LEASING LAW By Steve Whelan Bankruptcy (Not So) Remote S members. One critical element of a successful transaction is the establishment of a bankruptcy-remote, special purpose entity (SPE, typically a limited liability company, or “LLC”) to own the assets and issue the asset-backed securities (ABS). Two recent court decisions have overturned creditor efforts to interpose a special or independent member for the express purpose of blocking a Bankruptcy Code filing. Voluntary Petition. In re Lake Michi-gan Beach Pottawattamie Resort LLC , decided in April 2016 by a Bankruptcy Court in Chicago, upheld the filing of a bankruptcy petition despite the refusal of the Special Member to authorize any such “Material Action,” as required by the operating agreement of the LLC. The Special Member had been imposed by the lender to the LLC (whose loan was collateralized by a mortgage on the resort property of the LLC) as a condi-tion to its forbearance from pursuing remedies following the LLC’s default on the loan. The lender was appointed as the Special Member but had “no duty or obligation to give any consideration to any interest of or factors affecting the Company or the Members.” When the LLC again defaulted on the loan, the lender commenced fore-closure on the collateral. On the day before the foreclosure sale was to have occurred, the LLC petitioned for relief under the Bankruptcy Code, thereby blocking the sale and any other rem-edies that the lender might take. The lender sued to dismiss the bankruptcy case on the grounds that the LLC had not complied with its operating agree-ment requirement for the lender to ap-prove such a Material Action. The court construed the Special Member section of the operating agreement as lacking the “essential playbook for a successful blocking director structure…the director must be subject to normal director fiduciary duties” and able to “vote in favor of a bankruptcy filing, even if it is not in the best interests of the creditor that they were chosen by.” The court ruled that the Special Member provision was void. The bankruptcy petition hence was duly authorized and the lender’s motion to dismiss was denied. More OverReaching . Similarly, in June 2016 In re Intervention Energy Holdings, LLC ruled that “a limited liability com-pany governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ulti-mate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder— and which owed no duty to anyone but itself in connection with an LLC’s decision to seek federal bank-ruptcy relief, is tantamount to an abso-lute waiver of that right, and…is void as contrary to federal public policy.” In that controversy, the LLC oper-ating agreement issued one common unit in the LLC to the lender and the approval of all common unit holders would be required “prior to any vol-ECURITIZ ATION OF EQUIPMENT LEASES AND LOANS continues to provide a robust form of capital for many ELFA ABS sponsors and investors must beware of overreaching. 42 NOVEMBER/DECEMBER 2016 EQUIPMENT LEASING & FINANCE MAGAZINE