The appointment of a receiver will not always bar a company’s board from filing bankruptcy, according to a theory developed by Bankruptcy Judge Thomas P. Agresti of Erie, Pa.
After a company defaulted on a $2.8 million loan, the bank obtained a judgment, and the foreclosure court appointed a receiver. The receivership order barred the officers and directors from interfering with the receiver or taking any action on behalf of the company, including the commencement of bankruptcy.
Six days after entry of the receivership order, the controlling shareholder filed a chapter 11 petition. Judge Agresti allowed the receiver to remain in control pending disposition of the bank’s motion to dismiss.
Section 1112(b), allowing the court to dismiss for cause, provided the statutory basis for the bank’s motion, Judge Agresti said. He then established a shifting burden of proof for dismissal, initially requiring the moving party to make out a prima facie case, then shifting the burden to the party that filed the petition.
Having determined that the receivership order was otherwise valid and enforceable, Judge Agresti confronted the shareholder’s contention that the state court order violated the Supremacy Clause of the U.S. Constitution because it effectively blocked the company from having access to the bankruptcy court.
Combining the constitutional concept with the burden of proof, Judge Agresti took the following approach in his Aug. 22 opinion: “[I]f it ever becomes apparent that the state court proceedings resulted in an improper impediment to a corporate debtor’s access to the bankruptcy system due to the appointment of a receiver that is not carrying out its duties in a disinterested manner, then the need to assure federal supremacy in the area of bankruptcy must overcome the initial deferral to the action of the state court, allowing those formerly in control of the debtor to file bankruptcy on its behalf.”
Presuming that the receiver had exclusive authority to file bankruptcy, Judge Agresti said the shareholder could overcome the presumption by showing that the receiver was “biased” against the shareholders or was “otherwise derelict in its duties, to the point that it would interfere with the Debtor’s ability to access the bankruptcy system.”
Without saying so directly, Judge Agresti seemed to imply by using the word “disinterested” that a receiver acting only in the interests of the secured lender would not prevail on a motion to dismiss if unsecured creditors deserve protection in bankruptcy.
Applying the standard to the case before him, Judge Agresti said there was no evidence indicating bias on the part of the receiver. Rather than dismissing outright, the judge granted the motion but stayed its effectiveness for two weeks, giving the shareholder time to file a motion for reconsideration based on the principles established in the opinion.
A reconsideration motion, Judge Agresti said, might result in further delay in dismissal and require an evidentiary hearing.
Footnote: The shareholder did not challenge the disinterestedness of the receiver, allowing Judge Agresti to dismiss the petition on Sept. 6.