The Independent Manager's Role in Bankruptcy

A recent court decision in Illinois has caught the attention of the lending and corporate governance world, and it's worth taking a closer look at what happened and why it matters.

Picture this: It's January 2024, and a bankruptcy court in Illinois just made a significant ruling that essentially said, "If your company agreed to have an independent manager sign off on bankruptcy filings, you can't just skip that step when things get tough."

Here's the story: A company (technically, a Delaware LLC) had borrowed $26 million and put up some Chicago property as collateral. As part of the loan agreement, they had to bring on an independent manager who would need to approve any major decisions – especially filing for bankruptcy. This is pretty common in lending agreements these days, as it helps protect lenders' interests.

Well, when the loan came due and the company couldn't pay, things got interesting. The lender started foreclosure proceedings, and guess what the company did? The day before the foreclosure hearing, they filed for Chapter 11 bankruptcy. The catch? They didn't bother getting their independent manager's approval – in fact, they didn't even tell her about it!

The lender, understandably not thrilled about this, asked the court to throw out the bankruptcy case. The company tried to defend itself with two arguments: first, they claimed the independent manager had already resigned (spoiler alert: she hadn't), and second, they suggested she had indirectly approved the filing after the fact.

The court wasn't buying either argument. They found that while the independent manager had submitted a resignation letter dated August 2022, she didn't actually send it until April 2024 – after the bankruptcy filing. In fact, the court discovered she resigned partly because she was upset about being left out of the bankruptcy decision!

But here's where it gets really interesting. The company tried arguing that requiring an independent manager's approval for bankruptcy filing was against public policy – essentially saying it unfairly restricted their right to file for bankruptcy. The court disagreed, explaining that having an independent manager isn't automatically a problem as long as they have proper fiduciary duties (meaning they're legally required to act in the best interests of the company, not just the lender).

So what's the big takeaway from all this? A few key points:

First, if your company has agreed to have an independent manager approve major decisions, you can't just ignore that requirement when things get tough. These provisions have real teeth, and courts will enforce them.

Second, corporate governance matters – a lot. Following your organization's rules and getting the proper approvals isn't just bureaucratic red tape; it's essential for protecting your company's interests and options.

Finally, while independent manager provisions in LLC agreements are generally enforceable, they need to be structured properly. The independent manager needs to have real fiduciary duties, not just serve as a roadblock.

For businesses and their advisors, this case serves as a reminder to take corporate governance seriously and ensure all necessary approvals are in place before making major decisions, especially filing for bankruptcy. It's much better to handle these issues upfront than to have your bankruptcy case dismissed when you need protection the most.