      72
         See, e.g., In re Pease, 195 B.R. at 435 (citing protections of the Bankruptcy Code that
void the necessity of a pre-petition waiver of the automatic stay).
      73
         See, e.g., In re Wald, 211 B.R. 359, 361 (Bankr. D. N.D. 1997) (involving a stipulation
entered into during a previous bankruptcy proceeding where the debtor agreed to allow the
creditor to proceed with foreclosure proceedings upon the debtor’s default. The bankruptcy
court held these stipulations were common and a showing of special circumstances would be
required to relieve the debtor from the stipulation). See also In re Gulf Beach Dev., 48 B.R. at 43
(lifting the automatic stay to allow the bank to proceed with a foreclosure proceeding where
the debtor had previously executed a settlement agreement in which it was released from its
debt, but where the debtor agreed to an entry of final judgment in the foreclosure
proceedings. The debtor filed for bankruptcy hoping to avoid the foreclosure proceedings
while reaping the benefits of the release from debt.).
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64                  BANKRUPTCY DEVELOPMENTS JOURNAL                                 [Vol. 18

understand not only what bankruptcy hindrance mechanisms exist,
but also how implementing those devices may affect them either
directly or indirectly. What follows below is a brief analysis of some
of the various devices that have been used or suggested in the last
few years.

A. Personal Guaranty
     One method to deter an unwanted bankruptcy is to obtain a
personal guaranty that is contingent upon a bankruptcy filing.74
There are two types of personal guaranties that can be obtained.75
The first is a “springing guaranty” that is given by an insider (i.e., a
member or managing director) and becomes effective (i.e., the
insider becomes personally liable) upon the occurrence of certain
conditions, typically a bankruptcy filing by the company or failure to
dismiss quickly an involuntary bankruptcy petition.76 The second
personal guaranty is an “exploding guaranty,” where the insider will
become personally liable for the company’s debt if it contests the
lender’s rights in the bankruptcy proceeding.77 In other words, an
exploding guaranty requires the insider to not contest actions taken
by the lender against the company in the company’s bankruptcy
proceedings.78
     Currently, there is very little case law regarding the legitimacy
                                            79
of springing and exploding guaranties.          However, at least one
commentator has suggested that personal guaranties cause the
insider to violate his fiduciary duties to other creditors of the
company because there is an inherent conflict between the insider’s


     74
         See Marshall E. Tracht, Will Exploding Guaranties Bomb?, 117 BANKING L. J. 129, 129.
(2000) (hereinafter Tracht, Exploding Guaranties). For more information on guaranties in
bankruptcy, see also, Marshall E. Tracht, Insider Guaranties in Bankruptcy: A Framework for
Analysis, 54 U. MIAMI L. REV. 497 (April 2000).
     75
         Tracht, Exploding Guaranties, supra note 74 at 129.
     76
         Id.
     77
         Id.
     78
         See id.
     79
         According to Marshall E. Tracht, only two cases have dealt with bankruptcy
contingent guaranties. See id. at 130-31 (citing FDIC v. Prince George Corp., 58 F.3d 1041 (4th
Cir. 1995) and First Nationwide Bank v. Brookhaven Realty Assocs., 637 N.Y.S.2d 418 (1996)).
Tracht states that both these cases enforced contingency provisions involving a bankruptcy
carve-out in a nonrecourse mortgage. Id. He opines that neither decision provides much
guidance because the bankruptcy proceedings had been terminated prior to the suit involving
the personal guaranty and each debtor had very few (if any) creditors. See id. at 130-31.
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2001]                         Limited Liability Companies                                       65

self-interest and the best interest of the company’s creditors.80 It has
also been suggested that personal guaranties violate bankruptcy
policy because they do not maximize a company’s overall value for
the benefit of all creditors.81 Indeed, the analysis in Kingston Square
strongly suggests that personal guaranties that favor a violation of
                                                82
fiduciary duties will be disfavored by the law. Thus, even though
certain fiduciary duties in LLCs are malleable under state law,83 the
                                                           84
duties owed to third-party creditors may not be waivable. In other
words, the inherent conflict between the insider’s self-interest and
the best interest of the company’s creditors might be impossible to
overcome contractually.85 Despite the problems with personal

