Monday, December 21, 2009

Case Makes Good Point About State Turnover Receivers

An opinion from Judge Craig Gargotta reaches the rather unremarkable conclusion that it was appropriate to dismiss a chapter 7 case filed for a corporation which had no assets and only one significant creditor. In re Gaston Premier Homes, Ltd., No. 09-11903 (Bankr. W.D. Tex. 11/18/09).

Gaston involved a case where a creditor obtained a judgment against the debtor and then obtained a turnover order which appointed a state court receiver. When the state court receiver started digging into transactions between the debtor and its principal, the debtor filed a chapter 7 petition. The receiver and the judgment creditor sought to have the case dismissed. The court dismissed the case under 11 U.S.C. Sec. 305 which allows the court to dismiss a case if it is in the best interest of creditors. This holding is unremarkable because it appears that the case was filed to frustrate the receiver rather than to obtain an equitable division of the debtor's assets.

More interesting is an argument which the court rejected. The state court receiver argued that his appointment divested management of the ability to file a bankruptcy proceeding. Important to the court's decision was the fact that this receiver was appointed pursuant to a turnover order for the benefit of a single creditor rather than being appointed as a receiver for the benefit of all the company's creditors under Tex. Civ. Prac. & Rem. Code Chapter 64.

The court stated:

The Receiver in the instant case was not appointed under the Receivership Chapter (Ch. 64) of the Texas Civil Practice & Remedies Code. He was appointed under the Texas Turnover Statute, in an order itself styled "Order for Turnover Relief", to take possession of the leviable property of the Debtor in order to satisfy the judgment of a particular creditor: the other Movant, Richard Johnson. Thus, the Receiver is acting to collect available property for one purpose: to pay one creditor, Richard Johnson. Movants themselves admit this in paragraph 9 of their Motion.

The Debtor has the better argument. To begin with, the Receiver in this case has been appointed for the benefit of Richard Johnson, not the creditors. There has been no case law provided to the Court that suggests that a receiver in this context abrogated the Debtor's ability to file bankruptcy. . . . The better reasoned cases hold that the ability to file bankruptcy is a function of federal, not state law. The Receiver in this instance cannot preclude a remedy under fderal law--there is nothing in the state turnover statute that allows for it.
Opinion, pp. 10-11.

The Bankruptcy Court makes a legitimate point. There is a world of difference between a Turnover Receiver appointed under Texas Civil Practice & Remedies Code Sec. 31.002 and a receiver appointed under Texas Civil Practice & Remedies Code Chapter 64. A Turnover Receiver is basically a collection agent for a judgment creditor. A Turnover Receiver is generally appointed on an ex parte basis with a minimal bond. There are no statutory qualifications for a turnover receiver.

On the other hand, a receiver appointed under Chapter 64 must be a citizen and a qualified voter and may not be a party, attorney or other person interested in the action for appointment of a receiver. A Chapter 64 receiver's bond must be "good and sufficient." (Bond of $100 for business grossing $70,000 per month was not "good and sufficient." Harmon v. Schoelpple, 730 S.W.2d 376 (Tex.Civ.App.--Houston[14th Dist.], 1987, no writ). Additionally, a Chapter 64 receiver for immovable property may not be appointed without notice.

The difference between the two types of receivers is that a Chapter 64 receiver is more like a bankruptcy trustee while a Turnover Receiver is simply an extension of the judgment creditor. It is important to note that a Turnover Receiver cannot prevent a debtor from seeking relief under the Bankruptcy Code.

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