Depending on the circumstances, a federal receivership court has the power to bar creditors from filing an involuntary chapter 11 petition.
In his November 18 opinion, District Judge Thomas M. Durkin of Chicago said that receivership represented a “superior method than bankruptcy to keep the railroad operational and maximize the estate’s value for all interested stakeholders.”
The case involved two small railroads, one in Oregon and the other in Colorado, both owned by the same holding companies. The operating and holding companies all pledged their assets to a lender for a line of credit, for which they were all jointly and severally liable.
Following default, the lender initiated a receivership in Chicago, where Judge Durkin appointed a receiver when the companies lodged no opposition. The receivership order covering all of the companies contained a broad anti-litigation injunction barring “all” persons and entities from commencing or prosecuting “any suit or proceeding” against the companies in receivership.
One month later, three creditors filed an involuntary chapter 11 petition in Colorado against the Colorado railroad. The receiver responded by filing a motion for instructions from Judge Durkin. Initially, Judge Durkin ruled that the involuntary petition violated the anti-litigation injunction and was of no force or effect. The involuntary petitioners filed a motion for reconsideration.
Reviewing his prior decision de novo, Judge Durkin first ruled that the filing of the involuntary petition violated the “plain language” of the receivership order.
Next, Judge Durkin confronted the question of whether he had power to enjoin non-parties from filing an involuntary bankruptcy.
Confronting the same issue, the Second and Fourth Circuits reached different conclusions, although the facts were dissimilar.
In the Fourth Circuit, the business shut down, and a major creditor initiated a receivership. The district court issued an anti-litigation injunction. A week later, 50 creditors filed an involuntary bankruptcy petition in another state.
The receivership court declined to recognize the automatic stay and held the petitioners in contempt. The Fourth Circuit reversed on appeal. Gilchrist v. Generic Electric Capital Corp., 262 F.3d 295 (4th Cir. 2001).
The Fourth Circuit said the receivership court had not explained why receivership was superior to bankruptcy when there were thousands of creditors and assets in several states. Judge Durkin quoted the Fourth Circuit as favoring the “highly developed and specific bankruptcy process” when dealing with a large corporation that “would push the receivership process to its limits.” Id. at 304.
Absent “special circumstances,” the Fourth Circuit said, receivership “would ultimately be more clumsy and expensive than long-established bankruptcy procedures.” Id.
The Second Circuit reached the opposite conclusion in a receivership initiated by the Securities and Exchange Commission to unwind a Ponzi scheme. SEC v. Byers, 609 F.3d 87 (2d Cir. 2010).
A group of creditors moved to modify the anti-litigation injunction, which specifically prohibited the filing of a bankruptcy petition. The district court denied the motion, and the creditors appealed.
Upholding the lower court, the Second Circuit held that the district court had power and discretion to bar the filing of a bankruptcy petition, although the power should be “sparsely exercised.” Id. at 89.
Judge Durkin said that both circuits “emphasized the importance of specific facts at issue.” He concluded that the facts in the case before him were more akin to Byers, where the circuit court allowed the receivership to proceed.
Referring to the case in his court, Judge Durkin said that the receivership dealt with assets in several states and that “creditors asserting relatively small claims now seek to put one of the receivership entities into bankruptcy, potentially to the detriment of every other interested party, and at the possible expense of shutting down the railroad.” By contrast, he said that Gilchrist involved a “large corporation” where the creditors had failed to explain the comparative virtue of receivership.
Significantly, Judge Durkin said that the lender in his case was financing the operations in receivership. By comparison, the involuntary petitioners had not explained how the chapter 11 case would be financed. Furthermore, the receiver already had identified potential buyers to continue the business.
Judge Durkin concluded that “receivership offers a superior method than bankruptcy to keep the railroad operational and maximize the estate’s value for all interested stakeholders.” Given “the circumstances of this case,” he found “authority to enjoin nonparties from filing an involuntary bankruptcy . . . .”
Judge Durkin had a final hurdle to overcome: He lacked authority to order the bankruptcy court “to cede its jurisdiction.” Given his jurisdiction over the receivership assets and the power to enforce his own injunctions, the judge directed the petitioning creditors to dismiss the petition.
Depending on the circumstances, a federal receivership court has the power to bar creditors from filing an involuntary chapter 11 petition.
In his November 18 opinion, District Judge Thomas M. Durkin of Chicago said that receivership represented a “superior method than bankruptcy to keep the railroad operational and maximize the estate’s value for all interested stakeholders.”
The case involved two small railroads, one in Oregon and the other in Colorado, both owned by the same holding companies. The operating and holding companies all pledged their assets to a lender for a line of credit, for which they were all jointly and severally liable.
Following default, the lender initiated a receivership in Chicago, where Judge Durkin appointed a receiver when the companies lodged no opposition. The receivership order covering all of the companies contained a broad anti-litigation injunction barring “all” persons and entities from commencing or prosecuting “any suit or proceeding” against the companies in receivership.
One month later, three creditors filed an involuntary chapter 11 petition in Colorado against the Colorado railroad. The receiver responded by filing a motion for instructions from Judge Durkin. Initially, Judge Durkin ruled that the involuntary petition violated the anti-litigation injunction and was of no force or effect. The involuntary petitioners filed a motion for reconsideration.