     80
         See Tracht, Exploding Guaranties, supra note 74, at 132. Tracht’s argument regarding
the fiduciary duties assumes that it would not be in the best interest of the company’s other
creditors to permit the creditor with the exploding or springing guaranty to pursue his
remedies against the company. While this assumption is generally true, the careful creditor
seeking a personal guaranty could attempt to structure the guaranty in such a way to
harmonize the self-interest of the insider with those of the other creditors.
     81
         See id. at 134. Tracht gives a simple hypothetical to show why personal guaranties
violate bankruptcy policy.
      Consider a hypothetical firm, with a liquidation value of $70 and a reorganization
      value of $80. The firm has $100 in unsecured debt, $50 of which has been
      protected with a springing guaranty and $50 of which is not guarantied. Clearly the
      firm should be reorganized, in which case creditors will lose only $20 rather than
      $30. From the insider’s perspective, however, the choice is between nonbankruptcy
      liquidation with no personal liability, and bankruptcy reorganization with a
      personal liability of $10. In other words, the incentives created by a bankruptcy-
      contingent guaranty may prevent efficient bankruptcy filings.
Id.
         Tracht’s hypothetical illustrates that the ultimate objective of a bankruptcy
proceeding is to maximize the company’s overall value. In contrast, a personal guaranty
generally creates an incentive for the insider to maximize his own self-interest at the expense
of other creditors. Arguably, a personal guaranty would not violate the bankruptcy policy if its
net effect were to maximize the company’s overall value. In other words, a major creditor of
the company could structure the guaranty in such a way that it would assume control (at least
temporarily) of the company should revenues or operations drop below a minimum
threshold. While this step may be adversely viewed by minor creditors (i.e., those with
relatively small claims against the company), the overall net effect might actually enhance the
company’s going-concern because new management has been put in place without a
burdensome bankruptcy proceeding.
     82
         See generally In re Kingston Square Assocs., 214 B.R. 713 (Bankr. S.D.N.Y. 1997); see also
supra Part I.C.
     83
         See supra Part I.B.
     84
         See, e.g., In re Kingston Square, 214 B.R. at 735.
     85
         See Tracht, Exploding Guarantees, supra note 74, at 129, 132. Tracht’s argument
regarding the fiduciary duties assumes that it would not be in the best interest of the
company’s other creditors to let the creditor with the exploding or springing guaranty to
pursue his remedies against the company. While this assumption is generally true, the careful
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66                   BANKRUPTCY DEVELOPMENTS JOURNAL                                   [Vol. 18

guaranties, these devices will continue to be a valuable deterrent to
                                                         86
unwanted bankruptcies until more case law is developed.

B. Provisions in Organizational Documents (Remote Vehicles)
     A second (and relatively simple) method to hinder or prevent
an unwanted bankruptcy is to create a “bankruptcy remote vehicle”87
by adding provisions to a company’s articles of organization that
make a voluntary bankruptcy filing difficult or practically
impossible.88 Such provisions require a unanimous or supermajority
consent of all directors or shareholders before the company may file
                89
for bankruptcy. This strategy can be easily implemented for LLCs,
corporations, or voluntary partnership filings.90
     The catch to the supermajority or unanimous vote requirement
is that a secured creditor will often want to designate an
“independent” voter who will ensure that the supermajority or
unanimous approval for a bankruptcy will not be obtained.91 The
secured creditor’s intention is to create a situation where (1) assets
will be peacefully surrendered or (2) there will be no bankruptcy
proceedings to hinder a state law foreclosure.92 The obvious
downside to this approach is that the creditor’s influence may cause


creditor seeking a personal guaranty could attempt to structure the guaranty in such a way to
harmonize the self-interest of the insider with those of the other creditors.
     86
         Even though personal guaranties implicate fiduciary duties and bankruptcy policy,
they should continue to be an excellent deterrent (at least psychologically) until they are
expressly prohibited by statute or until courts begin to strongly strike these provisions down.
     87
         See Harold S. Novikoff & Barbara S. Kohl, Bankruptcy “Proofing”: Bankruptcy Remote
Vehicles and Bankruptcy Waivers, SD24 A.L.I.–A.B.A. 143 (1998).
     88
         See Marshall E. Tracht, Contractual Bankruptcy Waivers: Reconciling Theory, Practice, and
Law, 82 CORNELL L. REV. 301, 309 (1997) [hereinafter Tracht, Waivers].
     89
         See id.
     90
         See id. It should be noted, however, that a unanimous or supermajority vote
requirement would not prevent involuntary bankruptcy filings by general partners. See 11
U.S.C. § 303(b)(3) (2000); see also discussion infra Part III.B.
     91
         See Gregory A. Tselikis, “Bankruptcy-Proofing” Your Commercial Transaction: Reality or
Myth?, 13 ME. B.J. 234, 234 (1998). In creating any remote vehicle, the creditor must
structure the organizations governing documents in such a way so that (1) the “independent”
director cannot be removed by the other members and (2) that new directors cannot be
added without the consent of the independent director so as to create a supermajority.
Creditors can insure this protection through a very carefully crafted organizational
agreement. They can also add terms to their loan that will make the entire balance
immediately due if the “independent” voter is removed or if more directors are added to the
board so as to create a supermajority that is independent of the “independent” director.
     92
         See id. at 234.
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2001]                        Limited Liability Companies                                     67

the “independent voter” to breach its fiduciary duties to the
                                   93
company and third-party creditors. As such, creditors may find it
difficult to fill the role of independent voter because both the
creditor and the voter face significant consequences if the court
finds wrongdoing on the part of either.94
     Another serious concern with remote vehicles is that creditors
who require the supermajority or unanimous consent could be
deemed “insiders” of the debtor company.95 In the case of either a
corporation or partnership, the “independent” designee would most

