Q:      I was just appointed receiver by a state court in California. The entity involved is incorporated in New Jersey. I have heard the entity may file bankruptcy in New Jersey. Can it properly do so given my appointment?                   

A:      It depends. Among the key factors are: what you have been appointed receiver over; what the order of appointment provides; what steps you have taken since your appointment; and timing.

          This issue was explored in a recent Third Circuit case involving similar issues. In re Whittaker, Clark & Daniels, Inc., 152 F. 4th 432 (4th Cir. 2025) (“Whittaker”). Whittaker, Clark & Daniels, Inc. and related affiliates (“WCD”) had been a manufacturer and distributor of various materials, including talc. In 2004 WCD sold substantially all its operating assets and ceased actively operating. It was later revealed the talc contained asbestos. Approximately 2,700 lawsuits were filed against WCD. One plaintiff obtained a $29 million judgment in South Carolina. Days later the plaintiff moved the court to place WCD into receivership, which motion was granted. Despite the judgment, the receiver was not appointed as a receiver in aid of execution. Instead, he was appointed under South Carolina Code §15-65-10 (4) (basically the same as Calif. Code of Civ. Pro. § 564(6)) which provides a receiver can be appointed “(4) When a corporation has been dissolved, is insolvent or in imminent danger of insolvency…”. The court found WCD was insolvent or in imminent danger of insolvency given the plaintiff’s $29 million judgment, other judgments of over $80 million, and the fact that WCD only had $15 million, nine years prior, after it sold all its assets; although it may have had insurance and other claims against third parties. It also found WCD had no current business or employees. WCD moved for reconsideration, which the court denied. Prior to the court issuing a written order, WCD filed bankruptcy in New Jersey, where it was incorporated. The receiver moved the bankruptcy court to dismiss the filing as an unauthorized petition, arguing his appointment divested WCD’s board of directors of the authority to approve a bankruptcy filing and, instead, vested such authority in him alone. The bankruptcy court denied the receiver’s motion and the district court affirmed. The receiver appealed and the Third Circuit also affirmed.

          Before the Circuit addressed the merits of the receiver’s arguments it addressed an important bankruptcy issue: Does an improperly filed petition affect the court’s subject matter jurisdiction? If it does, the court would have no choice but to dismiss, because it lacked jurisdiction. If it does not, the court can hear the case, but could dismiss the case for “cause” under 11 U.S.C. § 1112(b)(1). This distinction can have other consequences. If the court lacked subject matter jurisdiction various bankruptcy provisions, like the automatic stay, might not apply.

          The Circuit starts noting: jurisdiction “is a word of many, too many, meanings.” Whittaker, supra. at 442. It explains  that while some courts have felt than an improper petition extinguishes the power to a court to hear a case, more “recent Supreme Court cases exercise greater care before hanging the ‘jurisdictional label’ on a statutory provision. Today the standard for concluding a statute limits federal courts’ subject matter jurisdiction is an exacting one…[and] must plainly show that Congress imbued a procedural  bar with jurisdictional consequences.” Id. at 443.(citations omitted). It then examined the statutes granting federal courts jurisdiction over bankruptcy cases (28 U.S.C. §1334(a) and § 157 a),(b)(1)) and concluded they “do not attach jurisdictional significance to the propriety of a debtor’s petition.” Id. Nor, it noted, does the only Code section dealing with with petitions, 11 U.S.C. § 301(a). It therefore concluded: an improperly filed petition does not strip bankruptcy courts of subject matter jurisdiction, but may be “cause” for dismissal.

          Having decided an improper petition does not deprive the bankruptcy court of subject matter jurisdiction, it then examined the issue of whether the petition was improper and whether the case should be dismissed for “cause”. However, before it could decide that issue, it raised another predicate issue—Who’s law applied, South Carolina’s or New Jersey’s? It did not have to decide this “choice of law” issue because the parties agreed New Jersey law governed. In a footnote, it noted that the issue could have been even more complicated because, while WCD was incorporated in New Jersey, and the receivership was in South Carolina, WCD’s principal place of business, and possible domicile, was in Connecticut. Id. at 447 fn. 9. As explained infra. some justices felt this issue so important they wrote two lengthy concurring options on how to resolve the choice of law issue in bankruptcy cases, which, while similar, come to slightly different conclusions.

