Answering a question on which there is little authority, Bankruptcy Judge Jacqueline P. Cox of Chicago ruled that a receiver may move to intervene and dismiss an involuntary petition but may not file an answer.
The state court appointed a receiver about one year ago to take possession of an individual’s property. The individual owned a corporation that was the owner of a parcel of real estate on which a bank held a $500,000 first mortgage. The receivership order specifically authorized the receiver to take possession and sell the real property on which the bank held the mortgage.
In early March 2022, the bank filed an involuntary chapter 7 petition against the corporation with title to the property. The debtor did not respond to or oppose the petition. The bank contested the receiver’s right to answer or move to dismiss the involuntary petition.
The bank reasoned that the receiver was a “mere” custodian not entitled to contest the involuntary petition.
Section 303(d) says that the “debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section.” In her May 27 opinion, Judge Cox said that the Bankruptcy Code and Rules “are less clear in defining” who can challenge a petition, other than the debtor.
Judge Cox first established that the receiver was a “custodian” under Rule 101(11)(A). Citing the Collier treatise, she said, “Some authorities suggest a receiver may seek to intervene under Fed. R. Bankr. P. 1018.”
In 1940, before adoption of the Bankruptcy Code, Judge Cox cited the Seventh Circuit for holding that the court has discretion to allow a receiver to intervene in an involuntary petition, although the receiver has no absolute right of intervention.
More recently, Judge Cox cited Collier for saying that a custodian could seek to intervene and that intervention should be granted, because a custodian is protecting the property for all creditors.
Having established the right to file a motion for intervention, Judge Cox turned to the question of the pleadings that a receiver could file after intervention. She noted that Section 707(a) does not limit who may seek dismissal “for cause.” She also noted that Section 1112(b) allows a “party in interest” to seek dismissal or conversion of a chapter 11 case.
Judge Cox cited “some courts” for holding that some entities other than the debtor may file a motion to dismiss an involuntary petition under Section 707(a). Similarly, she said that Collier “surmises” that a receiver can answer a petition if the debtor did not.
Next, Judge Cox quoted the Illinois receivership statute, which permits a receiver to take “such action as is reasonably necessary” to protect receivership property. In the case at bar, the state court had specifically authorized the receiver to sell the property.
Courts in other states with similar statutes have interpreted the law as permitting receivers to intervene, Judge Cox said.
Judge Cox said that the “broad language of both the Illinois Receivership Statute and the Receivership Order suggests the Receiver should have the right to file a responsive pleading, but not an answer.” She permitted the receiver to file motions to intervene, dismiss or abstain.
Judge Cox did not permit the receiver to answer or contest the involuntary petition “because Bankruptcy Code § 303(d) and Fed. R. Bankr. P. 1011(a) allow debtors and non-petitioning general partners only to do so.”