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Can Kentucky businesses contract bankruptcy rights away?

It is very likely that few businesses go into operation with the idea that they will go bankrupt. Generally business owners are looking to run profitably for the foreseeable future. However, the possibility of failure always exists, as business is a risky proposition even under favorable circumstances. Further, the use of business bankruptcy may be in the best interests of the business' owners and investors in many cases, as it may allow the business to reorganize and shed useless debt. Of course, a business' creditors may not always see it that way, and sometimes will seek to minimize the possibility of a bankruptcy filing.

One way to do this is to condition some act, such as lending money, on the borrower relinquishing the right to file bankruptcy. Doing this explicitly, such as through a contract barring the borrower form filing bankruptcy will generally not be enforced by the courts on public policy grounds. However, there are some parties that attempt to get creative with such ideas.

In Kentucky, for example, a federal court has struck provisions in an operating agreement that basically gave a lender the power over whether the borrower could file for bankruptcy. Basically, as a condition for taking the loan, the borrowing company had to place provisions in its operating agreement that gave away much of its own ability to decide if bankruptcy was the proper course for the company. It also gave veto power to the lender, who could simply not allow the borrower to file bankruptcy even if an independent body decided it was in the company's best interests.

The Bankruptcy Court for the Eastern District of Kentucky shot this strategy down, finding that whether or not to file a business bankruptcy was a business decision that needed to be made by the managers of that business, rather than another interested party that had no incentive to take into account the needs of the business.

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