INTERSECTION OF STATE LAW REMEDIES

AND BANKRUPTCY

Professor Michael D. Sabbath SBLI/W. Homer Drake, Jr.

Endowed Chair in Bankruptcy Law Mercer University School of Law

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Contents

I. Introduction .......................................................................................................................1

II. Who May File Bankruptcy Petition after State Receiver Appointed? ..............................1

A. The Receiver...........................................................................................................1

B. The Corporate Debtor .............................................................................................4

III. Filing of Bankruptcy Petition after Assignment for Benefit of Creditors ........................7

IV. Abstention Pursuant to Section 305 in Voluntary Cases ..................................................8

V. Turnover Pursuant to Section 543 ...................................................................................13

VI. Right of Assignee to Pursue State Law Preference Claims ............................................17

A. Sherwood Partners, Inc. v. Lycos, Inc. .................................................................17

B. Case Law after Sherwood Partners ......................................................................23

C. Sherwood Partners and the Future .......................................................................25

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I. Introduction

This paper discusses some of the issues that arise when federal bankruptcy law

intersects with state receiverships and assignments for the benefit of creditors. This is an

area where the case law is often scant, and there has been very little academic discussion.

But as assignments for the benefit of creditors have reemerged in recent years as a viable

(less expensive and less time-consuming) alternative to bankruptcy, these issues likely

will be arising more often.

II. Who May File Bankruptcy Petition after State Receiver Appointed?

A. The Receiver

It is well-settled that state law determines who has authority to file a bankruptcy

petition on behalf of an entity. See Price v. Gurney, 324 U.S. 100, 106-107 (1945);

Phillips v. First City, Texas-Tyler, N.A. (In re Phillips), 966 F.2d 926, 934 (5th Cir.

1992) (“Without further direction from Congress, we will continue to look to state law to

determine which people have authority to seek federal bankruptcy protection on behalf of

state-created business entities.”); In re Giggles Restaurant, Inc., 103 B.R. 549, 553

(Bankr. D. N.J. 1989) (“In determining who has authority to file a voluntary petition in

bankruptcy, it is clear that this power to file is governed by state law.”). A number of

courts have considered who has authority to file a bankruptcy petition on behalf of a

debtor once a receiver has been appointed pursuant to state law.

Several courts have concluded that a court order appointing a receiver under state

law may provide the authority for that receiver to file a bankruptcy petition. In In re

Monterey Equities-Hillside, 73 B.R. 749 (Bankr. N.D. Cal. 1987), the court found that a

receiver that was authorized by the state court to manage and control a limited

partnership had the authority to commence a case under Chapter 11, though the court

treated the filing as an involuntary petition absent the consent of the general partner. The

court did state generally that a bankruptcy petition for a partnership or other artificial

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entity may be filed by those who, under state law, “have the authority to manage the

entity,” and that “[s]ince the state court authorized the receiver to manage the partnership,

he also has the authority to commence a bankruptcy case.” Id. at 752. In that case, the

limited partners obtained an ex parte order appointing a receiver to “take over

management and control” of the debtor. But it should be noted that the order also

specifically provided that “[i]n furtherance of his duty to preserve, protect and defend the

property of the Limited Partnership and its limited partners, the receiver may file a

petition for reorganization of [the debtor] under Chapter 11 of the Bankruptcy Code. . .”

Id. at 751. The court could find nothing in the Bankruptcy Code or Rules that would

preclude the filing of an involuntary petition by a state court-appointed receiver who has

been expressly authorized to file a bankruptcy petition for the partnership. Nor did the

party seeking dismissal of the bankruptcy petition cite any case that had found that a state

court cannot authorize a receiver to file a petition. Id. at 752.

In In re StatePark Building Group, LTD., 316 B.R. 466 (Bankr. N.D. Tex. 466), a

receiver was appointed by the state court to liquidate assets of judicially dissolved limited

partnerships. After proceeding for six months in the state court receivership, the receiver

filed bankruptcy petitions seeking to liquidate the debtors under Chapter 11. In that case,

the receivership orders neither specifically granted nor specifically denied the receiver

authority to file on behalf of the debtors. The court did note, though, that the powers

given to the receiver by the orders were “fairly broad,” and that the receiver was

“empowered to do any and all acts necessary to the proper and lawful conduct of the

receivership,” and to “act as a liquidator” and to “liquidate all assets, including real

property.” Id. at 472. The court concluded:

While not as express as the Monterey Equities-Hillside order on the authority to

file a bankruptcy petition, the power to manage and liquidate the property of the

Debtors granted to the Receiver under both Texas law of receiverships and the

specific orders appointing the Receiver over these Debtors certainly includes the

authority to file a liquidation Chapter 11 case. Id. at 472.

