In In re Donelson, LLC, Case No. 3:24-bk-00879 (Bankr. M.D. Tenn. Apr. 25, 2024), the court held that the “typical” receivership order—vesting all corporate decision-making in the hands of a receiver and enjoining existing management from interfering with the receiver’s efforts—does NOT deprive the company’s pre-receivership management from the ability to petition for bankruptcy relief for the company.
According to Judge Mashburn, in order to purportedly place the authority to file bankruptcy exclusively in the hands of the receiver, the state court must specifically declare in the receivership order that the power to file bankruptcy has been transferred from existing management to the receiver. Even with such an explicit provision included in the receivership order, the bankruptcy court must still consider whether the Supremacy Clause and federal preemption principles override the state court mandate.
The workaround, according to Judge Mashburn, is: (a) to include a provision in the receivership order that restructures the company in such a way that displaces existing management from all power whatsoever; or (b) for the receiver to remove all officers and directors from their company positions. Judge Mashburn does not elaborate on why such language in the order or action by the receiver would not run into the same preemption concerns referenced above.
Under the North Carolina Commercial Receivership Act, included among the default powers of a general receiver is “the power to file a bankruptcy case . . . and to take all other action in the name of the entity without the necessity of any approval or consent of . . . persons that pursuant to the governance documents of the entity or applicable law would be legally required in the absence of the receiver’s appointment . . . .” Frequently, the receivership order will provide that the receiver has the exclusive authority to exercise the powers listed in the aforementioned section of the Act to the exclusion of existing control parties. Based on Judge Mashburn’s reasoning, even that language may not be enough to deprive prior management of the power to file a viable bankruptcy case without the receiver’s consent.