In our 2017 article, “An Overview of Bankruptcy Remote Structures”, we wrote about the use – and features – of bankruptcy remote structures in the United States. Bankruptcy remote structures are most often used for valuable assets, such as drill ships, FSRUs, commercial aircraft and real estate. Generally, each asset is held by a special purpose or single purpose company (“SPC”). As we noted in our 2017 article, “[t]here are certain features of the SPC [single purpose company] that make it difficult or costly for the SPC to file for bankruptcy. … Lenders may [ ] choose to install independent board members to monitor the company and prevent an improvident bankruptcy filing.” Some of these bankruptcy remote features may be built into the SPC’s organizational documents, but an absolute prohibition on an entity seeking bankruptcy protection is void as against US public policy.
So, what is permissible? The U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, recently enforced a provision in the debtor’s operating agreement that required the debtor to obtain the independent manager’s consent to commence bankruptcy proceedings. Because the debtor failed to do so, the chapter 11 bankruptcy case was dismissed.
Factual Background
In In re 301 W North Avenue, LLC,¹ the debtor, 301 W North Avenue, LLC (the “Debtor”), a Delaware entity, had entered into a loan agreement with BDS III Mortgage Capital J LLC, which loan was secured by a mortgage over the real estate development property owned by the Debtor. Pursuant to the loan agreement, Debtor was required to be a “bankruptcy remote entity.”
Specifically, the loan agreement required that the Debtor’s organizational documents provide for at least one independent manager or director (the “Independent Manager”) at all times. The Debtor engaged CT Corporation Staffing, Inc. (“CTCS”) to find the Independent Manager, and CTCS designated Lisa M. Pierro. Pursuant to the loan agreement, the Debtor was prohibited from filing a bankruptcy petition “[w]ithout the unanimous written consent of all members, as well as the consent of the Independent Manager…”.²
Ultimately the Debtor defaulted on its loan, and the original lender’s successor-in-interest, BDS III Mortgage Capital G, LLC (the “Lender”) commenced a mortgage foreclosure action.³ However, on the eve of the hearing in that foreclosure action, on February 27, 2024, the Debtor filed for bankruptcy. The bankruptcy petition (the “Petition”) was signed by the president of Debtor’s manager, F. Martin Paris, Jr., who declared he was authorized to file the petition on the Debtor’s behalf.⁴
During the Debtor’s bankruptcy proceeding, at the meeting of creditors, the Debtor’s president, Paris, testified that he did not believe the Debtor had a board of directors when the Petition was filed, and was “not familiar with anybody,” such as an independent member or director, “that would have held consent to file.”⁵ Paris further testified that the name Lisa Pierro was not familiar to him. At a subsequent deposition, Paris “conceded that he did not believe that he reviewed the LLC Agreement prior to filing the Petition.”⁶
Pierro, the Independent Manager, confirmed at her deposition that she was not consulted prior to filing the Petition, and that she did not see the “Consent in Lieu of Meeting of the Members and Manager” that was executed by, inter alia, the Debtor and Debtor’s manager (i.e. Paris), authorizing the filing of the Petition, until her deposition.⁷
A couple months after the Debtor filed the Petition for bankruptcy, Pierro, prompted by the unauthorized bankruptcy filing, signed a resignation notice “due to CTCS’s growing concerns about nonpayment of its invoices” on April 30, 2024. The notice was backdated to August 31, 2022, “the last date that CTCS received payment” in respect of Pierro’s role as Independent Manager.
The Debtor did not notify the Lender of Pierro’s resignation, and the Lender had not received any information about a proposed replacement Independent Manager.⁸ (The Loan Agreement, in addition to requiring the appointment of an Independent Manager, also provided that the resignation of the Independent Manager “shall not be effective without two (2) Business Days prior written notice to Lender accompanied by evidence that the replacement Independent Manager satisfies the applicable terms and conditions….”.⁹)
The Motion to Dismiss
The Lender moved to dismiss the Debtor’s bankruptcy case and bar the Debtor from refiling on the grounds that Debtor did not have authority to file the Petition. Pursuant to US bankruptcy code, a bankruptcy court “shall… dismiss a case under this chapter [11]… for cause…”¹⁰ which includes the lack of corporate authority to file.¹¹
As an initial matter, the bankruptcy court concluded the LLC Agreement required the Debtor to obtain the consent of the Independent Manager before filing the Petition, and the Debtor failed to do so. “Paris’ testimony that he could not recall whether either the Loan Agreement or the LLC Agreement required an independent manager on the board is irrelevant. The documents speak for themselves, and what they say is unambiguous.”¹²
With respect to the Debtor’s argument that Pierro had resigned before the Petition (because her letter of resignation dated back to before the Petition was filed), the bankruptcy court found Pierro only signed and sent her resignation after the Debtor filed the Petition without her consent – “Pierro remained as the Independent [Director] on the Petition Date, and her consent was required to authorize the Debtor to file for relief under the Bankruptcy Code.”¹³
The bankruptcy court’s inquiry did not end there, however; it next assessed with the LLC Agreement’s provisions impermissibly restricted the Debtor from filing for bankruptcy against public policy. “Provisions that place an independent manager on the board of a limited liability company, with the requirements that the independent manager must participate in certain corporate decisions, such as the filing of a bankruptcy petition, are not presumptively void.”¹⁴ Whether such requirements are void depends upon whether “an operating agreement creates a structure in which a director’s fiduciary duties are respected and that complies with non-bankruptcy statutes or law…”.¹⁵ Here, the Lender argued that “the Independent Manager Provisions expressly impose upon the Independent Manager a fiduciary duty to consider the interests not only of Lender but also those of the Debtor…”.¹⁶ The bankruptcy court concluded that the LLC Agreement required the Independent Manager to consider the interests of the Debtor, its members, and creditors, and thus did not impermissibly restrict the Debtor’s right to file for bankruptcy relief.
Therefore, the bankruptcy court dismissed the bankruptcy case, but did not bar the Debtor from refiling, because such a bar “would effectively prohibit the Debtor from deciding – properly, in compliance with the LLC Agreement – whether or not it should file for relief under the Bankruptcy Code.”¹⁷
The bankruptcy court’s decision in In re 301 W North Avenue, LLC highlights the continued use, and importance, of bankruptcy remote structures, and confirms the bankruptcy court’s commitment to enforcing unambiguous contractual requirements that do not run afoul of public policy.
Bankruptcy remote structures assist in protecting lenders from improvident bankruptcy filings where the lender’s collateral held by the SPC is “in the money” and therefore at risk of being dragged into a larger group insolvency to finance the bankruptcy proceeding and otherwise prejudice the secured lender.
Watson Farley & Williams has an intimate knowledge of the methods used to create bankruptcy remote structures, including creating statutory trusts and other devices.
[1] 666 B.R. 583 (Bankr. N.D. Ill. 2025).
[2] Id. at 589.
[3] Id. at 592.
[4] Id.
[5] Id.
[6] Id. at 593.
[7] Id.
[8] Id.
[9] Id.
[10] 11 U.S.C. §1112(b).
[11] 666 B.R. at 594.
[12] Id. at 595.
[13] Id.
[14] Id. at 598 (emphasis in original).
[15] Id.
[16] Id. at 598-99.
[17] Id. at 601.