    93
         See id. at 234-35; see also supra Part I.B-C.
    94
         See Tselikis, supra note 91, at 235. (Tselikis points out several reasons why creditors
and “independent” voters may want to seriously consider the implications of their actions.
First, both the creditor and “independent” designee are subject to substantial liability and/or
punitive damages. Second, attorneys should be particularly wary of playing the role of the
independent designee because of the serious ethical dilemmas created by the conflicting
fiduciary duties). “No man can serve two masters.” Matthew 6:24.
     95
         It has been questioned whether “the designation of an independent director by a
creditor can render the creditor an ‘insider’ for preference purposes.” Novikoff & Kohl, supra
note 2, at 4. The Bankruptcy Code defines “insider” as follows:
      (31) “insider” includes—
            (A) if the debtor is an individual—
                  (i) relative of the debtor or of a general partner of the debtor;
                  (ii) partnership in which the debtor is a general partner;
                  (iii) general partner of the debtor; or
                  (iv) corporation of which the debtor is a director, officer, or person in
                  control;
            (B) if the debtor is a corporation—
                  (i) director of the debtor;
                  (ii) officer of the debtor;
                  (iii) person in control of the debtor;
                  (iv) partnership in which the debtor is a general partner;
                  (v) general partner of the debtor; or
                  (vi) relative of a general partner, director, officer, or person in control of
                  the debtor;
            (C)if the debtor is a partnership—
                  (i) general partner in the debtor;
                  (ii) relative of a general partner in, general partner of, or person in
                  control of the debtor;
                  (iii) partnership in which the debtor is a general partner;
                  (iv) general partner of the debtor; or
                  (v) person in control of the debtor;
            (D) if the debtor is a municipality, elected official of the debtor or relative of
            an elected official of the debtor;
            (E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and
            (F) managing agent of the debtor;
11 U.S.C. § 101(31) (2000).
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68                 BANKRUPTCY DEVELOPMENTS JOURNAL                              [Vol. 18

likely be a director, officer, or general partner of some sort. (In the
case of an LLC, the designee would be a member or the managing
director). Regardless of the exact position, the designee likely
would qualify as an “insider” under the Bankruptcy Code.96 Thus,
the critical issue would be whether the “insider” status of the
“independent” designee could be attributed to the creditor through
the principal-agent relationship. This is obviously a very fact specific
question, but it is one that creditors who demand the
“independent” designee should be extremely cautious about. Given
the right set of circumstances, the Bankruptcy Code allows the
trustee to void transfers made to creditors up to one year before the
bankruptcy filing.97 Thus, a creditor that has used the independent
designee to obtain collateral could ultimately be forced to return
the collateral to the debtor. A simple hypothetical will illustrate this
point.
     Secured Creditor obtains a security interest in collateral
purchased by company using funds loaned by the creditor. To
protect itself, the creditor requires that the company amend its
governing documents such that a unanimous vote is required to file
for bankruptcy. The creditor then appoints an “independent”
designee to serve as one of the company’s voting directors. Over
time, the collateral depreciates so that the creditor’s claim is
partially secured.      Simultaneously, the company experiences
difficult financial times and is forced to consider bankruptcy.
Believing that it would be more efficient to simply foreclose the loan
and obtain the collateral, the creditor instructs the independent
agent to block any attempted bankruptcy filing. The creditor then
forecloses on the collateral and has it repossessed. Six months later,
the company files for bankruptcy. (The bankruptcy filing could be
accomplished by (1) the departure of the independent agent after
the collateral has been repossessed or (2) the company convincing
other creditors to file an involuntary petition). Once in bankruptcy,
the company would seek to have the transfer to the bank rescinded
on the grounds that the bank was an “insider.”
     This simple hypothetical illustrates two important points. First,
creditors that demand a supermajority or unanimous consent for

     96
         See 11 U.S.C. § 101(31). A judge would most likely rule that a member of an LLC is
also an insider under the Bankruptcy Code even though the Code does not have any
definition of “insider” that clearly includes a member.
     97
         See id. § 547(b).
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2001]                        Limited Liability Companies                                      69

bankruptcy must ensure that the “independent” designee remains a
voting member for at least one year beyond the time when the
                                    98
collateral is actually repossessed. Such a move would prevent the
possibility of the creditor being deemed an insider of the company.99
Second, even if the designee remains with the debtor company, the
creditor still runs the risk of a voided transfer if other creditors can
force an involuntary bankruptcy and prove that the creditor was an
                                       100
insider before the one year passes.        Thus, creditors who require
“independent” company directors inevitably run the risk of being
deemed insiders of the debtor company.
     There is at least one more downside to bankruptcy remote
vehicles. Companies and their managers or owners who enter into
agreements requiring a supermajority or unanimous consent for
bankruptcy could face claims from other unsecured creditors for
breach of fiduciary duty because the company has intentionally
limited its ability to pay other creditors.101 In the context of an LLC,
this concern is particularly pointed because the LLC liability shield
would not protect the member for his personal breach of fiduciary
duties.
     Simply stated, bankruptcy remote vehicles may be easily
implemented, but they are fraught with real dangers to both the
creditor and debtor. Creditors face the difficult task of finding an
independent designee who is willing to risk personal breaches of a
fiduciary duty. Creditors also run the risk of being deemed insiders
of the company and subsequently losing any collateral they may
have repossessed. Debtors also face claims of fiduciary duty
violations for any preferences given to the domineering creditor.
Taken together, the heavy risks stemming from bankruptcy remote
vehicles apparently outweigh any benefit from these unique devices.

