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).
2 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. |