State Law Dictates Who May File Bankruptcy For A Corporation

A prior Ask the Receiver discussed Sino Clean Energy Inc. by and through Baowen Ren v. Seiden, 565 B.R. 677 (Nev. 2017), where a  district court’s affirmed of a bankruptcy court’s order dismissing a bankruptcy case. A state court receiver for a corporation removed the corporation’s board of directors and replaced them. The unhappy, removed, board members filed a bankruptcy petition for the corporation. The district court held state law determines who is authorized to file bankruptcy for a corporation. It rejected the petitioner’s argument that states cannot prevent a corporation from filing bankruptcy, explaining petitioners blurred the distinction between barring a corporation from filing bankruptcy, which states cannot do, and the long standing rule empowering states to determine who has the authority to file bankruptcy for an entity. The order appointing the receiver specifically empowered the receiver to pick a new board of directors for the corporation.

In August, the Ninth Circuit affirmed the district court. In re Sino Clean Energy, Inc., ____ F. 3d ___ (9th Cir. 2018). The Ninth Circuit explained that because the receiver had removed the prior board of directors, they no longer had any authority to act for the corporation. This is consistent with established receivership law. See, Commodity Futures Trading Commission v. FITC, Inc., 52B.R. 935, 937 (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.”]. See also, SEC v. Spence & Green, 612F.2d 896, 903 (5th Cir. 1980); U.S. v. Vanguard Inv. Co. Inc., 667 F. Supp. 257 (M.D.N.C. 1987); First Savings & Loan Ass’n v. First Federal Savings & Loan Ass’n, 531 F. Supp. 251, 255-256(D. Hawaii 1981) [“When a receiver is appointed for a corporation, the corporation’s management loses the power to run its affairs and the receiver obtains all of the corporations power and assets.”].

The Ninth Circuit further explained: “state law dictates which persons may file a bankruptcy petition on behalf of a debtor corporation” and “state law includes the decision of its state courts,” which would include the receivership order.

The Circuit rejected the cases relied on by the petitioners, which held that states cannot enjoin a corporation from filing bankruptcy explaining, like the district court, enjoining a corporation from filing is different from determining who has the authority to file bankruptcy for a corporation. It specifically cited In re Corporate & Leisure Event Prods., Inc., 351 B.R. 724(Bankr. D. Ariz. 2006), relied upon by petitioners, and held to the extent it is contradictory “it is wrong.”

*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.