United States: Authority To File Bankruptcy: What Will A Court Consider?

Last Updated: January 13 2014
Article by Vicki Harding

In re Quad-C Funding LLC, 496 B.R. 135 (Bankr. S.D.N.Y. 2013) –

After a multi-member limited liability company filed a chapter 11 bankruptcy petition, one member (Crossroads) moved to dismiss the case on the basis that the filing was not properly authorized since it did not consent.

This challenge was only the latest in a series of battles between the parties.  The fundamental objection raised by the Crossroads was that the debtor's operating agreement required a super majority vote of 62.5% to approve certain actions (including a bankruptcy filing), which Crossroads contended meant that it had to consent.

Initially Crossroads did have sufficient voting rights to block a super majority vote.  However, circumstances changed.  Although raising equity capital generally required a super majority vote, the debtor was permitted to raise an additional $200,000 through the sale of common units and up to $5 million through the sale of preferred units.  Without notice to Crossroads, the debtor proceeded to raise capital within this exception –resulting in additional member interests sufficient to dilute Crossroads so that it could no longer block a super majority vote.

Under the operating agreement, Crossroads also had a right to dissolve the debtor under certain circumstances.  When the debtor proposed to amend the operating agreement to eliminate the dissolution right, Crossroads responded with an election to dissolve the debtor effective April 17.  However, the amendment was approved without Crossroads' consent effective April 13.  In response, Crossroads commenced litigation to obtain dissolution and a declaratory judgment that the amendment was invalid.

As characterized by the bankruptcy court, the state court litigation "has been protracted, involved, and extremely expensive; Crossroads alone appears to have accrued more than $1 million in legal fees to date."  The state court denied a request for a preliminary injunction by Crossroads, but did find that the debtor was required to advance Crossroads' legal fees under the terms of a servicing agreement.  The debtor appealed, and the fee order was upheld on appeal.

When negotiations with Crossroads failed, a meeting of members was called to consider authorizing a chapter 11 filing.  Crossroads challenged the admission of new members, arguing that they were not "accredited investors" as contemplated by the securities offering memorandum, and claimed that it continued to have the ability to block the super majority vote required to authorize a bankruptcy filing.

Notwithstanding Crossroads' objections, the bankruptcy filing was approved by 100% of the preferred members and 63.5% of the common unit members (including approval by the new members, but not Crossroads).  So, Crossroads moved to dismiss the bankruptcy petition on the basis that it was not authorized.  Dismissal was opposed by the debtor and a creditor holding a senior subordinated unsecured note in the amount of $7.25 million that constituted at least 80% of the total scheduled unsecured claims.

The court's description of the resulting circumstances provides some insight on factors that appear to have influenced its decision:

Debtor in its present guise is defunct; this may be the only thing on which the parties to this motion agree.  Crossroads would apparently like to wind it up; it has already spent more than $1 million trying to bring this about in the State Court and appears to be obviously willing to spend several millions more – at least if it can charge the bill to the Debtor.  Debtor, which is and always has been under the control of Levinson, would apparently like to find a way to buy out Crossroads and preserve Debtor as a functioning entity – something we call a reorganization – but it also agrees that the parties must be divorced.  That is something that the Bankruptcy Code can bring about, cheaply and efficiently, with due regard for rights of creditors, who should not have to stand idly by while insiders litigate themselves into penury and destroy whatever business there was.

In ruling on the motion, the court began by noting that the Bankruptcy Code does not establish specific rules regarding the authority to file a petition.  Bankruptcy courts initially look to state law to define what is required.  However, there can be countervailing federal interests that affect state rights.

The court also noted that part of the goal in enacting the Bankruptcy Code was to avoid the costly and lengthy litigation regarding the threshold issue of whether the debtor was allowed to seek bankruptcy engendered by the prior bankruptcy act.  It interpreted Crossroads' allegation that the new investors were not "accredited investors" as an argument that:

[T]his Court must put the chapter 11 case on hold indefinitely while we attempt to locate each of the new investors, force them to disclose their income and assets and the income and assets of their spouses as of 2010, and doubtless depose them.  According to Crossroads, the Court must then hold an evidentiary hearing to establish whether each of the individuals was an Accredited Investor three years ago.

The court questioned the relevance of the status of the new investors as accredited investors under securities law in the first place.  But regardless, the court declined to accept Crossroads' invitation to investigate the matter on the basis that it would be "wrong as a matter of federal policy."

Considering various factors, the court concluded that the record was "adequate to sustain the petition and on that record finds that Crossroads has not sustained its burden to justify the relief it seeks."  Given this holding, the court noted that it did not need to go on to consider whether the requirement for a super majority vote, which gave a minority a veto over a chapter 11 filing, was valid.

This case seems to go farther afield than usual in its analysis of authority to file.  In reading this decision one gets the sense that the court was offended by the position taken by Crossroads that the bankruptcy case should be dismissed given that (1) it was itself seeking dissolution, and (2) it was pursuing its position at significant expense to the debtor.  The court also appeared to have reservations about giving a minority member the power to veto a bankruptcy petition that everyone else thought was in the best interests of the debtor.  In seeking to persuade a court, it is worth remembering that the underlying context and policy considerations may be a significant factor in the court's decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki Harding
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions