Following Sixth Circuit precedent and interpreting the Uniform Commercial Real Estate Act (UCREA), Chief Bankruptcy Judge Randal S. Mashburn of Nashville, Tenn., decided that the appointment of a receiver in state court did not prevent a managing member of a limited liability corporation from filing a chapter 11 petition.

The debtor was a member-managed LLC with three members. Two members were managers. Disputes broke out with the two managers on one side and the non-manager on the other. On application by the non-manager, the state court appointed a receiver.

In his April 25 opinion, Judge Mashburn said “it was a more or less plain vanilla receivership” where the “receiver was given the typical powers exercised in such receiverships.”

After appointment of the receiver, one of the managers filed a chapter 11 petition on behalf of the LLC. The non-manager filed a motion to dismiss the chapter 11 case but conceded that the manager did have authority to file bankruptcy under the operating agreement. However, the non-manager argued that appointment of the receiver barred the managers from filing a bankruptcy petition.

On the merits, Judge Mashburn began from the proposition that the “authority to bind an entity to a voluntary petition in bankruptcy is determined by state law.” However, Judge Mashburn said he was also “bound by clear Sixth Circuit precedent . . .” setting out the “general rule in the Sixth Circuit . . . that the appointment of a receiver and issuance of the typical injunction against interference does not affect a company’s, or by extension, its managers’, authority to file bankruptcy.”

The Sixth Circuit opinions that Judge Mashburn relied upon dated from 1914 and 1929 and were interpretations of the former Bankruptcy Act. He said that “the result should be the same under the Bankruptcy Code.”

Judge Mashburn drew two conclusions from the Sixth Circuit opinions. First, the court appointing the receiver “must expressly state its intent to deviate from the general rule that a receivership will not affect bankruptcy rights.” Second, “it is questionable whether any provision expressly prohibiting bankruptcy would be enforceable and not preempted by the Bankruptcy Code.”

In the case before him, though, “the state court’s orders are silent about bankruptcy,” Judge Mashburn said. In addition, the state court had listed some of the receiver’s powers, but “none of which was commencing a bankruptcy case,” he said.

The order appointing the receiver gave the receiver all of the powers of a receiver under Tennessee law, including those in the UCREA. Judge Mashburn pointed to an official comment on the UCREA which says that the act does not prevent an owner from filing bankruptcy when there is a receiver.

Judge Mashburn suggested a method where a receivership court might bar a manager from filing bankruptcy without offending the supremacy of the Bankruptcy Code. He said that the receivership court might “simply . . . remove the company’s management or restructure the entity in some manner, either by court order or action of the receiver.”

Judge Mashburn denied the motion to dismiss based on the idea that the receivership prevented a manager from filing a chapter 11 petition.