By: Donald L Swanson
A receiver is appointed to recommend, for the appointing court’s determination, whether to put the defendant into a voluntary bankruptcy proceeding.
- I don’t remember ever seeing such a thing before!
The opinion is City National Bank of Florida v. Louisiana Apple, LLC, Case No. 24-cv-23285, U.S. District Court, Southern Florida (entered September 17, 2024; Doc. 34).
Plaintiff brings a federal court receivership lawsuit against Defendant and its wholly owned subsidiaries, under diversity jurisdiction, to collect on an $8 million defaulted loan. Plaintiff is from Florida, and the Defendants are from Kentucky, Oklahoma, Indiana and Arkansas.
Plaintiff seeks appointment of a receiver to, (i) sequester all of Plaintiff’s collateral, (ii) account for recent dissipations of Plaintiff’s collateral, and (iii) terminate agreements with related entities.
Meanwhile, the Court (i) allows the related entities, including several Florida entities, to intervene in the receivership (“Intervenors”), as a matter of right, over Plaintiff’s objection, and (ii) sets a hearing on Plaintiff’s request for appointment of a receiver.
But, Interveners promptly move to dismiss the receivership lawsuit for, (i) lack of complete diversity, which their presence destroys, and (ii) lack of supplemental jurisdiction over the non-diverse Intervenors.
The District Court denies Intervenors’ motion to dismiss. Here is a summary of its rationale.
Legal Standards
Federal courts are courts of limited jurisdiction. If a federal court determines that it is without subject matter jurisdiction, the court is powerless to continue.
Here, the parties are no longer diverse. Plaintiff and various Intervenors are from the State of Florida. But that doesn’t necessarily mean jurisdiction is lost:
- the federal district court may still exercise supplemental jurisdiction over the non-diverse Intervenors, if those intervenors are “dispensable“; and
- the idea is that the presence of a “dispensable” party should not destroy the court’s diversity jurisdiction—whereas, the presence of an “indispensable” party must result in a dismissal of the case for lack of diversity jurisdiction.
Rule 19 Tests of Indispensability
Fed.R.CivP. 19 states a multi-part test for determining whether a party is “indispensable.”
The first—i.e., most important and “nearly dispositive”—test under Rule 19(b) is the extent to which Intervenors would be prejudiced if a judgment were rendered in their absence.
The Court finds that a decision to appoint a receiver, in Intervenors’ absence, would not prejudice Intervenors unduly, because Plaintiff has agreed that the scope of a receivers role would be limited to:
- assessing whether a viable preference claim would exist against any of the Defendants, if they were in bankruptcy, and
- determining and recommending whether any of the Defendants should file for bankruptcy voluntarily.
A receiver appointed for such strictly limited purposes would not pose an “immediate and serious” danger to the Intervenors or their business operations—thus, any prejudice Intervenors might suffer, if they were absent from the case, is minimized.
Granted, a worst-case scenario for Intervenors is that a receiver is appointed, who recommends (and the Court approves) that Defendants enter into voluntary bankruptcies to preserve preference claims under § 547 of the Bankruptcy Code.
Nevertheless, this first factor does not weigh in favor of indispensability because;
- the receiver cannot directly interfere with Intervenors’ interests;
- if the receiver recommends bankruptcy—and if the Court authorizes the receiver to put Defendants into bankruptcy voluntarily—Intervenors will have a full and fair opportunity to defend their rights in an adversary proceeding in bankruptcy court; and
- in short, Intervenors won’t suffer any meaningful prejudice because they, (i) will not lose any rights in this case, and (ii) have an adequate, alternative forum (the bankruptcy court) in which to fully defend their rights.
By contrast, Plaintiff might not have an adequate remedy, if this case were dismissed, because the bankruptcy preference claim is time-sensitive (and might disappear) if Plaintiff were forced to start over by seeking a receiver in state court.
Intervenors are Dispensible Parties
The District Court declares:
- not one of the Intervenors is “an indispensable party”;
- therefore, the District Court will “exercise our supplemental jurisdiction over them”; and
- “Accordingly, we hereby ORDER and ADJUDGE that,”
- “the [Intervenors’] Motion to Dismiss is DENIED”; and
- “A motion hearing on [Plaintiff’s] Motion to Appoint Receiver is SET for Thursday, September 19, 2024, at 4:00 p.m.
On September 20, 2024, the District Court orders the appointment of a receiver to report on the questions of (i) whether Defendants “should enter bankruptcy”; and (2) whether a viable preference claim exists under 11
U.S.C. § 547(b)
Conclusion
Wow! That’s fascinating.
I don’t think I’ve ever seen, before, a receivership used as an avenue to put the receivership defendant into a voluntary bankruptcy proceeding.
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