I was involved in a case earlier this year where the Superior Court appointed a Receiver to take control of the assets and management of a corporation. Notwithstanding the appointment of a Receiver, the owners filed a Chapter 7 petition. The Bankruptcy Court ultimately abstained and dismissed the case based upon the equities of the case and because the petition was filed without the approval of the directors. The court did not need to reach the issue of whether the officers and directors had authority to file the petition after the Receiver was appointed, but intimated in the hearing that the Receiver could not prevent the filing.
The issue was recently addressed by an Arizona Bankruptcy Court. In In re Corporate and Leisure Event Productions, Inc., 2006 Bankr. LEXIS 2074 (Bankr. D. Ariz. September 5, 2006), the State Court appointed a Receiver and expressly authorized the Receiver to remove the officers, directors and any other persons from the management of the debtor (which the Receiver concluded was a multi-million dollar Ponzi scheme). The State Court also expressly enjoined the defendants therein from filing a Bankruptcy petition or taking any other action to interfere with the Receivership. Nevertheless, the principal of the debtor filed Chapter 11 petitions on behalf of the debtor and related corporations and removed the State Court proceedings to Bankruptcy Court. The Receiver filed an Emergency Motion to Dismiss Unauthorized Chapter 11 Petition.
The Court denied the Motion to Dismiss. Rather than summarize, I have included several excerpts from the opinion
This dispute is not governed by the Bankruptcy Code. Indeed, the complaining creditors and their Receiver cannot point to any provision of the Bankruptcy Code that has even allegedly been violated by these filings. But while intracorporate disputes would ordinarily be governed by the law of the state of incorporation, this particular kind of creditor-driven intracorporate dispute is governed instead by federal common law, as will be seen.
Much of the history of bankruptcy law deals with efforts by creditors to escape bankruptcy court jurisdiction or to enforce remedies provided by state law that are unavailable under bankruptcy law. Before this country had a federal bankruptcy law, a debtor who had been discharged by one state’s insolvency law remained at risk that creditors could send him to debtor’s prison in another state, if he ventured there. It was to put an end to this practice that the Constitution conferred on Congress the unique uniform bankruptcy power. Once Congress exercises that power it preempts and supersedes all state bankruptcy and insolvency laws and other state law remedies that might interfere with the uniform federal bankruptcy system.
As Justice Story there noted, the Bankruptcy Act of 1841 did not specifically authorize bankruptcy courts to enjoin state courts, and in fact the Judiciary Act of 1793 expressly prohibited federal courts from enjoining state courts. Consequently if a state court first acquired jurisdiction over a debtor’s assets such as through a receivership, a subsequent bankruptcy court arguably could not reach them. That is virtually identical to the kind of race to the courthouse that the creditors here claim to have won. But Congress closed this loophole in the Bankruptcy Act of 1867, in which Congress for the first time amended the Judiciary Act of 1793 to expressly permit federal district courts sitting in bankruptcy to stay proceedings in state courts
Given this background, it is not surprising that all courts to have addressed the precise issue after 1867 — a creditor’s argument that a receivership order removes authority for a debtor or its corporate constituents to file a bankruptcy case — have concluded that state court receivership orders cannot bar debtors from resorting to the exclusive bankruptcy court jurisdiction.
It is of course true that bankruptcy courts generally look to state law to determine who is authorized to file a voluntary petition for a corporation, partnership or other kind of organizational entity. This rule, however, derives not from the language of the Bankruptcy Code (or its predecessor Bankruptcy Act), but rather from federal common law in the absence of statutory directive.
Just as obviously, however, there is a federal common law exception to this reliance on state law when the state law is in the form of a receivership order that attempts to preclude any of the original constituents of the organizational entity from filing a petition on its behalf, in order to maintain the state court remedy that has been obtained by creditors. It makes no difference whether the corporate officers and directors were actually removed by the receiver or the receivership order merely enjoins their interference or filing of a petition. In either case, state law withdraws their authority to file for bankruptcy relief and yet in both cases the unanimous federal common law holds that they are nevertheless entitled to do so.
Nor is it any answer to say that that analysis should not apply here because this Receiver did have authority to file for the receivership entities. Congress obviously intended bankruptcy relief to be available for the benefit of many of the constituents of a business entity, including not only the creditor interests but also the equity interests and perhaps those of employees and customers as well. While bankruptcy case law generally refers to state law to determine who has eligibility to file the petition, it unanimously refuses to do so (in the absence of an intracorporate dispute) when state law has provided a creditor’s remedy to vest that authority in a receiver.
(many footnotes omitted).
However, the Court did note that in some cases it would be appropriate to abstain from exercising jurisdiction over the case pursuant to 11 U.S.C. §305, or continue the “Receiver in Possession” in a Chapter 11 –
Finally, it is clear that Congress did not intend a bright-line rule to govern these issues either way. Even though the ordinary rule is that receivers must turn over estate property to a debtor in possession or trustee, Code § 543(b)<!—->, the bankruptcy courts have discretion to waive that requirement if the interests of creditors would be better served by continuing the receiver in possession. Code § 543(d)(1)<!—->. And although the existence of bankruptcy jurisdiction may be undeniable, bankruptcy courts nevertheless have discretion to abstain or suspend proceedings if "the interests of creditors and the debtor would be better served." Code § 305(a)(1)<!—->. As the Supreme Court held in resolving a somewhat similar conflict between two federal statutes, "[t]he bankruptcy court is a court of equity and, in making this determination it is in a very real sense balancing the equities." The express powers to excuse turnover or abstain provide ample authority to balance the equities based on the facts of each individual case, and provide a more sensible and fact-based resolution than any bright-line test of corporate authority or race to the courthouse could provide. That is obviously the remedy Congress preferred and dictated, rather than the simple race to the courthouse on which the Receiver and creditors rely.
Finally, the Court, in a footnote, questioned whether the outcome would be different if the debtor is a partnership –
Query, though, whether a filing by a receiver for a partnership entity (or entity that is undefined in the Bankruptcy Code that may be analogized to a partnership) would have to be treated as an involuntary filing, because Code § 303(b)(3)<!—-> does to some extent prescribe who must consent to the filing of a voluntary partnership petition. In re Monterey Equities-Hillside, 73 B.R. 749, 752 (Bankr. N.D. Cal. 1987)<!—->.