C. Bad Faith Stipulation
    Another hindrance mechanism is to require the debtor to
agree that any bankruptcy filing would be in “bad faith” and to seek

    98
        Otherwise they risk an avoidance of any transfers by the trustee under § 547(b).
    99
        See 11 U.S.C. § 547(b).
    100
        An involuntary filing could be orchestrated by an insider inducing the company’s
creditors to file an involuntary petition. See, e.g., In re Kingston Square Assocs., 214 B.R. 713
(Bankr. S.D.N.Y. 1997). An involuntary petition may also be available for LLCs under the
provisions of 11 U.S.C. § 303(b)(3). See infra Part III.B.
    101
        See Tselikis, supra note 91, at 234, 236.
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70                   BANKRUPTCY DEVELOPMENTS JOURNAL                                   [Vol. 18

a dismissal of the petition.102 While there are cases indicating that
                                        103
the “bad faith” agreement is binding, a more recent decision from
Florida indicates that the bad faith agreement, standing alone, will
be insufficient to establish the bad faith required for dismissal.104
Thus, an alternative to an outright “bad faith” agreement is to
simply require the debtor to stipulate to findings of fact that would
increase the likelihood of a dismissal by the court for a bad faith
       105
filing. While stipulated facts increase the likelihood of a dismissal,
creditors and debtors must be wary because they could be accused
of a Rule 11 violation for making misrepresentations to the court.106
As such, the bad faith stipulation agreement is a viable alternative if
the stipulated facts are indicative of the real situation.

D. Pre-petition Waiver of the Automatic Stay
     Another pre-petition option is to require the debtor to waive
the automatic stay protections once bankruptcy is filed.107 When a
debtor files for bankruptcy, all of its creditors are enjoined from
commencing or continuing proceedings against the debtor,
enforcing judgments, filings liens, etc.108 The court may grant relief
from a stay for a particular creditor after notice, a hearing, and a
                 109
finding of cause. Thus, the practical effect of this relief is to allow
the creditor to pursue—at least in some limited form—its claims
against the debtor. Obviously, creditors that could obtain and

     102
         Novikoff & Kohl, supra note 2, at 11-12.
     103
         See id. (citing In re University Commons, 200 B.R. 255, 259 (Bankr. M.D. Fla. 1996); In
re Aurora, 134 B.R. 982, 985 (Bankr. M.D. Fla. 1991); In re Orange Park S. P’ship, 79 B.R. 79,
82 (Bankr. M.D. Fla. 1987). Novikoff and Kohl note that each of these cases involved both the
“bad faith” agreement plus the normal indications of a bad faith filing. Thus, reliance upon
these cases for establishing the per se validity of a “bad faith” agreement seems tenuous at best.
    104
         See Novikoff & Kohl, supra note 2, at 12 (citing In re S. E. Fin. Assocs., 212 B.R. 1003,
1005 (Bankr. M.D. Fla. 1997).
    105
         See Tracht, Waivers, supra note 88, at 310.
    106
         See Fed. R. Civ. P. 11(b) (“By presenting to the court . . . [stipulated facts], an
attorney . . . is certifying that to the best of the person’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances, . . . (3) the allegations and other
factual contentions have evidentiary support”).
    107
         See Novikoff & Kohl, supra note 2, at 12-13. For an excellent article regarding
bankruptcy treatment of waivers of the automatic stay provision, see Sally S. Neely, Prepetition
Waivers of the Automatic Stay: Are they Enforceable?, SE71 A.L.I.–A.B.A. 17 (Feb. 24, 2000). The
specific provisions governing automatic stays are found at 11 U.S.C. § 362 (2000).
    108
         11 U.S.C. § 362(a)(2000).
    109
         Id. § 362(d).
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2001]                          Limited Liability Companies                                        71

enforce a waiver of the automatic stay are in a better position than
other creditors because the debtor cannot avail itself of all the
protections of a bankruptcy filing. Although courts generally agree
that any creditor with an automatic stay waiver must petition the
                                          110
court in accordance with 11 U.S.C. § 362, there is a sharp split as
to whether waivers of the automatic stay are enforceable.111 In
regards to LLCs, a pre-petition waiver of the automatic stay would
likely yield the same results as with a corporation or partnership
because the waiver has no real bearing on the company’s structure.

E. Abstention
     A final pre-petition hindrance mechanism is to require the
debtor to seek court abstention once a bankruptcy petition has been
filed. The Bankruptcy Code allows the court to dismiss or suspend a
case if the interests of the creditors and the debtor are best served
by the action.112       An agreement requiring the debtor to
automatically seek a dismissal under § 305 would probably be void
for the same reasons that a debtor cannot waive the right to file for
bankruptcy.113 However, requiring the debtor to simply seek a
temporary court abstention is more likely to succeed because (1)

