United States District Court, E.D. Arkansas, Western Division
OPINION AND ORDER
LEON HOLMES UNITED STATES DISTRICT JUDGE.
Court Partners Limited Partnership is an Arkansas limited
partnership consisting of three partner-entities: Centerline
Credit Enhanced Partners LP, Chartermac Credit Enhanced SLP
LLC, and NHDC Texas Affordable Housing, Inc. Centerline is a
limited partner, Chartermac is a special limited partner,
NHDC Texas is the general partner of Squire Court. NHDC
Texas, on behalf of Squire Court, petitioned for Chapter 11
bankruptcy in the bankruptcy court for the Eastern District
of Arkansas. This was done without the consent of and against
the wishes of the limited partners, who moved the bankruptcy
court to dismiss the petition. After an evidentiary hearing,
the bankruptcy court granted that motion. NHDC Texas, acting on
behalf of Squire Court, and National Community Renaissance
Development Corporation, an affiliate of NHDC Texas,
appealed. Centerline and Chartermac have cross-appealed.
Wells Fargo Bank, N.A., the trustee with respect to revenue
bonds issued by the Pulaski County Public Facilities Board
secured by the assets of Squire Court, also is an appellee.
This Court affirms.
Court was originally formed on June 27, 2005, for the purpose
of acquiring, operating, and leasing a low-income apartment
complex. It had a single general partner and a single limited
partner. Squire Court planned to purchase real estate and
construct and lease 155 apartment units that would make the
partnership eligible for low-income housing tax credits. On
October 1, 2006, Squire Court took on new partners, and its
partnership agreement was amended to reflect the changes. The
original general and limited partner both withdrew from
Squire Court. Centerline, then known as RCC Credit Facility,
L.L.C., became a limited partner, committing to contribute
$1, 392, 000 in accordance with specified terms and
conditions. In return, Centerline was given a 99.98% interest
in Squire Court. Chartermac, then known as Related Direct SLP
LLC, also became a limited partner and was given a .01%
interest in Squire Court. NHDC Texas became Squire
Court's sole general partner and was given a .01%
interest in Squire Court.
the amended partnership agreement, NHDC Texas was given
exclusive authority to manage and control Squire Court's
business, assets, and affairs. The agreement, however,
required unanimous consent of the partners before Squire
Court could “file a petition seeking, or consent to,
reorganization or relief under any applicable federal or
state law relating to bankruptcy.”
“Development Deficit Guaranty Agreement” was also
executed at this time. As its name suggests, the guaranty
agreement obligated the guarantor to cover certain cost
overruns. These costs included any “Development
Deficit”-costs of acquiring and developing the
apartment complex (most notably a $3, 400, 000 mortgage) that
exceeded cash flow and other revenue streams-and “all
expenses of operating and maintaining the Improvements in
excess of the Gross Collections to the extent necessary to
maintain Break-Even Operations.” National
Community Renaissance Development Corporation, then known as
National Housing Development Corporation, is the guarantor
under terms of the agreement. National Community Renaissance
is an affiliate of NHDC Texas, and the guaranty agreement
sets out that it stood to benefit from the acquisition by the
limited partners of a partnership interest in Squire Court.
The guaranty agreement also states that the guaranty induced
the limited partners to acquire their interests in Squire
March 2016, NHDC Texas ceased making payments on Squire
Court's mortgage. Wells Fargo Bank, N.A., the mortgage
servicer, accelerated the maturity date of the mortgage.
Although the terms of the guaranty agreement required
National Community Renaissance to pay the accelerated amount,
it refused. In June 2016, the limited partners filed suit in
Arkansas state court against National Community Renaissance
to enforce the terms of the guaranty agreement. While that
action was ongoing, NHDC Texas filed a voluntary petition for
bankruptcy on behalf of Squire Court on September 12, 2016.
Before filing that petition, NHDC Texas sought consent from
Centerline and Chartermac, but they declined to consent. NHDC
Texas then filed the petition anyway. Centerline and
Chartermac filed a motion seeking to dismiss the petition.
and Chartermac argued that the bankruptcy petition should be
dismissed because (1) NHDC Texas lacked corporate authority
to file it, (2) NHDC Texas filed it in bad faith, and (3) the
bankruptcy court should abstain and dismiss the case under 11
U.S.C. § 305(a). They also moved for sanctions based on
their bad-faith-filing claim. The bankruptcy court held that
NHDC Texas filed the petition without authority and granted
the limited partners' motion to dismiss. The bankruptcy
court found no evidence that NHDC Texas filed the petition in
bad faith, and it rejected the limited partners' argument
under 11 U.S.C. § 305(a). It therefore denied their
motion for dismissal on those grounds as well as their motion
for sanctions. NHDC Texas and guarantor National Community
Renaissance appealed the dismissal. The limited partners
cross appealed, arguing that the bankruptcy court erred in
denying their motion as to bad faith, abstention under 11
U.S.C. § 305(a), and sanctions.
appellants principally argue on appeal that the provision in
the amended partnership agreement requiring unanimous consent
of the members to file for bankruptcy is void as a matter of
federal public policy. They contend that federal public
policy provides that only a fiduciary may decide whether an
entity will or will not seek relief under the bankruptcy
code. They interpret the unanimous-consent provision as a
“veto” held in the hands of self-interested
parties who have no obligation to put the partnership's
interests ahead of theirs. They also argue that the limited
partners are unable to act in the best interests of the
partnership because they stand in conflict with partnership
by way of their contribution obligations and by way of their
decision to enforce the guaranty agreement rather than seek
bankruptcy. The combination of conflicting interests and a
lack of fiduciary duties, they say, frustrates the
partnership's constitutional right to seek bankruptcy
relief. The appellants alternatively request that the case be
remanded for additional factual development.
limited partners' arguments relating to their cross
appeal address the bankruptcy court's denial of their
arguments below. They continue to request sanctions against
the appellants. The limited partners, as they did before the
bankruptcy court, allege a collusive scheme between NHDC
Texas and National Community Renaissance that they argue
proves bad faith and entitles them to sanctions.
