In re Donaldson Ford, Inc., Bankruptcy No. 82-00221.

CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio
Writing for the CourtWALTER J. KRASNIEWSKI
Citation19 BR 425
PartiesIn re DONALDSON FORD, INC. dba Ray Hughes Ford, Debtor.
Docket NumberBankruptcy No. 82-00221.
Decision Date13 April 1982

19 B.R. 425 (1982)

In re DONALDSON FORD, INC. dba Ray Hughes Ford, Debtor.

Bankruptcy No. 82-00221.

United States Bankruptcy Court, N.D. Ohio, W.D.

April 13, 1982.

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Burton A. Kalniz, Toledo, Ohio, William Lukens, Cleveland, Ohio, for debtor.

Jim A. Miller, Toledo, Ohio, for Donaldson Ford, Inc., d/b/a Ray Hughes Ford by and through its receiver and manager.

Thomas S. Zaremba, Toledo, Ohio, for Donaldson Ford, Inc., d/b/a Ray Hughes Ford by and through its receiver and manager and for Wilbur Donaldson.

Joseph D. Shibley, Toledo, Ohio, for Wilbur Donaldson, a shareholder of Donaldson Ford, Inc., d/b/a Ray Hughes Ford.

Ralph DeNune, III, Toledo, Ohio, receiver.

19 BR 427

WALTER J. KRASNIEWSKI, Bankruptcy Judge.

This matter is before the Court upon the motion of Wilbur Donaldson and Ralph DeNune, III, Receiver, (Movants) to dismiss the Debtor's voluntary petition under Chapter 11 of the Bankruptcy Code as having been illegally filed in contravention of an order of the Common Pleas Court of Lucas County, Ohio. Alternatively, Movants invoke this Court's power under 11 U.S.C. § 305 to abstain from asserting jurisdiction over this matter. Considering the stipulations of fact submitted to the Court, the memoranda of law in support of and in opposition to the motion to dismiss, and this Court's own review of the controlling precedent in this circuit, it is the opinion of this Court that the motion should be overruled.

This case was initiated by the filing of a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on February 5, 1982. The petition was filed by Ray G. Hughes, the 51% shareholder, President, and member of the board of directors of the Debtor, an automobile dealership, pursuant to a resolution adopted at a "Special Meeting of the Board of Directors" on February 3, 1982. On February 9, 1982 Wilbur Donaldson, as the 49% shareholder and manager of the Debtor appointed pursuant to an order of the Common Pleas Court of Lucas County, Ohio in Case No. 81-01850 and Ralph DeNune, III, Receiver appointed in that same action, filed the present motion to dismiss the petition.

The motion to dismiss raises two main issues:

1. The extent of the authority, if any, remaining in the directors and officers of a corporation to act on behalf of the company in authorizing and filing a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code subsequent to the issuance of a blanket receivership injunction; and
2. Whether this Court should dismiss the petition as not being in the best interests of the creditors and the Debtor under § 305 of the Bankruptcy Code


On July 27, 1981 Wilbur Donaldson filed an action in the Common Pleas Court of Lucas County, Ohio hereinafter "state court". Named as defendants in that action are Donaldson Ford, Inc., dba Ray Hughes Ford, Ray G. Hughes, and certain other officers and directors of the Debtor. The complaint seeks to recover from the defendants therein for certain alleged acts of conversion in breach of their fiduciary duty to the company, to recover assets of the company assertedly diverted to others, and for mismanagement of the affairs of the company and wasting of assets. Among the types of relief sought in that action were injunctive relief against the asserted harmful actions of defendants therein and appointment of a receiver to take over operations of the Debtor.

After hearing testimony on December 29 and 30 of 1981, on February 2, 1982, the state court made the following findings of fact:

1. that Defendants, Ray G. Hughes and Michael Horvath, are actually engaged in committing and will continue to commit acts hereinafter set forth, to the irreparable injury, loss and damage of the Plaintiff, Wilbur M. Donaldson, and to Donaldson Ford, Inc., d/b/a Ray Hughes Ford;
2. that Donaldson Ford, Inc., d/b/a Ray Hughes Ford is a Delaware corporation in which Defendant, Ray G. Hughes, is the owner of fifty-one percent (51%) of the outstanding common stock and Plaintiff, Wilbur M. Donaldson is the owner of forty-nine percent (49%) of the outstanding common stock, that Ray G. Hughes and Michael Horvath are directors and officers of Donaldson Ford, Inc.;
3. that Donaldson Ford, Inc. is insolvent or is in immenent danger of becoming insolvent;
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4. that said plaintiff\'s motion for a preliminary injunction and the appointment of a receiver should be granted as necessary for the protection and preservation of the rights of the plaintiff and Donaldson Ford, Inc.