    110
          See Novikoff & Kohl, supra note 2, at 13 (citing In re Shady Grove Tech Ctr. Assocs.,
216 B.R. 386, 393-94 (Bankr. D. Md. 1998); In re Darrell Creek Assocs., 187 B.R. 908, 910
(Bankr. D.S.C. 1995); In re Powers, 170 B.R. 480, 483 (Bankr. D. Mass 1994); In re Cheeks, 167
B.R. 817, 818-19 (Bankr. D.S.C. 1994); In re Sky Group Int’l, Inc., 108 B.R. 86, 89 (Bankr. W.D.
Pa. 1989); In re S. E. Fin. Assocs., 212 B.R. 1003, 1005 (Bankr. M.D. Fla. 1997)(dicta)).
     111
          See Novikoff & Kohl, supra note 2, at 13. Novikoff and Kohl cite numerous cases
holding that automatic stay waivers are or are not enforceable. See, e.g., In re Shady Grove
Tech Ctr. Assocs., 216 B.R. 386, 393-94 (Bankr. D. Md. 1998) (automatic stay waivers are
enforceable); see also In re Atrium High Point L.P., 189 B.R. 599, 608 (Bankr. M.D.N.C. 1995);
In re Darrell Creek Assocs., 187 B.R. at 910; In re Cheeks, 167 B.R. at 818; In re Powers, 170 B.R. at
484; In re McBride Estates, Ltd., 154 B.R. 339, 343 (Bankr. N.D. Fla. 1993); In re Citadel
Props., Inc., 86 B.R. 275, 276 (Bankr. M.D. Fla. 1988); but see In re Pease, 195 B.R. 431, 433
(Bankr. D. Neb. 1996) (automatic stay waivers are not enforceable); see also In re Jenkins Court
Assocs., 181 B.R. 33, 37 (Bankr. E.D. Pa. 1995); Farm Credit of Cent. Fla. v. Polk, 160 B.R. 870,
873-74 (M.D. Fla. 1993); In re Sky Group Int’l, Inc., 108 B.R. at 89.
     112
          11 U.S.C. § 305(a) (2000).
        Section 305(a) specifically provides:
       (a) The court, after notice and a hearing, may dismiss a case under this title, or may
       suspend all proceedings in a case under this title, at any time if—
          (1) the interests of creditors and the debtor would be better served by such
       dismissal or suspension . . . .
     113
          Novikoff & Kohl, supra note 2, at 11 (discussing why a waiver of the right to file for
bankruptcy is void).
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the debtor is not deprived of the right to file for bankruptcy,114 (2)
the out-of-court workout might actually be more beneficial for both
                           115
the debtor and creditors, and (3) the abstention promotes judicial
economy and saves litigation costs. To increase the likelihood of a
court suspension, the creditor could require that the debtor
stipulate to various facts. However, such a requirement may border
on a Rule 11 violation if the stipulated facts are not completely
accurate or if the debtor’s best interest would be to remain in the
bankruptcy proceedings.116
     Arguably, debtors are more inclined to sign an abstention
agreement (as opposed to a waiver of the automatic stay) because
their rights and interests are not restricted as much. Furthermore,
the biggest advantage a creditor could hope to gain from such an
agreement is an increased amount of time before the bankruptcy
proceedings have their full effect. Increased time, in turn, might
provide the key element to further minimizing a creditor’s debt or
to successfully turning around the struggling debtor. Of course, the
creditor also faces a potential downside: the collateral may continue
to depreciate in value during the abstention period.
     Another advantage of a § 305 abstention mechanism is that a
suspension or dismissal of a case cannot be appealed.117 Thus, a
creditor that can convince a court to suspend the proceedings is
insured of a temporary period of no bankruptcy proceedings. Of
course, the abstention rule cuts both ways and a court’s decision to
not dismiss or suspend a case cannot be appealed either.118 Given
the workings of § 305, a creditor’s course seems clear: the creditor


     114
         The court’s order of dismissal could be without any prejudice such that the debtor
could re-file if a non-bankruptcy workout proved to be infeasible. Furthermore, the
suspension of the proceedings could be conditioned on the occurrence (or absence) of
various conditions such that the bankruptcy proceedings could be easily reinstated if the
workout was unsuccessful.
    115
         See Novikoff & Kohl, supra note 2, at 15 (discussing In re Colonial Ford, Inc., 24 B.R.
1014 (Bankr. D. Utah 1982)).
    116
         See discussion, supra Part II.C. regarding Rule 11 violations for requiring stipulated
facts for a waiver of the automatic stay.
    117
         11 U.S.C § 305(c) (2000) specifically provides:
      (c) An order under subsection (a) of this section dismissing a case or suspending
      all proceedings in a case, or a decision not so to dismiss or suspend, is not
      reviewable by appeal or otherwise by the court of appeals under section 158(d),
      1291, or 1292 of title 28 or by the Supreme Court of the United States under
      section 1254 of title 28.
    118
         See 11 U.S.C. § 305(c).
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2001]                        Limited Liability Companies                                      73

should generally attempt to have the case dismissed or suspended.
If the creditor prevails, then it gets the advantage of a dismissed case
or a period of time without the bankruptcy proceedings. If the
creditor fails, then it is in the same position as if no motion was ever
filed.


     III. CLASSIFICATION OF AN LLC ONCE A BANKRUPTCY IS FILED
     Despite sophisticated attempts to implement bankruptcy
hindrance mechanisms, an LLC may nevertheless voluntarily file for
bankruptcy or be the subject of an involuntary petition. Any LLC
bankruptcy filing creates an immediate problem: the Bankruptcy
Code has not been amended to deal with the unique features of the
limited liability company. Currently there are no statutes or case law
to help determine whether an LLC should be considered a
corporation or a partnership in bankruptcy. A limited liability
company’s classification is an important consideration for both
creditors and debtors because the classification could impact a
creditor’s future posture as the bankruptcy progresses.119 This
section addresses these classification issues in the context of the
initial bankruptcy filing.

