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BankruptcyFeaturesLitigationThe Bankruptcy Strategist

A Cautionary Tale for Lender Overreaching into Bankruptcy Remoteness

By Jeffrey S. Greenberg

Bankruptcy remote structures are often used to protect against the impact of default under a credit facility. A common mechanism is organizational documents requiring an outside director or member's vote to authorize a bankruptcy filing. In In re Lexington Hospitality Group, LLC, 577 B.R. 676 (2017), however, the United States Bankruptcy Court for the Eastern District of Kentucky found that such a requirement implemented at the behest of a lender, among other bankruptcy restrictions, and where there was not true independence frustrated the important federal public policy of favoring fresh starts in bankruptcy.

Lexington Hospitality Group is a cautionary tale to secured lenders with reliance in bankruptcy remoteness. That these lenders might hold meaningful equity stakes rather than minority positions has not yet proved meaningful.

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