Directors of a corporation who have been removed by a state court receiver do not have authority to file a voluntary bankruptcy petition on behalf of the corporation, the Ninth Circuit held.
A Nevada corporation was deregistered by the Securities and Exchange Commission for failing to make required filings. The company was later suspended from trading on the NASDAQ stock market.
Ultimately, shareholders prevailed on a Nevada court to appoint a receiver. The state court gave the receiver power to reconstitute the board. The receiver replaced the incumbent board with a sole director.
Later, the company’s former chief executive purported to reconstitute the board. The chief executive’s board proceeded to file a voluntary chapter 11 petition. The bankruptcy court dismissed the petition, ruling that the board formed by the chief executive lacked corporate authority to file bankruptcy because the board had been supplanted by the receiver.
The district court affirmed, and so did District Judge Ivan L.R. Lemelle on August 27. Judge Lemelle was sitting by designation from the Eastern District of Louisiana.
Judge Lemelle said that state law prescribes who has authority to file a voluntary bankruptcy petition under Section 301. In turn, Nevada law gives decision-making authority to a board of directors, allowing them to act when there is a quorum, or a majority of directors “then in office.” Unless they are acting by unanimous consent, an “act of the board” is an “act of directors holding a majority of the voting power” at a meeting when there is a quorum.
Applying Nevada law, Judge Lemelle said that the individuals who filed the voluntary petition “were not members of the board” and “were not authorized to file a bankruptcy petition on behalf of” the corporation.
Hinting that the result might be different, Judge Lemelle distinguished the case on appeal from a situation where the state court purports to enjoin the corporation from filing bankruptcy altogether. In the case at hand, the board appointed by the receiver “was and is fully able to file for bankruptcy,” he said.