Finance

A versatile and cost-effective bankruptcy alternative, receiverships have experienced a resurgence of popularity in recent years. State-court receiverships offer lenders and other creditors flexibility and a streamlined process, while federal receiverships can be attractive in complex cases involving multiple jurisdictions or government agencies.

With receiverships proliferating, so too have court decisions addressing the intersection between receivership and bankruptcy. Companies unhappy to find themselves in receivership may file voluntary Chapter 11 proceedings in an effort to regain corporate control as debtor-in-possession. Recent decisions underscore the importance of a well-drafted receivership order to prevent existing management from retaking control through a bankruptcy.

Recent Third Circuit Precedent

In a precedential decision from September, In re Whittaker Clark & Daniels, 152 F.4^th 432 (3d Cir. 2025), the U.S. Court of Appeals for the Third Circuit held that Whittaker Clark & Daniels Inc. (WCD), a New Jersey corporation, properly filed for bankruptcy protection in New Jersey, even though it was already the subject of a receivership action in South Carolina.

Historically, WCD processed, manufactured and distributed talc and other industrial chemicals and minerals. After ceasing operations in 2004 following the sale of its assets, WCD faced a deluge of 2,700 asbestos personal-injury suits, one of which resulted in a mesothelioma victim, Sarah Plant, winning a $29 million jury verdict against WCD in 2023. Plant successfully petitioned the South Carolina state court to appoint a receiver with powers including “the power and authority [to] fully administer all [WCD’s] assets.”

Without consulting the newly appointed receiver, WCD’s board passed a resolution authorizing its bankruptcy filing in New Jersey. The receiver moved to dismiss the bankruptcy case, arguing that the receivership order vested such authority in the receiver alone. The bankruptcy court denied the dismissal motion after examining the receivership order and finding that the receiver did not displace the board under its terms. The receiver unsuccessfully appealed to the district court, and then to the Third Circuit.

The receiver argued that, because his powers extended to all the business affairs of WCD, he was the only party authorized to file for bankruptcy. The Third Circuit disagreed, noting that — while the receivership order gave the receiver control over WCD’s “assets” and power and authority to protect WCD’s interests “whatever they may be” — it did not “speak to [WCD's] corporate affairs, including the board's authority under New Jersey law to decide whether to file for bankruptcy.” Moreover, even if the South Carolina state court had attempted to place WCD’s corporate affairs under the control of a South Carolina receiver, “the state of incorporation enjoys the exclusive authority to govern the internal affairs of its corporations.” The Third Circuit warned that to interpret the receivership order in the manner advocated by the receiver would be unconstitutional as “an unprecedented exertion of power over a foreign corporation whose internal affairs are governed by the laws of a sister state, and a radical intrusion into the province of a co-equal sovereign.”

Rejecting the receiver’s argument that the U.S. Constitution’s Full Faith and Credit Clause required New Jersey to respect the South Carolina receivership order, the Third Circuit faulted the receiver for procedural missteps. New Jersey law contemplates the appointment of an ancillary receiver in New Jersey to aid any out-of-state receiver — “including by enjoining the corporation and its board from taking specific actions and exercising specific powers” — while simultaneously protecting the interests of New Jersey creditors. Having failed to request the appointment of an ancillary receiver in New Jersey or a restriction on the board’s authority to file bankruptcy, the receiver’s powers did not extend to WCD’s corporate affairs in New Jersey and WCD’s board retained authority to file the bankruptcy.

Other Jurisdictions

The scope of the receivership order was similarly critical in a decision from last year in In re 530 Donelson, 660 B.R. 887 (Bankr. M.D. Tenn. 2024), in which the U.S. Bankruptcy Court for the Middle District of Tennessee considered whether the appointment of a receiver by a Tennessee state court prevented a limited liability company (LLC)’s managers from placing the LLC into a Chapter 11 bankruptcy. In holding that the existence of the receivership did not preclude bankruptcy, the court focused on the terms of the receivership order and related orders, which did not expressly preclude the managers’ filing.

The Tennessee state court appointed a receiver to manage both the subject LLC and the parcel of real property that was its only asset. Under the receivership order, the receiver’s authority included, among other things, “negotiating the [LLC]’s loan with [the LLC’s lender], collecting rents, establishing bank accounts, and investigating best uses for the property.” The bankruptcy court characterized the receivership as a “more or less plain vanilla receivership” with the receiver “given the typical powers exercised in such receiverships.” Notably, filing for bankruptcy was absent from the powers enumerated in the receivership order.

