Bankruptcy Court Holds That Receivership Order Divests Debtor’s Manager Of Authority To File Chapter 11 Petition

When a loan goes into default, one remedy that a secured lender may have is to seek the appointment of a receiver over its collateral. However, if the lender succeeds and a receiver is appointed, the defaulting borrower’s “counterpunch” may be to file for Chapter 11. A borrower’s bankruptcy filing opens the door to potentially significant delay, uncertainty and expense for the secured lender in its efforts to recover on its loan.

For instance, the secured lender’s initial challenge in bankruptcy may be to keep the receiver in possession of the collateral, requiring the lender to file what may be a hotly contested motion to “excuse” the receiver’s “turnover” obligations under Section 543 of the Bankruptcy Code. Looking further ahead in the case, the lender may face a variety of challenges, including having the terms of its loan rewritten through a “cramdown” plan of reorganization.

In re Mount Acadia Senior Properties LLC, ___ B.R. ___ (Bankr. S.D. Cal. 2026) (2026 WL 319159), a recent decision by the United States Bankruptcy Court for the Southern District of California, highlights one potential way to reduce the risk of a bankruptcy proceeding following the appointment of a receiver: through language in the receiver’s appointment order that divests the debtor’s management of authority to act on behalf of the debtor.

Background

In Mount Acadia, the debtor, Mount Acadia Senior Properties LLC, owned real property that was being developed into a senior and assisted living facility. One of the debtor’s creditors, Live Oak Banking Company, sued the debtor and others in San Diego Superior Court, seeking the appointment of a receiver over the debtor and related affiliates.

Following a two-day evidentiary hearing, the state court appointed a receiver over the real and personal property assets of the debtor and a related entity. The order appointing the receiver provided, among other things, that (1) the receiver shall have “all” the powers of the debtor’s directors, officers and managers, and (2) the authorities of the debtor’s directors, officers and managers in existence prior to entry of the order are suspended. The receiver promptly posted the required bond, filed the required oath and otherwise effectuated the appointment order.

The debtor subsequently filed a “skeleton” Chapter 11 petition that was executed by an individual claiming to be the debtor’s managing partner. Attached to the petition was a written consent executed by the same individual stating that the debtor was authorized to file the petition and execute any related documents.

Live Oak moved to dismiss the bankruptcy case, arguing that under the terms of the order appointing the receiver, the debtor lacked authority to file the petition.

Bankruptcy Court’s Ruling

The bankruptcy court noted that a person filing a bankruptcy petition on behalf of a business entity must have authority to do so, and that generally state law determines who has such authority. Here, under the applicable law (the California Revised Uniform Limited Liability Company Act), any actions taken by the debtor’s manager on behalf of the debtor “required that corporate authority [be] vested in the manager.”

The order appointing the receiver, however, had unequivocally divested the debtor’s manager of authority to act on behalf of the debtor. At the time the petition was filed, only the receiver was vested with authority to take such action on the debtor’s behalf. Citing to controlling Ninth Circuit law, the bankruptcy court dismissed the debtor’s case because it had been filed without the required corporate authority.

The bankruptcy court noted that the result would be different if the receiver had filed the bankruptcy petition itself or ratified the filing, given that the receiver exercised all managerial control over the debtor. The court went on to reject the debtor’s argument that the receiver had implicitly ratified the unauthorized bankruptcy filing through either the receiver’s failure to contest the motion to dismiss or the receiver’s statements and conduct in the case. The court noted in particular the receiver’s express statement that it took no position on whether the petition was authorized.

Takeaway

It will likely be difficult in the typical “rents and profits” receivership scenario for a secured lender to obtain an order that contains provisions divesting the borrower’s management of authority to act on the borrower’s behalf. Indeed, in Mount Acadia, the court noted that the receivership order essentially placed the debtor into “what appears … to be very close to a full equity receivership.” And there is authority in other jurisdictions suggesting that a company retains the right to file bankruptcy even if a receiver has been appointed. Nonetheless, it is a tactic worth keeping in mind if—depending upon the facts and circumstances as well as upon the applicable law governing the borrower’s corporate authority—the court appointing the receiver is inclined to grant the relief.

For More Information

If you have any questions about this Alert, please contact James Billingsley, Geoffrey A. Heaton, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.