          Finally getting to the merits, the Circuit stated it has long been held that local law governs a corporate debtor’s authority to file bankruptcy. Id. Therefore, the question was: “Whether under New Jersey laws the receivership order stripped WCD’s board of the authority to file bankruptcy?” Id. at 444. It explained “New Jersey law recognizes that ‘comity requires that [a foreign receiver] should be acknowledged and aided’ to the extend that doing so is not ‘to the disadvantage of creditors resident in [New Jersey]’. ***New Jersey law permits its courts to recognize foreign receivership orders and appoint an ancillary receiver to aid in the execution of foreign judgments, including enjoining the corporation and its board from taking specific actions and exercising specific powers”Id.(citations omitted). It concluded, the receiver needed to move for and be granted recognition of his order by having an ancillary receiver appointed, in order to displace WCD’s board’s authority over corporate decisions, including filing bankruptcy. Because the receiver never even tried to get an ancillary receiver, WCD’s board retained its authority. The receiver complained that he never had a chance to to seek an ancillary receiver because of the rapid filing. The Circuit responded: “The fact that the Receiver lost the race to the courthouse does not render the results invalid.” Id, at 446 fn. 8.

          The receiver made another argument as to why he should prevail. He contended New Jersey, and hence the bankruptcy court, were required to give “full faith and credit” to the South Carolina receivership order under 28 U.S.C. §1738. The Circuit found three reasons why the Full Faith and Credit statute did not apply.

          First, and most importantly to all the receiver’s arguments, the order never purported to displace the WCD’s board’s authority and vest that authority in the receiver, because the order only gave the receiver the power and authority to administer all assets of WCD and take any and all steps necessary to protect the interests of WCD whatever they may be.

The order did not address WCD’s corporate affairs, the board’s power, or bankruptcy because, contrary to what the receiver apparently assumed, WCD itself was never put into receivership, only its assets were.

          Second, it held that, even if the order extended to WCD’s corporate affairs, under §1738 “[e]nforcement measures do not travel with the sister state judgment and full faith and credit does not mean that States must adopt the practices of other States regarding the time, manner and mechanisms for enforcing judgments.” Id. at 446 (citations omitted). Therefor, in order to enforce the order the receiver was required to use the enforcement mechanisms provided by New Jersey law, by having an ancillary receiver appointed, which was not done.

          Third, the Circuit questioned the ability of the South Carolina court to place WCD’s corporate powers in its receiver, given WCD was a New Jersey corporation. It stated “federalism embodies ‘the fundamental principle of equal sovereignty’ among the states.*** So it is no surprise that the Constitution limits the authority a state court can exercise over a corporation incorporated in a sister state.***Thus, when it comes to control over corporate decision-making, a state ‘has no interest in regulating the internal affairs of foreign corporations.’ [And to do so] would be an unprecedented exertion of power over a foreign corporation whose internal affairs are governed by the laws of a sister state and a radical intrusion into the province of a co-equal sovereign.” Id. at 447 (citations omitted).

