The July 2018 decision in Sino Clean Energy, Inc. v. Seiden (In re Sino Clean Energy, Inc.), 901 F.3d 1139 (9th Cir. 2018) reminds us that authority to file a corporation into bankruptcy is determined by state law. Before the bankruptcy filing, a receiver was appointed for Sino Clean Energy, Inc. (“SCEI”), under Nevada state law. The order appointing the receiver held that the then-serving board of directors was liable for nonfeasance and gross mismanagement under Nevada law and granted the receiver numerous powers, including the power to reconstitute SCEI’s board of directors. The receiver replaced the board of directors (the “Original Board”) with a new sole director (the “Current Board”).
SCEI’s former CEO and board chair then purported to “reconstitute” the Original Board, despite its having been replaced by the receiver. This “rogue” board filed a voluntary petition Chapter 11 bankruptcy petition on behalf of SCEI. The bankruptcy court dismissed the Chapter 11 case because the petition was filed without corporate authority, as SCEI’s Original Board (the board that filed the corporate bankruptcy) had been replaced by the receiver and no longer had any authority.
On appeal, both the district court and the Ninth Circuit affirmed the bankruptcy court’s decision. State law determines who has the authority to file a voluntary bankruptcy petition on behalf of the debtor. Price v. Gurney, 324 U.S. 100, 106-107 (1945) (bankruptcy filed by shareholder who was not the board of directors was dismissed. It was a misnomer to speak of the filing of a (bankruptcy) petition on behalf of a corporation as a derivative action.)
Under Nevada law, the individuals who filed SCEI’s bankruptcy petition were not members of the Current Board at the time they filed the petition, and they were not authorized to file a bankruptcy petition on behalf of SCEI.
The authority for a corporation to file bankruptcy is determined by state law.