A receiver is neither a Chapter 11 trustee nor a debtor-in-possession
On Sept. 29, 2017, Chief Judge Russ Kendig of the U.S. Bankruptcy Court for the Northern District of Ohio issued a memorandum of opinion in the jointly administered Chapter 11 bankruptcy cases of Briar Hill Foods, LLC, et al. (Debtors).1 The memorandum of opinion holds that although Section 543(d) of the Bankruptcy Code allows a court-appointed receiver to be excused from compliance with the general turnover requirements of a custodian under Section 543(a) – (c), the Bankruptcy Code expresses no guidance as to the parameters of a custodian’s duties or his obligations if excused. Chief Judge Kendig ruled that the administration of a Chapter 11 case must be managed by a trustee or debtor in possession and that granting these powers to a person that is neither a Chapter 11 trustee nor a debtor in possession, and not a professional employed under Section 327 of the Bankruptcy Code, is beyond the scope of the Bankruptcy Court’s authority.
The turnover provisions of Section 543 of the Bankruptcy Code are part of the statutory expression of congressional preference that a Chapter 11 debtor be permitted to operate and control its business during the reorganization process. Moreover, that operation is for the benefit of all constituencies and is not solely for the benefit of the lender holding the primary mortgage against the debtor's property. In analyzing creditors’ interests under this statute, bankruptcy courts will examine the likelihood of reorganization, the probability that funds required for reorganization will be available, whether there are instances of mismanagement by the debtor, and whether turnover would be injurious to creditors.
In light of this holding, potential alternative options, other than seeking relief under Section 543(d) of the Bankruptcy Code, are to seek the Bankruptcy Court’s abstention under Section 305(a) of the Bankruptcy Code , or move for the appointment of the receiver as a Chapter 11 trustee.
1. Case No. 17-61892
2. 11 U.S.C. § 543(a)
3. 11 U.S.C. § 543(b)
FACTS
The Debtors operated several retail grocery stores in multiple counties in Ohio, as well as certain real estate holding companies. The Debtors had a secured a revolving line of credit and certain secured term loans with Huntington National Bank. The Debtors defaulted on the loans and the bank commenced foreclosure actions. The bank also sought the appointment of a receiver (in five separate receivership actions) to take possession and control over the real property and the rents, leases, and other personal property or assets related to the real property (collectively, the receivership property). The Debtors had ceased business operations and had no employees. The receiver commenced a sale process, but was unable to close a sale transaction, partly due to the buyer’s concerns over successor liability. On Aug. 25, 2017, the Debtors filed for bankruptcy protection and on Sept. 6, 2017, the Debtors filed a motion to excuse the receiver’s compliance with the turnover provisions of Section 543 of the Bankruptcy Code and to authorize the receiver to remain in possession of the receivership property pursuant to Section 543(d) of the Bankruptcy Code. The Debtors asserted that their estates and creditors would be best served by permitting the receiver to continue controlling and managing the receivership property through the sale process. The bank and the potential buyer did not object to the motion.LAW
Section 543 of the Bankruptcy Code states that a custodian with knowledge of the case “may not make any disbursement from, or take any action in the administration of, property of the debtor, proceeds, product, offspring, rents or profits of such property, or property of the estate, in the possession, custody, or control of such custodian, except such action as is necessary to preserve such property.”2 In addition, a custodian is further directed to deliver the debtor’s property to the bankruptcy trustee, and then file an accounting of the property, proceeds, products, rents, or profits.3 Section 543(d) of the Bankruptcy Code provides that after notice and a hearing the Bankruptcy Court “may excuse compliance” with the turnover requirements if the interests of creditors would be better served “by permitting a custodian to continue in possession, custody, or control of such property. . . ” A court-appointed receiver is a “custodian” under Section 101(11) of the Bankruptcy Code.The turnover provisions of Section 543 of the Bankruptcy Code are part of the statutory expression of congressional preference that a Chapter 11 debtor be permitted to operate and control its business during the reorganization process. Moreover, that operation is for the benefit of all constituencies and is not solely for the benefit of the lender holding the primary mortgage against the debtor's property. In analyzing creditors’ interests under this statute, bankruptcy courts will examine the likelihood of reorganization, the probability that funds required for reorganization will be available, whether there are instances of mismanagement by the debtor, and whether turnover would be injurious to creditors.
HOLDING
Chief Judge Kendig noted that allowing a blanket authorization of a receiver’s possession of the debtor’s assets and continued management of its affairs is the functional equivalent of the appointment of a receiver in the bankruptcy case, a result specifically proscribed by Section 105(b) of the Bankruptcy Code.In light of this holding, potential alternative options, other than seeking relief under Section 543(d) of the Bankruptcy Code, are to seek the Bankruptcy Court’s abstention under Section 305(a) of the Bankruptcy Code , or move for the appointment of the receiver as a Chapter 11 trustee.
1. Case No. 17-61892
2. 11 U.S.C. § 543(a)
3. 11 U.S.C. § 543(b)
