Q: I was appointed receiver for a corporation.
My order of appointment gives me, and me alone, the power to file
bankruptcy for the corporation. The former president of the corporation is
threatening to file a bankruptcy petition for the corporation in an
apparent attempt to oust me. Can he do that?
A: The answer depends on the specific language of your order of
appointment. If it specifically vests you, and only you, with the power to
file a voluntary bankruptcy for the corporation, then the former president
has no right to do so. A number of recent cases have pointed out there is
a major difference between prohibiting a corporation, or even a
partnership, from filing a bankruptcy, which cannot be done, and
specifying who has the ability to commence a bankruptcy for a corporation
or a partnership.In one of the most recent
cases to discuss this issue, Sino Clean Energy Inc. by and through
Baowen Ren vs. Seiden, 563 B.R. 677 ( Nev. 2017), the order appointing
the receiver for a corporation specifically empowered the receiver to pick
a new board of directors for the corporation. The receiver did so,
replacing the old board. Members of the former board filed a voluntary
petition on behalf of the corporation. The receiver moved to dismiss the
bankruptcy, arguing that the former directors had no authority to file the
bankruptcy petition on behalf of the corporation. The bankruptcy court
agreed and dismissed the bankruptcy. The directors appealed and the
district court affirmed. The bankruptcy court had concluded that the case
must be dismissed because only a corporation’s current directors can act
on its behalf. Therefore, the former directors had no authority to act for
the corporation and file the bankruptcy petition. The district court
agreed with this analysis. While the appellants argued that a state cannot
prevent a corporation from filing bankruptcy, the district court pointed
out that the appellants were blurring the line between the rule preventing
states from barring corporations from filing bankruptcy and the long
standing rule empowering states to determine who gets to file bankruptcy
for an entity in the first place. It pointed out that state law governs
whether a person is authorized to file a bankruptcy petition on behalf of
a corporation. It distinguished cases deciding otherwise, because they too
appeared to have blurred this distinction. In support of its decision the
court relied on an older Ninth Circuit case, Oil & Gas vs. Duryee,
9 F.3d 771 (9th Cir. 1993). There a rehabilitator was appointed for an
insurance company and the former president filed a bankruptcy petition for
the company. In affirming dismissal the court held that the former
president had no power to file a petition on behalf of the entity. “[W]hen
Becker-Jones purported to file the bankruptcy… he was an impostor; his
action is null and void.” Id. at 773.
In an unreported decision from the Central
District of California, In re Licores, 2013 WL 6834609 (C.D. Cal.
2013), the District Court upheld the dismissal of a bankruptcy petition
where a receiver had been appointed over a partnership. The order
appointing the receiver vested the receiver with the sole power to file
bankruptcy on behalf of the partnership and specifically ordered that
certain former partners were prohibited from filing a bankruptcy petition
on behalf of the partnership. Despite that fact, the former partners filed
a petition anyway. The bankruptcy court granted the receiver’s motion to
dismiss, finding the debtor lacked authorization to file bankruptcy in
view of the order vesting the receiver with the exclusive authority to
file. In affirming, the district court again distinguished the argument
made by appellants that states lack authority to enter orders preventing
corporate officers or partners from the commencing bankruptcy proceedings
because that was not what occurred. It points out that state law governs
who may act on behalf of an entity outside of bankruptcy and, therefore,
may determine who may bring an entity into bankruptcy. The receivership
order specified who may and who may not file bankruptcy for the
partnership and that was permissible. See, Commodity Futures Trading
Commission v. FITC Inc., 52 B.R. 935 (N.D. Cal. 1985) (“Once a court
appoints a receiver, the management loses the power to run the
corporation’s affairs. The receiver obtains all the corporation’s power
and assets. Thus it was the receiver, and only the receiver, who this
court empowered with the authority to place FITC in bankruptcy.”).
Parties drafting the receivership orders who seek
to prevent ousted principles or control persons from divesting the
receiver should make sure that the order of appointment makes clear who
has the power and who doesn’t have the power to act on behalf of the
entity placed in receivership, including the power to commence a
bankruptcy case. Something along the following lines might be considered:
“The receiver shall be vested with, and is authorized, directed and
empowered to exercise, all of the powers of the receivership defendant,
its officers, directors, shareholders and general partners or persons who
exercise similar powers and performs similar duties; and the receivership
defendant, its officers, agents, employees, representatives, directors,
successors in interest, attorneys in fact and all other persons acting in
concert or participating with them, are hereby divested of, restrained and
barred from exercising any powers vested herein in the receiver.”
*Peter A. Davidson is a Partner of Ervin
Cohen & Jessup LLP a Beverly Hills Law Firm. His practice includes
representing Receivers and acting as a Receiver in State and Federal
Court.
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