Court sits as an appellate court when reviewing a bankruptcy
court's judgment. In re Falcon Prods., Inc., 497
F.3d 838, 841 (8th Cir. 2007). Legal questions are reviewed
de novo, and factual findings are reviewed for clear error.
In re Vote, 276 F.3d 1024, 1026 (8th Cir. 2002).
Whether NHDC Texas had authority to file the bankruptcy
petition is a legal question. See Keenihan v. Heritage
Press, Inc., 19 F.3d 1255, 1258 (8th Cir. 1994).
“A person filing a voluntary bankruptcy petition on a
corporation's behalf must be authorized to do so, and the
authorization must derive from state law.” Id.
(citing Price v. Gurney, 324 U.S. 100, 106, 65 S.Ct.
513, 516, 89 L.Ed. 776 (1945)); see also Collier on
Bankruptcy ¶ 2-301 (Alan N. Resnick & Henry J.
Sommer eds., 16th ed.) (explaining that”[n]either the
Code nor the Federal Rules of Bankruptcy Procedure identify
which party to a partnership may file a voluntary bankruptcy
petition on behalf of a partnership, ” and so
“applicable state law or the governing partnership
documents determine who has the authority to file a
partnership's voluntary bankruptcy petition”). The
Supreme Court long ago instructed that if a court
“finds that those who purport to act on behalf of the
corporation have not been granted authority by local law to
institute the proceedings, it has no alternative but to
dismiss the petition. It is not enough that those who seek to
speak for the corporation may have the right to obtain that
authority.” Gurney, 324 U.S. at 106, 65 S.Ct.
Arkansas, “the partnership agreement governs relations
among the partners and between the partners and the
partnership.” Ark. Code Ann. § 4-47-110(a). The
amended partnership agreement here requires all partners to
consent to a voluntary bankruptcy petition. All partners did
not consent. The appellants seek to invalidate the
unanimous-consent clause on the grounds that it violates
federal public policy. Unless the clause is invalidated, the
bankruptcy petition was filed without authorization and must
appellants rely on three cases in support of their
proposition: In re Lake Michigan Beach Pottawattamie
Resort LLC, 547 B.R. 899 (Bankr. N.D.Ill. 2016); In
re Intervention Energy Holdings, LLC, 553 B.R. 258
(Bankr. D. Del. 2016); and In re Bay Club Partners 472,
LLC, 2014 WL 1796688, at *1 (Bankr. D. Or. May 6, 2014).
These cases all begin with the uncontested premise that
entities, like individuals, cannot contract away access to
bankruptcy relief. See Continental Ins. Co. v. Thorpe
Insulation Co., 671 F.3d 1011, 1026 (9th Cir. 2012)
(“This prohibition of prepetition waiver has to be the
law; otherwise, astute creditors would routinely require
their debtors to waive.” (quotation and citation
omitted)); In re Pease, 195 B.R. 431, 434-35 (Bankr.
D. Neb. 1996) (“[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 Bankruptcy Code preempts the
private right to contract around its essential
Lake Michigan Beach, the debtor defaulted on its
debt to a creditor and agreed to give the creditor
“special member” status if the creditor promised
not to pursue remedies for the default. 547 B.R. at 903-04.
The debtor amended its operating agreement to make the
creditor a member of the debtor with the right to approve or
disapprove of any “Material Action”-defined to
include institution of bankruptcy proceedings-by the debtor.
Id. As a special member, the creditor had no
interest in the profits or losses of the debtor, no right to
distributions, no tax consequences, and was not required to
make capital contributions to the debtor. Id. The
creditor “was kept separate and apart from the Debtor
in all ways but for its authority to block the Debtor from
petitioning for bankruptcy relief.” Id. In
Intervention Energy, the debtor defaulted on its
debt to a creditor and agreed to make the creditor a common
member if the creditor agreed to waive all defaults. 553 B.R.
at 261. The debtor amended its operating agreement to require
unanimous consent from its members to file for bankruptcy.
Id. The debtor issued 22, 000, 001 “Common
Units” to interest holders. Id. at 260. The
creditor held 1 Common Unit. Id. In Bay
Club, the debtor received a loan from a creditor to
purchase a large apartment complex. 2014 WL 1796688, at *1.
The creditor requested that a bankruptcy waiver provision be
added to the debtor's operating agreement along with its
requests for other restrictive covenants. Id. at *3.
The provision recited that the debtor “intends to
borrow money with which to acquire the Property, and to
pledge the Property and related assets as security
therefor.” Id. It went on to state that the
debtor “shall not institute proceedings to be
adjudicated bankrupt or insolvent” until “the
indebtedness secured by that pledge is paid in full.”
court in Intervention Energy noted, the form that
such a contractual waiver takes is limited only by the
resourcefulness of attorneys. See 553 B.R. at 264.
While each case involves a different contractual provision,
in all of the cases the provision amounted to a debtor
agreeing to a prepetition waiver. Moreover, each case
involved a creditor limiting a debtor's right to seek