Winter 2014 • Issue 50, page 5

The Right to File - Who Does It Belong To?

By McDow, Ashley*

It is well settled that “[a] person filing a voluntary bankruptcy petition on a corporation's behalf must be authorized to do so, and the authorization must derive from state law.” Price v. Gurney, 324 U.S. 100, 106, 65 S.Ct. 513, 516, (1945). Although it is clear what this means for the factions of a corporate entity, it is less than clear what this means for a court-appointed receiver or an assignee for the benefit of creditors. Specifically, is a receiver authorized to file a bankruptcy petition, and if so, from where does this power derive? In addition, are there any risks to a receiver to commencing a bankruptcy case on behalf of a corporate entity, particularly if the relevant factions do not support the filing?

Although “it is well settled that a bankruptcy filing is a ‘specific act requiring specific authorization,’”1 there is no provision in Title 11 of the United States Annotated Code which proscribes who has the authority to file a petition on behalf of a debtor. Furthermore, although it has become well settled law throughout the country that bankruptcy courts will look to state law and corporate documents to resolve this issue,2 where a court-appointed receiver files a voluntary petition on behalf of the receivership entity, bankruptcy courts focus primarily on the content of the order(s) which appointed the receiver, as well as the law that authorized the court to appoint the receiver, to determine whether the rights conferred upon the receiver encompassed the right to file a voluntary petition on behalf of the receivership entity. Where the order contains language such as “the receiver ‘is empowered to do any and all acts necessary to the proper and lawful conduct of the receivership,’”3 courts have generally held that the receiver possessed the requisite authority to file the petition on behalf of the corporate entity.

The resounding position of courts throughout the country is that a receiver has the authority under state and federal law to file a bankruptcy petition for the receivership entity.4 However, it is important to note that even if the receiver has the authority to file a voluntary petition, this right is concomitantly held by the corporate directors of the entity, as it is “fundamental that a state court receivership proceeding may not operate to deny a corporate debtor access to the federal bankruptcy courts [citations omitted] and it has been held that an order in a state court receivership specifically restraining the debtor corporate, its stockholders, officers and directors from instituting federal reorganization proceedings is an unconstitutional deprivation of the right to bankruptcy relief.”5 In an attempt to harmonize the constitutional right of the entity to seek bankruptcy protection irrespective of the presence of a receiver with the desire to ensure that the members of the corporate entity not take any actions which could be harmful to the entity, some courts have indicated that leave of the court is required for a corporate entity to file a voluntary petition following the appointment of a receiver.6

In order to ensure that bankruptcy is a viable alternative for a receiver, both the party who sought the appointment of the receiver and the receiver should be aware of the state law which governs who has the authority to take certain actions on behalf of the receivership entity. Additionally, it is incumbent upon the parties to ensure that the order appointing and/or confirming the appointment of the receiver includes broad language with respect to the powers conferred upon the receiver, as this language may be relied upon by the bankruptcy court in deciding whether the filing of the bankruptcy petition was proper, particularly where state law is not clear with respect to the issue of who has the authority to act on behalf of the entity in such a situation.

1 In re N2N Commerce, Inc., 405 B.R. 34, 41 (D.Mass. 2009).
See In re Statepark Building Group, Ltd., 316 B.R. 466, 470 (N.D.Tex. 2004) citing Phillips v. First City Texas-Tyler, N.A. (In re Phillips), 966 F.2d 926, 934 (5th Cir. 1992) (“[w]ithout further direction from Congress, we will continue to look to state law to determine which people have authority to seek federal bankruptcy protection on behalf of state-created business entities”); see also Keenihan v. Heritage Press, Inc., 19 F.3d 1255, 1258 (8th Cir. 1994) citing Price v. Gurney, 324 U.S. 100, 106 (1945) (“[a] person filing a voluntary petition on a corporation’s behalf must be authorized to do so, and the authorization must derive from state law.”).
3 In re Statepark Building Group, Ltd., at 472.
4 Chitex Communications Inc. v. Kramer, 168 B.R. 587, 590 (S.D.Tex. 1994); In re Gen-air Plumbing & Remodeling, 208 B.R. 426, 431 (Bankr. N.D.Ill. 1997); In re Monterey Equities-Hillside, 73 B.R. 749, 752 (Bankr.N.D.Cal. 1987).
5 In re Corporate and Leisure Event Productions, Inc., 351 B.R. 724, 731 (D.Ariz. 2006); In re Milestone Educational Institute, Inc., 167 B.R. 716, 720 (D.Mass. 1994) citing In re Prudence, 79 F.2d 77, 80 (2d Cir. 1935); See also Cash Currency Exch. Inc.. v. Shine, 762 F.2d 542 (7th Cir. 1985) (“…the exclusivity of an administrative receiver’s title to all assets under state law is irrelevant to the determination whether a particular entity may file for bankruptcy relief….[A] corporation may not be precluded by state law from availing itself of federal bankruptcy law.”).
6 U.S. v. Vanguard Inv. Co. Inc., 667 F. Supp. 257, 259-60 (M.D.No.Car. 1987) (“Vanguard should have moved this Court for leave to file a bankruptcy petition. Such action would have properly brought before the Court the issues of whether Vanguard is entitled to file a bankruptcy petition as a matter of equitable discretion. However, because Vanguard chose to act without authority and in violation of the TRO-receivership, its purported position is without legal effect.”). See also Securities & Ex. Comm.. v. Lincoln Thrift Ass’n., 577 F.2d 600 (9th Cir. 1978).

Reprinted with permission of the TMA Ohio Chapter Newsletter, December 2013.

*Ashley McDow practices in bankruptcy and commercial law at the Los Angeles office of BakerHostetler focusing on the representation of debtors-in-possession, Chapter 7 and 11 trustees and other entities in bankruptcy proceedings.