A. Eligibility
     In all likelihood an LLC will be deemed eligible to file under
the Bankruptcy Code.120 However, its classification as an eligible
entity may ultimately affect the company’s rights as the bankruptcy
case progresses. The Bankruptcy Code requires that an entity
qualify as a “person” to file a bankruptcy petition.121 The term


    119
         See e.g., 11 U.S.C. § 303(b)(3) (involuntary filings only permitted for partners and not
allowed for corporate shareholders); § 502(a) (creditor of a general partner in a partnership
that is a debtor in a chapter 7 case may object to a proof of claim); § 508(b) (creditor of
partnership in chapter 7 who receives payments from a general partner for an unsecured
claim cannot receive the payment until the other unsecured creditors receive a payment equal
to that given by the general partner); § 723(a) (trustee may have claims against the general
partner of a partnership).
    120
         It has been noted that, “[v]irtually anyone or anything can be a debtor in a
bankruptcy proceeding.” Anthony Michael Sabino, Litigation Issues for the Limited Liability
Company, 69-Feb N.Y. ST. B.J., 30, 31 (Feb. 1997).
    121
         11 U.S.C § 109(a) (2000); see also The Best Entity for Doing the Deal: Limited Liability
Companies and Bankruptcy, 937 P.L.I./Corp. 747, 763 (Apr.-May 1996) [hereinafter Best Entity].
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“person” includes, but is not limited to, individuals, partnerships,
                    122
and corporations.       Because this definition is not limited to the
specifically enumerated entities, it probably would include an
LLC.123 Given traditional limitations on the term “person,” courts
will likely determine that an LLC meets the threshold definitional
               124
requirement. It should be noted, however, that there are no
reported cases holding that an LLC constitutes a “person” under the
Bankruptcy Code. Thus, the weak technical argument remains that
an LLC is not eligible to file for bankruptcy because it is not a
“person.”
     Until the Code is amended to specifically address LLCs, courts
must decide whether to classify limited liability companies as
corporations or partnerships for purposes of the bankruptcy
proceedings. At least two commentators disagree about the impact
that occurs to an LLC if it is determined to constitute a
“corporation” during the bankruptcy proceedings.               James J
Wheaton argues that the impact is minimal.
     It is also worth observing that the classification of an LLC as a
partnership or as a corporation for purposes of determining the
applicability of the Bankruptcy Code should have little other effect
on the disposition of a bankruptcy proceeding. Most of the
provisions of the Bankruptcy Code that apply specifically to
partnerships relate to issues, such as the liabilities of general
partners, that are not likely to apply in an LLC context.125
     In contrast, it has been suggested that the definitional
classification could affect the court’s treatment of the LLC—
particularly if the LLC is set up to closely resemble a partnership.
      A court may hesitate to conclude that an LLC is a
      corporation because the definition of corporation
      specifically excludes the limited partnership, an entity that
      resembles the LLC. A court may also wish to avoid
      characterizing the LLC as a corporation because an LLC

    122
        See 11 U.S.C. § 101(41). (Section 101(41) specifically provides: “person” includes
individual, partnership, and corporation, but does not include governmental unit, [with some
exceptions for the governmental unit]). The Bankruptcy Code’s Rules of Construction state
that the terms “includes” and “including” are not limiting. 11 U.S.C. § 102(3).
    123
        See 11 U.S.C. §§ 101(41), 102(3); see also Best Entity, supra note 121, at 763-64.
    124
        Best Entity, supra note 121, at 764-65.
    125
        James J. Wheaton, Square Pegs in Round Holes: LLCs Under Other Statutes, Q287 A.L.I.-
A.B.A. 49, 51 (Mar. 25, 1999).
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2001]                         Limited Liability Companies                                        75

          managed by its members resembles a general partnership
          more closely than a corporation. A court may therefore
          wish to treat this type of LLC as a partnership for certain
          purposes under the Bankruptcy Code—such as
          determining the method of filing a petition, determining
          the venue of the case, and determining the members’
          fiduciary duties. It is thus more expedient for a court to
          simply conclude that an LLC is eligible for relief without
          tying the entity to the definition of corporation.126

While it is easy to simply call an LLC a “person” without
determining what kind of a person it is (i.e., a partnership or
corporation), there still are certain situations where the Court must
determine if the LLC is more like a partnership or a corporation
                              127
under the Bankruptcy Code.
     Because a corporation constitutes a “person” under the
Bankruptcy Code,128 a court could determine that an LLC
                                                                     129
constitutes a “corporation” when determining its eligibility to file.
Such a conclusion would resolve future problems whether to treat
the LLC like a partnership or corporation. The Code’s expansive
definition of “corporation” includes two possible categories under
which an LLC could qualify: (ii) [a] partnership association
organized under a law that makes only the capital subscribed
responsible for the debts of such association . . .; and (iv) [an]
unincorporated company or association.130 An LLC appears to
qualify as a “corporation” under both of these definitions.131 Thus, a



    126
         Best Entity, supra note 121, at 766-67 (citations omitted).
    127
         Examples where the classification as a partnership or corporation would be important
include: 11 U.S.C. § 303(b)(3) (involuntary filings only permitted for partners and not
allowed for corporate shareholders); § 502(a) (creditor of a general partner in a partnership
that is a debtor in a chapter 7 case may object to a proof of claim); § 508(b) (creditor of
partnership in chapter 7 who receives payments from a general partner for an unsecured
claim cannot receive the payment until the other unsecured creditors receive a payment equal
to that given by the general partner); § 723(a) (trustee may have claims against the general
partner of a partnership).
    128
         See 11 U.S.C. § 101(41) (2000).
    129
         Best Entity, supra note 121, at 765.
    130
         11 U.S.C. § 101(9)(A)(ii), (iv).
    131
         See Wheaton, supra note 125, at 51; see also Best Entity, supra note 121, at 764-67; Aileen
R. Leventon, Securities and Bankruptcy Law Issues Relating to Limited Liability Companies, 836
P.L.I./Corp. 671, 680-81 (Jan.-Mar., 1994).
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76                  BANKRUPTCY DEVELOPMENTS JOURNAL                               [Vol. 18

