Receiver’s Appointing Order Language Controls Who Can File A Corporate Bankruptcy

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.