Louisville Bankruptcy Clinic

Hotel Group Loan

Janee Hotel Group formed Lexington Hospitality Group (LHG) and acted as its manager. Janee acquired a hotel with acquisition financing provided by PCG Credit Partners (PCG).

PCG required LHG to include certain “Bankruptcy Restrictions” in its operating agreement. As a condition to the loan, the lender required the affirmative vote of an “Independent Manager” and 75% of the members to authorize a bankruptcy. As well as the advance, written affirmative vote of the lender.

Eventually, LHG filed for bankruptcy without satisfying the above requirements. PCG moved to dismiss the bankruptcy as unauthorized.

The court found that Kentucky law authorized LHG to file bankruptcy, since filing bankruptcy is within the expansive decisional authority reserved to managers under the Kentucky limited liability company act. The court concluded that the Independent Manger provisions were not adequately drafted to preserve the Bankruptcy Restrictions.

The court also took issue with the requirement that PCG consent to any LHG bankruptcy. Most troubling was that “PCG [had] no restrictions and no fiduciary duties to LHG that might limit self-interested decisions that ignore the best interest of [LHG].” The court, therefore, held that the Bankruptcy Restrictions as a whole “serve[d] only one purpose: to frustrate LHG’s ability to file bankruptcy;” and accordingly, were unenforceable.

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