Can A State Receivership Court Issue A Nation-Wide Stay?

By: Donald L Swanson

I recently ran across an Order from a state court, under that state’s receivership statutes, purporting to create a nation-wide injunction (i.e., a “stay”) against any judicial, administrative or other action by any creditor that would affect any of the debtor’s property. 

And the debtor’s property spans across state lines.

My first reaction to such a thing is this:

• “Since when can a state court issue a nation-wide stay?!” 

Here are three reasons why I believe such a stay is improper (as more fully discussed below): (i) lack of jurisdiction, (ii) comparison with assignments for benefit of creditors (“ABC”), and (iii) U.S. Constitution.

Lack of Jurisdiction

The receivership jurisdiction of any state court is limited:

• it extends only to property located within the geographical scope of that court’s jurisdiction, as established by the laws of that state; but
• in no event does it extend to property located in another state—an ancillary receivership is needed in that other state, from which a similar “stay” order can be obtained; and
• it does not extend to any creditor located in another state, absent sufficient minimum contacts.[Fn. 1]

So, a state receivership court:

• has in rem jurisdiction to order a “stay” injunction over property within the geographical limits of its jurisdiction;
• can have in personum jurisdiction over creditors of debtor that have sufficient minimum contacts; but
• has no jurisdiction over property located in another state and no jurisdiction over creditors in other states who have no minimum contacts.

ABC Comparison

Unlike a receivership, a stay is not needed for an ABC.  Here’s why.

A receiver displaces the debtor’s custody, management and control over receivership assets, while the underlying litigation proceeds.  Once the underlying litigation concludes, the receiver (i) liquidates receivership assets, and (ii) distributes the proceeds to creditors.

So, a receivership stay is needed to protect receivership assets while the litigation proceeds, because debtor retains ownership of receivership assets until the receiver’s sale occurs.

An ABC, by contrast, begins with a transfer of debtor’s ownership of assets to the ABC assignee.  Once the ABC assignment happens:

• debtor no longer has any title or interest in the ABC assets; and
• so, none of debtor’s creditors can obtain an interest in or impair the assigned assets after the ABC assignment occurs.

There is, actually, a long-standing U.S. Supreme Court opinion on this point.  The opinion is Reed v McIntyre, 98 U.S. 507, 512 (1878), which makes this ruling: 

• “the appellant would not have acquired priority over other creditors by the sheriff’s levy, for the obvious reason that the right of property in the goods seized under the execution had previously passed, by a valid and unimpeachable deed, to Combs [the Assignee in Debtor’s ABC], and they were not thereafter subject to execution as the property of the debtor.”  91 U.S. at 512.

U.S. Constitution

It is no-less than the U.S. Constitution that grants to Congress the right to create bankruptcy laws that apply throughout all of the United States and beyond.

That’s why a bankruptcy filed in any U.S. bankruptcy court results in a nation-wide automatic stay of actions by creditors from every corner of the U.S.—and from the entire globe.

The operative language in the U.S. Constitution is this:

• “The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (Art. 1, Sec. 8, Cl. 4)

Such “throughout the United States” power over contracts is conspicuously absent from the provision in the U.S. Constitution about states and contracts.  Here is what the Constitution actually says about the power of states over contracts:

• “No State shall enter into any . . . Law impairing the Obligation of Contracts” (Art. 1, Sec. 10, Cl. 1).

So . . . when a state court tries to issue an injunction (i.e., a “stay”) against the enforcement of contract rights in assets located in far-flung states, that state court is likely running afoul of the U.S. Constitution. 

Conclusion

A nation-wide injunction (i.e., a “stay”) in a state court receivership is not a real thing.  Courts may try to issue such an injunction, but they do not have the authority to do so.

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Footnote 1.  For an illustration of such receivership rules, see sections 5 and 14 of the Uniform Commercial Real Estate Receivership Act and the related Comments and Legislative Notes.

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