purely legal interpretation of the Code suggests that an LLC should
be considered a corporation for bankruptcy purposes.
      In contrast, the equitable approach suggests that an LLC
should be treated as a partnership because the company will often
be structured exactly like a partnership. There is “wiggle” room
under the Code’s definition whereby in limited circumstances an
LLC could be deemed to be a partnership for bankruptcy purposes.
For example, the Bankruptcy Code specifically excludes a “limited
partnership” from the definition of “corporation.”132 Furthermore,
the Code does not define a “limited partnership,” so entities that
constitute a limited partnership will be based upon a state law
definition of that term. Thus, a creative litigant could argue that an
LLC should be treated as a partnership if the state law definition of
“limited partnership” could be broadly construed to include an
LLC. Indeed, the malleability of the LLC laws should enable the
business entity to be structured to directly resemble a limited
partnership with the liability shield of an LLC. Obviously, this is a
very fact specific issue that practitioners need to carefully consider
in light of existing state law.

B. Involuntary Bankruptcy Petitions
     Knowledge of how involuntary bankruptcy petitions operate is
necessary to understand all the actions that creditors and debtors
may take in favoring or opposing an attempted bankruptcy filing. A
corporate debtor’s involuntary bankruptcy is commenced when
three or more of its creditors file a petition in the bankruptcy
      133
court. These creditors must hold an aggregate unsecured claim of
at least $10,775,134 and each claim cannot be contingent135 or the

     132
         See 11 U.S.C. § 101(9)(B).
     133
         See id. § 303(b)(1).
    134
         Although the aggregate unsecured claim must total $10,775, the debtor does not
need to be totally unsecured. For example, a debtor who has a claim of $12,000 that is
secured by collateral totaling $7,000 will have a secured claim of $7,000 and an unsecured
claim of $5,000. The unsecured claim of $5,000 can be added to the aggregate of unsecured
claims. See CHARLES JORDAN TABB, THE LAW OF BANKRUPTCY, § 2.3 (1997).
    135
         [C]laims are contingent as to liability if the debt is one which the debtor will be
      called upon to pay only upon the occurrence or happening of an extrinsic event
      which will trigger the liability of the debtor to the alleged creditor and if such
      triggering event or occurrence was one reasonably contemplated by the debtor and
      creditor at the time the event giving rise to the claim occurred.
In re All Media Props., Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff’d, In re All Media
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2001]                        Limited Liability Companies                                     77

subject of a bona fide136 dispute.137 If the debtor has less than twelve
creditors, then one or more creditors may file an involuntary
petition as long as they have non-contingent, bona-fide unsecured
claims totaling $10,775.138 Employees, insiders, and entities holding
a voidable transfer cannot have their claims aggregated if there are
                           139
less than twelve creditors.
      In contrast to a corporate bankruptcy, an involuntary
bankruptcy may also be commenced by one or more general
partners in a partnership.140 Any general partner that did not join in
the involuntary petition may file an answer in response to the
         141
petition.     A partnership may also be forced into involuntary
bankruptcy by creditors having non-contingent, bona-fide claims
totaling $10,775.142
      Why may general partners, acting individually, file an
involuntary petition while shareholders in a corporation do not
enjoy this same right? It has been suggested that individual partners
are given the right to file an involuntary petition because they face


Props., Inc., 646 F.2d 193 (5th Cir. 1981). In other words a contingent claim is one that is
dependent upon the occurrence of a future event. The contingency must deal with the
liability in general and not the amount of the liability; unmatured or unliquidated debts are
not contingent. See TABB, supra note 134, at § 2.3.
    136
          A “bona fide dispute” has been interpreted by several courts as constituting a factual
or legal dispute as to the validity of a debt, and the court only needs to determine if there is
actually a dispute (and not its outcome). See, e.g., Rimell v. Mark Twain Bank (In re Rimell),
946 F.2d 1363, 1365 (8th Cir. 1991); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544
(10th Cir. 1988); In re Busick, 831 F.2d 745, 750 (7th Cir. 1987); MAG Bus. Servs. Bentley
Racing Prods. v. Whiteside (In re Whiteside), 238 B.R. 468, 469 (Bankr. W.D. Mo. 1999); In re
Ramm Indus., 83 B.R. 815, 822 (Bankr. M.D. Fla. 1988). The procedure for determining a
bona fide dispute is relatively simple. A creditor filing an involuntary bankruptcy must prove
a prima facie case of no bona fide dispute. In re Rimell, 946 F.2d at 1365. If this is done, the
debtor must then prove that there is an actual dispute over the claim. Id. Although the court
will not resolve the dispute, it may, out of necessity, conduct a limited analysis of the
underlying legal claims and factual disputes. Id. Often, the resolution of the bona fide
dispute will require that the bankruptcy court make a factual finding based upon witness
credibility whether there is a bona fide dispute. Id. This factual finding can only be reversed
on appeal under the clearly erroneous standard. Id.
    137
          See 11 U.S.C. § 303(b)(1) (2000).
    138
          See id. § 303(b)(2).
    139
          See id.
    140
          See id. § 303(b)(3)(A). Note that one of the general partners or the trustee of a
general partner may also unilaterally file an involuntary bankruptcy for a general partnership
if a court has ordered a bankruptcy with respect to all of the general partners in the
partnership. See id. § 303(b)(3)(B).
    141
          See 11 U.S.C. § 303(d).
    142
          See id. § 303(b).
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78                      BANKRUPTCY DEVELOPMENTS JOURNAL          [Vol. 18

