Insight Terminal Solutions Beat Autumn Wind Lending, LLC In This Round In Court. Something only posted for interest and record. Nonetheless. An interesting behind-the-scenes battle as mentioned in ” Delaware Bankruptcy Court Rules that Bankruptcy Blocking Right in Debtor’s Corporate Charter Violates Federal Public Policy” by Jones Day:
Another notable case is In re Insight Terminal Solutions, LLC, 2019 WL 4640773 (Bankr. W.D. Ky. Sept. 23, 2019). In 2018, Autumn Wind Lending, LLC (“Autumn Wind”) provided up to $6.8 million in financing under a term loan facility to Delaware limited liability company Insight Terminal Solutions, LLC (“ITS”). The original maturity date of the loan was December 31, 2018. The loan was guaranteed by an ITS affiliate holding all of the outstanding ITS membership units and secured by a lien on substantially all of the assets of ITS and the guarantor. The pledged collateral included the ITS membership units held by the guarantor as well as certain warrants for ITS membership units.
In connection with an extension of the maturity date of the loan to June 30, 2019, Autumn Wind amended the loan agreement to include a bankruptcy rights waiver. The waiver provided that: (i) if the loan was not paid in full on or before June 30, 2019, and Autumn Wind refused to grant an additional extension of the maturity date, the guarantor agreed to relinquish its rights to the pledged ITS membership units; and (ii) ITS and the guarantor agreed to amend their respective organizational documents so that neither would be permitted to file for bankruptcy protection unless they first obtained the prior written consent of all holders of ITS membership units and any party holding warrants for such units. Both ITS and the guarantor later amended their operating agreements to include the bankruptcy rights waiver.
On July 1, 2019, ITS and the guarantor defaulted on the loan. The following day, Autumn Wind notified ITS and the guarantor that it intended to retain the pledged ITS membership units and that, in accordance with the Uniform Commercial Code (“UCC”), they had 20 days to object. After further amending their operating agreements to authorize a bankruptcy filing and adopting resolutions authorizing such a filing, ITS and the guarantor (collectively, “debtors”) filed for chapter 11 protection in the Western District of Kentucky on July 17, 2019—prior to the expiration of the 20-day period.
Autumn Wind moved to dismiss the chapter 11 cases, arguing that, in accordance with the bankruptcy rights waiver, the debtors lacked the authority to file for bankruptcy. According to Autumn Wind, when the debtors defaulted on the loan, the guarantor’s right to exercise voting and/or consensual rights and powers over the ITS membership units ceased immediately, and such rights became vested solely and exclusively in Autumn Wind. Moreover, Autumn Wind contended that, in its capacity as a holder of warrants for ITS membership units, Autumn Wind’s consent was required for any bankruptcy filings by the debtors.
The bankruptcy court denied the motion to dismiss. Initially, the court found that, by amending their operating agreements in July 2019 and adopting resolutions authorizing a bankruptcy filing, the debtors had authority under Delaware law to file for chapter 11 protection.
The debtors argued that the ITS membership units were never transferred to Autumn Wind because it did not comply with the UCC’s strict foreclosure requirements. The court acknowledged that “this is a compelling argument.” However, the court noted that it need not address this argument because “there is a more compelling reason” to deny the motion to dismiss—specifically, the bankruptcy rights waiver violated federal public policy.
The court explained as follows:
Autumn Wind’s primary witness testified that it was well aware that a contractual provision limiting a debtor’s right to seek relief under the Bankruptcy Code was legally unenforceable as against public policy. It was for this very reason that Autumn Wind included terms in the waiver and amendment that if Debtors did not achieve additional financing during the 3-1/2 month period they provided, then the agreement would provide a prohibition on filing for bankruptcy under this amendment. On July 1, 2019, the collateral would be turned over to Autumn Wind. Autumn Wind believed that by using this provision, they would avoid the public policy issue … However, the terms of the surrender of the collateral were not fully consummated as there was no completion of the strict foreclosure process. Furthermore, the attempt to circumvent the bankruptcy laws and public policy by “circuitry of arrangement,” were ineffective. Autumn Wind tried to get around this argument by making itself an equity holder, however, the process to achieve this was not completed. Autumn Wind did not become an equity holder, nor did they become the owner of the collateral through the strict foreclosure process. Furthermore, attempts to limit the Debtors’ access to the bankruptcy process were against public policy and invalid.
Eventually, this was a loss Insight Terminal Solutions. Now, the bankruptcy court has arranged for Autumn Wind Lending to take over Insight Terminal Solutions.
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