The court issued the typical "blanket receivership injunction", see generally Jordon v. Independent Energy Corporation, 446 F.Supp. 516 (N.D.Tex.1978), enjoining all persons "from in any way disturbing possession of the receiver and from prosecuting any actions which affect any of the property of said company, real or personal." Also enjoined were certain actions of the corporate officers and directors relating to their handling of advertising commissions, and the sale of insurance policies, warranty contracts, and materials or services to any customers of the company. Finally, Ralph DeNune, III, one of the Movants herein was appointed as receiver and given certain powers and authorities relating to the conduct of the Debtor's business.

Notwithstanding the state court order, on February 3, 1982 a "Special Meeting of the Board of Directors" was convened. It was resolved that it was in the best interests of the Debtor to file a petition for reorganization under Chapter 11 of the Bankruptcy Code, and that the officers of the Debtor would make the requisite filings to initiate a case. No authorization was sought, nor has any ever been given, from either the state court or its receiver to initiate the Chapter 11 filing.


The thrust of Movants' argument in support of dismissal is that the meeting of the Debtor's Board of Directors authorizing the filing of the voluntary petition and the actual filing of the petition by Ray G. Hughes were in direct contravention to the blanket receivership injunction issued by the state court, and that, therefore, there being no valid authority on the part of the directors and officers to act on behalf of the Debtor, the petition should be dismissed.

Relying on In re Joseph Feld & Co., 38 F.Supp. 506 (D.N.J.1941), Movants contend that the resolution authorizing the petition passed at the "Special Meeting of the Board of Directors" on February 3, 1982 was invalid as based on an illegal meeting requiring this Court to decline jurisdiction. Citing Chicago Title & Trust Co. v. Forty-One Thirty-Six Wilcox Building Corporation, 302 U.S. 120, 58 S.Ct. 125, 82 L.Ed. 147 (1937), Movants contend, state rather than federal law controls, in the first instance, to determine the capacity of a corporation to avail itself of the benefits of the Bankruptcy Code. This capacity, Movants argue, was lost as a result of the state court injunction, rendering the filing ineffectual.

The Court finds both cases inapposite under the circumstances of this case. In In re Joseph Feld & Co., 38 F.Supp. at 507, the court declined jurisdiction of a voluntary petition in bankruptcy since the meeting of the board of directors authorizing the institution of bankruptcy proceedings did not comport with local law. New Jersey law required due notice to all directors of the time, place and object of a meeting, absent waiver. Since one of the three directors of the corporation neither attended the meeting authorizing the petition, nor was notified of it, the resolution was invalid.

Chicago Title and Trust Co., 302 U.S. at 126, 58 S.Ct. at 127 held that a corporation which had been validly dissolved under the laws of the state which created it could not seek reorganization under § 77B of the Bankruptcy Act.

The record in this case reveals no deficiencies relating to insufficient notice to directors of the meeting authorizing the filing of the petition under Chapter 11, nor has there been any dissolution of the corporation herein involved. Movants' reliance on the above authority in support of their motion for dismissal, then, is misplaced. Furthermore, a close review of a line of cases decided in this circuit under the Bankruptcy Act of 1898 convinces this Court that the motion to dismiss should be overruled.

It has generally been held in this circuit that the pendency of an equity receivership will not ordinarily prevent a corporation

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from filing a voluntary petition in bankruptcy. In re Yaryan Naval Stores Co., 214 F. 563 (6th Cir. 1914); Struthers Furnace Co. v. Grant, 30 F.2d 576 (6th Cir. 1929); Muffler v. Petticrew Real Estate Co., 132 F.2d 479 (6th Cir.), cert. denied 319 U.S. 766, 63 S.Ct. 1329, 87 L.Ed. 1715 (1943). Accord, In re Prudence Co., 79 F.2d 77 (2nd Cir.) cert. denied 296 U.S. 646, 56 S.Ct. 248, 80 L.Ed. 459 (1935); Union National Bank v. Lehmann-Higginson Grocer Co., 82 F.2d 969 (10th Cir. 1936). See also, 1 Collier on Bankruptcy, ¶ 4.051 (14th Ed. 1976). The only recognized exception to this rule exists in cases which hold that an adjudication pursuant to a voluntary petition may be vacated for fraud. See, e.g., Zeitinger v. Hargadine-McKittrick Dry Goods Co., 244 F. 719 (8th Cir.) cert. denied 245 U.S. 667, 38 S.Ct. 64, 62 L.Ed. 538 (1917); Struthers Furnace Co. v. Grant, 30 F.2d 576 (6th Cir. 1929); In re E.C. Denton Stores Co., 5 F.Supp. 307 (S.D.Ohio 1933); In re Denton & Haskins Music Publishing Co., 10 F.Supp. 802 (S.D.N.Y.1935)

Thus, in Yaryan Naval Stores, 214 F. at 563, the Yaryan Naval Stores Company was an Ohio corporation having factories and places of business in Georgia and Mississippi. As a result of a creditors' suit in the United States District Court for the Southern District of Georgia, receivers were appointed and took possession of the corporation's property in both states. In addition to the usual order requiring the turn...

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