          So what steps can be taken to prevent a entity from filing bankruptcy when a receiver is appointed? First, the receiver must be appointed receiver over the entity, not just its assets. This alone may be sufficient to vest the corporate powers and privileges in the receiver. See, 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 corporation’s powers and assets.”); Prairie States Petroleum Company v. Universal Oil Sales Corp., 88 Ill. App. 3d 753, 759 (1980) (“Upon appointment of a receiver, the functions of the corporation’s managers and officers are suspended and the receiver stands in their place.”). Based on this reasoning, a number of courts have dismissed petitions by officers or directors after the appointment of a receiver. See, Chitex Communications, Inc. v. Kramer, 168 B.R. 587 (S.D. Tex. 1994); In re Gen-Air Plumbing & Remodeling. Inc. 208 B.R. 426 ( Bankr. N. D. Ill. 1997); Cf. In re Sino Clean Energy, Inc., 901 F.3d 1139 (9th Cir. 2018)(directors removed by state court receiver lacked authority to file bankruptcy). Second, despite the above cited law, the order should specifically state the board’s powers and privileges are divested and are vested solely in the receiver. Third, just to make sure, the order should also state only the receiver is vested with the power and right, subject to court approval, to file bankruptcy for the entity. These provisions should be an every order when an entity is placed in receivership. In addition, where the entity was not formed in the state where the receivership is, the receiver needs to move the court in the incorporation state to recognize his order of appointment and appoint an ancillary receiver (hopefully the receiver, but that is not always possible) and provide the same provisions in the ancillary receiver order.

          As indicated, supra., two justices wrote concurring options on the issue of what the choice of law rule should be in bankruptcy cases, because the Third Circuit has not decided the issue. Justice Krause (“Krause”) explained other circuits have come to three different conclusions. The Eighth Circuit has adopted the rule set forth in Klaxon Co. V. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941) (“Klaxon’) for diversity cases, which uses the choice of law rules of the state where the bankruptcy court sits. She believes this is the rule that should be adopted because bankruptcy law takes property rights as it finds them and applying Klaxon “respects the presumption that state law governs ‘until Congress strikes a different accommodation .’” And, “[a] choice-of-law rule is no less a rule of state law than any other.” Id. at 456 (citations omitted). She also believes that adopting a choice-of-law rule unique to bankruptcy could result in different outcomes, simply because a dispute is decided by the bankruptcy court rather than a state court.

          The Ninth Circuit has rejected Klaxon in favor of a federal common law choice of law rule. In re Lindsay, 59 F.3d 942, 946 (9th Cir. 1995). It reasoned Klaxon “does not apply to federal question cases such as bankruptcy.” and “ the risk of forum shopping which is avoidable by applying state law has no application.” Id. In applying federal choice of law rules in bankruptcy, courts look to the approach taken by the Restatement (Second) of Conflict of Laws which weights different factors depending on the type of claim. For tort or fraud claims they include: where the injury occurred; the place where the conduct causing the injury occurred; the domicile, residence, nationality, place of incorporation and place of business of the parties, the place where the relationship between the parties is centered. Restatement §145. Krause rejects this approach because it “risks altering parties rights by selecting different law than would govern outside of bankruptcy.” Whittaker, supra. at 459.

          The Second and Fourth Circuits take a hybrid approach, applying Klaxon in the absence of “a compelling federal interest which dictates otherwise”. Krause rejects this approach in favor of the bright line Klaxon rule because: “Tellingly, neither court has actually identified—much less confronted—such a situation. And the prospect of them ever doing so seems fanciful…” Id. at 460.

          The second concurring opinion by Justice Ambro, who wrote the opinion, agrees with much of what Krause says but concludes the “hybrid” approach is better because one shouldn’t completely rule out a case where there may be a “compelling federal interest” requiring  the application of federal common law. However, he agrees with Krause: “ I cannot think of such a case either… But this is not an argument that federal courts lack the authority to make choice-of-law rules in bankruptcy.” Id. at 477. He also questions whether the Eighth Circuit’s rule is a bright line “because that decision passes on the issue in a single conclusory sentence with no further analysis. It is thus hard to conclude that the Eighth Circuit contemplated and rejected the possibility of exceptions.” Id. at 472.

          The choice of law question can make a difference in a case. Assume the bankruptcy case was filed in California instead of New Jersey. If Klaxon  applied, California’s choice of law would govern. But because the Ninth Circuit rejects Klaxon, in favor of a federal common law rule, it is unlikely New Jersey law would apply, since the debtor was simply incorporated there. Nor would California law apply because that is simply where the court is sitting.  More likely it would be Connecticut law since that was the debtor’s principle place of business and possible domicile or South Carolina law, where the injury occurred, judgment was obtained and the receiver was appointed.

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