Still v. Fundsnet, Inc. (In Re Southwest Equipment Rental)Still v. Fundsnet, Inc. (In Re Southwest Equipment Rental)
MEMORANDUM
Thе bankruptcy trustee for Southwest Equipment Rental brought this suit against Fundsnet and First Data to recover the amount of alleged preferential payments that they received from Southwest beforе its bankruptcy. The defendants have filed motions to dismiss. They argue that Southwest’s bankruptcy case must be dismissed for lack of jurisdiction, and since this lawsuit is solely for the benefit of the bankruptcy estatе, it must also be dismissed for lack of jurisdiction.
The defendants contend that Southwest’s bankruptcy case must be dismissed because its voluntary bankruptcy petition was not properly authorized by its board of directors. Their argument against the voluntary petition focuses on how many directors Southwest was required to have, who was properly elected to the board of directors, and whether the proper procedures were followed by the directors. All their arguments concern the internal governance of the corporation. However, the defendants are not shareholders of Southwest and do not hold any shares as pledg-ees. They are merely creditors of Southwest.
The Bankruptcy Act of 1898 provided that the court would enter a separate order adjudicating the debtor a bankrupt after the debtor filed a voluntary bankruptcy petition. The law was changed so that the filing of the voluntary petition was an adjudicаtion. 2 James W. Moore, Collier on Bankruptcy 1118.46 (14th ed.1988). The current law, the Bankruptcy Code, follows this procedure. 11 U.S.C.A. §§ 301 & 303 (West 1979 & Supp.1992). The filing of a voluntary bankruptcy petition constitutes an order for rеlief. The court does not enter a separate order for relief in a voluntary case.
This change in procedure does not undercut the Supreme Court’s holding under the earlier law that creditors do not have standing to contest a corporation’s voluntary bankruptcy on the ground that the directors did not authorize it.
Even if action of directors authorizing the filing of a voluntary petition ... were in excess of the authority conferred, or otherwise invalid, creditors could not for that reason attack the consequent adjudication. The question is purely one of the internal management of the corporation. Creditors have no standing to plead statutory requirements not intended for their protection. If the stockholders’ rights had been infringed, and they chose to waive them, a creditor could not assert them in opposing an adjudication.
Royal Indemnity Co. v. American Bond & Mortgage Co.,
The Supreme Court’s decision in
Royal Indemnity
was neither the first nor the last to reach the same result.
Chicago Bank of Commerce v. Carter,
The bankruptcy courts in Florida have reported several cases in which someone questioned whether a corрoration’s voluntary bankruptcy case was properly authorized by the directors. The Florida bankruptcy courts have dismissed such cases when the motion to dismiss was filed by another shareholder.
In re AT Engineering, Inc.,
A creditor can argue that the Supreme Court’s decision has been overruled by the bankruptcy statutes. The bankruptcy statutes allow any party in interest to ask that a- corporation’s bankruptcy case ¿>e dismissed for cause. 11 U.S.C.A. § 707(a), 1112(b) & 1208(c) (West 1979 & Supp.1992).. A creditor is a party in interest. Failure of the directors to authorize a corporation’s bankruptcy filing is also cause for dismiss-* al of a bankruptcy case. It seems to follow that a creditor can obtain dismissal of a corporation’s bankruptcy on the ground that thе directors did not authorize it in accordance with state law or the corpora-, ti'on’s by-laws.
However, the law was essentially the same when the Supreme Court made its ’ decision. The failure of the directors to properly authorize the bankruptcy filing was a ground for vacating an adjudication, but it was a ground that the lower courts and the Supreme Court denied to creditors. 2 James W. Moore, Collier on Bankruptcy 1118.48 at 202-203 (14th ed. 1988).
In Chapter 11 cases, § 1109 adds to the argument that the Supreme Court’s decision has been overruled by statute. Section 1109 says that any party in interest, including a creditor, may raise and may appear and be heard on any issue in a Chapter 11 case. 11 U.S.C.A. § 1109(b) (West 1979);
see In re Memphis-Friday’s Associates,
The court concludes that the Supreme Court’s decision has not been overruled by statute.
“Standing” was not, perhaps, the best explanation for the Supreme Court’s decision. Any creditor has a stake in whether the debtor’s bankruptcy case will continue or will be dismissed. This gives rise to the argument that a creditor should be able to obtain dismissal оf a corporation’s voluntary bankruptcy case on the ground that the directors did not properly authorize it.
In re Giggles Restaurant, Inc.,
The court believes that there is an underlying practical reason for the rule. A creditor usually does not move for dismissal of a bankruptcy case out of concern for the debtor or other creditors. This case presents a good example. The trustee argues that the defendants received preferential payments. If the trustee wins, the defen
The court sees no reason in this case to depart from the general rule announced by the Supreme Court. Assuming the directors did not properly authorize Southwest’s bankruptcy filing, the court does not see why that should be a ground for dismissal on the motiоn of the defendants. The defendants are merely creditors and want the case dismissed to protect payments they received before the bankruptcy, without regard to whether dismissal will help or harm other creditors.
Judge Brown’s decision in
In re Memphis-Friday’s Associates
does not disagree with the general rule.
In re Memphis-Friday’s Associates,
The result is consistent with the Sixth Circuit’s decision in
In re Ives,
Thus, as a general rule, a creditor does not have standing to object to a corporation’s voluntary bankruptcy casе on the ground that the board of directors did not properly authorize it. Unusual facts may create exceptions to the rule.
Cf. In re Memphis-Friday’s Associates,
The court will enter an order denying the motions to dismiss to the extent they are based upon the alleged failure of Southwest’s directors to authоrize the filing of Southwest’s voluntary bankruptcy petition.
ORDER
The defendants have filed motions to dismiss based on the argument that the voluntary bankruptcy petition filed by Southwest Equipment Rental was not properly authorized by its board of directors. The defendants argue that since the bankruptcy petition was not properly authorized, this suit must be dismissed because (1) the court does not have subject matter jurisdiction, or (2) the trustee does not have capacity to sue because the bankruptcy case must be dismissed. In accordance with the court’s memorandum opinion entered this date, the court denies the motions to dismiss for lack of subject matter jurisdiction or lack of capacity to sue.
The court reserves ruling on other grounds for dismissal argued in the defendаnts’ motions, namely First Data’s argument that it cannot be liable as a shareholder of Fundsnet and the boilerplate arguments that the complaint for other, unexplained reasons fails to state a claim upon which relief can be granted. The court does not intend to rule on these grounds before a final pre-trial. This lawsuit has lingered too long. The court will enter a separate order for trial memoranda by the parties, and will set a pre-trial conference once the trial memoranda are filed.
Notes
. Two earlier Florida cases do not reveal the status of the parties who filed the motions to dismiss.
In re American Int'l Industries, Inc.,