In a subsequent order, the state court heavily limited the managing members’ ability to take any actions pertaining to the LLC and ordered the managing members “not to take any actions relating to the [LLC] or the Subject Property as a Receiver has been appointed in this case, and the Receiver will dictate what actions the [LLC] will take.” However, that order was silent as to who had authority to place the company into bankruptcy. Months later, the managing members of the LLC filed a Chapter 11 petition on behalf of the LLC, and thereafter the non-managing member moved to dismiss the bankruptcy based, in part, on the receivership order.

The bankruptcy court held that the state court’s appointment of the receiver did not strip the managing members of their authority to place the LLC into bankruptcy. The bankruptcy court’s decision rested on “clear Sixth Circuit precedent” holding that the imposition of a receivership, and the issuance of an injunction like that set forth in the state court’s second order, does not prohibit an entity’s management from placing the entity into bankruptcy. The bankruptcy court also found that, in the Sixth Circuit, absent a “specific declaration” limiting a company’s power to file for bankruptcy, appointment of a receiver does not divest a company of such power. (See In re Yaryan Naval Stores, 214 F. 563, 565 (6th Cir. 1914)). Even with a “specific declaration,” it remains “questionable whether any provision expressly prohibiting bankruptcy would be enforceable and not preempted by the Bankruptcy Code.” Accordingly, at least in Tennessee, an open question remains as to whether a state court receivership order purporting to prohibit a company from filing for bankruptcy would be enforceable given principles of federal preemption.

In other jurisdictions, courts have been notably divided on the issue, although they consistently consider the language of the receivership order as the first step in their analysis. In the Ninth Circuit, for instance, a California district court in In re El Torero Licores, No. SA 13-10578-MW, 2013 WL 6834609 (C.D. Cal. 2013), affirmed in 2013 the bankruptcy court’s holding that the appointment of a receiver can prevent a member from placing the company into bankruptcy, particularly where the receivership order grants the receiver the “exclusive authority to file.”

In contrast, in 2009, an Oregon bankruptcy court in In re Orchards Village Investments, 405 B.R. 341 (Bankr. D. Or. 2009), held that a Washington state court’s receivership order, which granted customary receiver powers and enjoined interference with the receiver’s activities, did not prevent members of an organization from placing that organization into bankruptcy, reasoning that “a state court receivership proceeding cannot be used to preclude a debtor from seeking federal bankruptcy protection, in spite of the broad authority granted to receivers in their appointment orders” because “[a]llowing terms dictated in a state receivership or insolvency proceeding to determine the availability of federal bankruptcy relief is fundamentally inconsistent with the constitutional grant to Congress of the right to enact uniform laws on the subject of bankruptcy.”

However, in In re Sino Clean Energy, 901 F.3d 1139 (9th Cir. 2018), the Ninth Circuit held in 2018 that a Nevada bankruptcy court correctly dismissed a “rogue bankruptcy petition” filed by ex-directors who had been removed from the board for “nonfeasance and gross mismanagement” during Nevada receivership proceedings. The Ninth Circuit saw no federal preemption issue because state law determines who may authorize a corporation’s bankruptcy filing; the company remained “fully able to file for bankruptcy through valid filings made by its eligible board of directors.”

Practical Implications

Creditors or other stakeholders seeking the appointment of a receiver should be aware that, without a “specific declaration” in the receivership order, the receivership may not prevent the company from filing for bankruptcy, potentially thwarting the receivership. Accordingly, any party seeking the appointment of a receiver should — at a minimum — include language in its proposed receivership order explicitly providing that only the receiver has the authority to place the company into bankruptcy. And if the business is not organized in the same state as the receivership proceedings, it is imperative that the receiver follow any applicable local procedures, which may include seeking ancillary relief in the state of formation.

Even with specific language in the receivership order, constitutional questions remain surrounding whether the U.S. Bankruptcy Code preempts any such provision. While Sino Clean Energy suggests removal of the old board as one way to guard against a preemption challenge, it is not always feasible to recruit new board members for a company in distress. Notably, none of the above cases involved a federal receivership, which may allow a receiver to manage assets across state lines, but which will not necessarily prevent intra-federal conflicts if bankruptcy is filed.

In sum, although the appointment of a receiver may not prevent a bankruptcy filing in all cases, certain strategies can increase the chances that the receivership will withstand a competing bankruptcy filing. Because state law determines who may authorize a company’s bankruptcy filing, it is arguably constitutional for a state court’s receivership order to strip old management of that authority and reassign it to the receiver or new management. As always, it is best to consult with counsel to ensure that any proposed receivership order includes appropriate language addressing this issue.