increasing personal liability if the partnership bankruptcy is
           143
delayed.       In contrast, a shareholder’s liability is almost always
limited to the amount of their investment. Thus, a shareholder
faces no increased liability if bankruptcy is delayed. If personal
liability is the controlling rationale for this rule, then individual LLC
members should not be able to unilaterally file an involuntary
petition because they do not face increased liability from a delayed
bankruptcy filing.144
      However, the personal liability rationale does not squarely
address the issues faced by LLCs and their members. LLCs are
typically owned by a few individuals rather than a large number of
people (as is often the case for corporations). Because ownership is
often concentrated in the hands of just a few people, each of the
LLC members often actively participate in the company’s
operations. While it is true that they do not face personal liability
for simply being members of the company, they are nevertheless
subject to fiduciary obligations that directly stem from their roles in
the LLC.145 Furthermore, there is a strong argument that the LLC
members cannot contractually escape all liability for their fiduciary
                  146
responsibilities. This is particularly true in regards to the general
creditors once the company becomes insolvent.
      Given this unique aspect of LLCs, there remains a strong
argument that individual members should be granted the right to
file an involuntary bankruptcy petition just as a general partner may
do. Indeed, this rationale becomes even more persuasive in the face
of bankruptcy hindrance mechanisms. As noted above, bankruptcy
hindrance mechanisms often implicate the fiduciary responsibility
of an LLC member. In an LLC owned and operated by two
members, a hindrance mechanism may drive one member to not
seek bankruptcy while the other member feels compelled by his
fiduciary obligations to file for the proceeding. If the LLC member
is not allowed to file involuntarily, then he would be subjected to
continuing violations of his fiduciary duty. Such a result is clearly
inequitable.
      However, this entire “equitable” argument for treating LLCs
like partnerships ignores one critical fact: there are a large number

     143
           See Neely, supra note 9, at 288.
     144
           See id.
     145
           See supra Part I.B.
     146
           See supra Part I.B.
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2001]                           Limited Liability Companies                79

of small, closely held corporations that practically function like a
partnership, and yet the Bankruptcy Code creates no special or
“equitable” protection for these small entities.         Often these
corporations involve just two or three individuals who opted for the
corporate entity to protect their own personal liability. Indeed,
where two or three individuals entirely own a corporation and serve
as its officers and directors, these people are subjected to the same
temptations to breach fiduciary duties owed to the corporation, its
shareholders, and the company’s general unsecured creditors
(when the company becomes insolvent). This fact existed long
before the LLC ever gained any prominence, and yet the
bankruptcy rules have remained the same. Arguing that an LLC
should be treated like a partnership simply because it resembles a
partnership ignores the fact that small, closely held corporations
which are practically operated as a partnership enjoy no such
benefit. Indeed, this argument further strengthens the suggestion
that an LLC should be treated as a corporation in bankruptcy
because that is what it most closely resembles in both form and
practice.
      Thus, the real problem with 11 U.S.C. § 303(b) is that it
subjects the shareholders and directors of small corporations to
personal liability if the other shareholders and directors of the
company refuse to file a bankruptcy petition. If the controlling
rationale for only allowing involuntary filings by partners is the
threat of increased personal liability,147 then the Code should be
modified to protect both small corporations and LLCs whose
members face potential personal liability. Such a modification
would be beneficial in at least two ways. First, it would be a logical
change to the code that reflects the fact that partners face personal
liability while shareholders and LLC members do not. Second, such
a modification would lend greater weight to the argument that an
LLC should be treated like a corporation under the Code because
its legal protections are more akin to the corporate entity rather
than a partnership. However, until the Bankruptcy Code is
amended to address these inherent problems, both creditors and
debtors have leeway to argue that individual LLC members have the
right to unilaterally file an involuntary petition.



    147
          See Neely, supra note 9, at 288.
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80                 BANKRUPTCY DEVELOPMENTS JOURNAL              [Vol. 18

                             CONCLUSION

      The advent of the limited liability company will likely go down
in history as a major step in American jurisprudence for business
entities. The combination of partnership-like taxation coupled with
corporate-like liability protection will continue to be the preferred
form of business. As more and more LLC companies come into
existence, both legislatures and courts will need to develop well
thought-out rules to govern these relatively new entities. One of the
areas that will need particular attention will be the field of
bankruptcy where there are no statutory guidelines as of yet. As
illustrated in this Article, there are a number of bankruptcy
hindrance mechanisms that creditors may employ to deter
unwanted bankruptcy filings. However, these unique contractual
creations are often fraught with dangers involving attempted waivers
of non-waivable rights. These mechanisms also often implicate the
fiduciary responsibilities of individual LLC members. Accordingly,
both creditors and debtors should carefully consider whether or not
they are in violation of a fiduciary duty (either contractual or legal)
when implementing a bankruptcy hindrance device. Finally, the
structure of the current bankruptcy code suggests that LLCs should
be treated as corporations when filing for bankruptcy. However, the
practical effect of this classification could potentially subject LLC
members to increased liability through continuing breaches of the
fiduciary duty. Congress, States, and the courts must address these
pressing issues to create a clear cut set of rules under which debtor
LLCs and creditors may comfortably operate.

								
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