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Based on these cases, it seems wrong to assume that a receiver who simply has

authority “to manage” an entity necessarily has authority to file a bankruptcy petition on

behalf of that entity. Courts generally find that a receiver derives his or her powers and

authority from the statutes, court rules, order of appointment, and subsequent order of the

appointing court. See, e.g., Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230,

1242 (9th Cir. 1995) (applying California law); In re Huff, 109 B.R. 506, 511 (Bankr.

S.D. Fla. 1989) (applying Florida law). Where a receiver’s powers are not statutorily

defined, courts have found that a receiver has only those powers specifically conferred

upon him or her by order of the court. See, e.g., Investors Ins. Co. of America v.

Gorelick, 108 Misc.2d 353, 441 N.Y.S.2d 151, 152 (App. Div. 1981) (receiver has no

legal power “except such as is specifically conferred upon him by order of the court”);

Midland Bank v. Galley Co., 971 P.2d 273, 277 (Colo. App. 1998) (“The order of

appointment of a receiver is the measure of the receiver’s power.”) Courts have

recognized, though, that the receiver’s powers include the implied authority necessary to

implement the orders of the appointing court. See, e.g., In re Telesports Productions, Inc.,

476 N.W. 2d 798, 800 (Minn. App. 1991); Sutton v. Schnack, 224 Iowa 251, 275

N.W.870, 872 (1937). Under state law, the power to file a voluntary petition in

bankruptcy on behalf of a corporation generally rests exclusively with the corporation’s

board of directors. See In re Wet-Jet Intern., Inc., 235 B.R. 142, 148 (Bankr. D. Mass.

1999) (applying Massachusetts law); In re Elgin’s Paint & Body Shop, 249 B.R. 110, 112

(Bankr. D.S.C. 2000) (applying South Carolina law). Whether a receiver with authority

“to manage” an entity has the implied authority to file a bankruptcy petition on that

entity’s behalf is, at least, debatable. See In re Prudence Co., Inc., 79 F.2d 77, 80 (2d Cir.

1935), cert. denied, 246 U.S. 646 (1935) (New York superintendent of banks took

possession of investment corporation under state banking law; court, in dicta, stated that

superintendent was vested with powers “similar to those exercised by an equity receiver,”

and that the banking law should not be interpreted to confer the power on him to file a

petition in bankruptcy, as this power lies with the directors); cf. In re Arkco Properties,

Inc., 207 B.R. 624 (Bankr. E.D. Ark. 1997) (bankruptcy filing is a specific act requiring

specific authorization and, in virtually every instance, this authority rests with the board

of directors; an individual’s authority to perform other specific acts on behalf of a

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corporation or under a general authority to manage the day-to-day affairs of a corporation

does not constitute authority to file a petition of bankruptcy); In re Stavola/Manson Elec.

Co., Inc., 94 B.R. 21, 24 (Bankr. D. Conn. 1988) (”It is well established that the president

of a corporation has no general power to file a petition because such an act goes beyond

the daily management of corporate affairs; it is a specific act requiring specific

authorization.”) Indeed, in In re Milestone Educational Institute, Inc., 167 B.R. 716, 723

(Bankr. D. Mass. 1994), the bankruptcy court suspended proceedings pursuant to § 305 in

order to permit the state appellate court to address the “novel and unsettled issues of

receivership law” that included “1) whether a state court receiver can be empowered to

commence a bankruptcy case for the corporation in the absence of consent by the

directors; and 2) if so, whether a receiver can be empowered to act on behalf of a

corporation and a debtor in a bankruptcy case in all respects so it is clear the corporation

not the receivership is the debtor.”

B. The Corporate Debtor

There is some scant authority that, once a state court receiver is appointed, only

that receiver has the authority to place the corporate debtor into bankruptcy. See Chitex

Communication, Inc. v. Kramer, 168 B.R. 587, 590 (S.D. Tex. 1994); In re Hammond, 13

F.2d 901, 903 (E.D. La. 1926); In re Associated Oil, 271 F. 788, 789 (E.D. La. 1921).

But the overwhelming majority of courts have found that the pendency of state court

receivership proceedings and blanket receivership injunctions issued in connection with

those proceedings do not operate to deny a corporate debtor access to the federal

bankruptcy system; state courts can enter orders prohibiting officers and directors from

interfering with the receiver’s management of the company, but the officers and directors

may still file a bankruptcy petition without the consent of the state court appointed

receiver. See, e.g., In re Cash Currency Exchange, Inc. v. Shine (In re Cash Currency

Exchange, Inc.), 762 F.2d 542, 552 (7th Cir. 1985); Struthers Furnace Co. v. Grant, 30

F.2d 576, 577 (6th Cir. 1929); In re Greater Apartment Hunter’s Guide, Inc., 40 B.R. 29,

31 (Bankr. N.D. Ga. 1984) (“a state court receivership cannot operate to deny a corporate

debtor access to this nation’s federal Bankruptcy Courts”); In re S & S Liquor Mart, Inc.,

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52 B.R. 226, 227 (Bankr. D.R.I. 1985) (corporate principals retain the right to initiate

voluntary bankruptcy notwithstanding receivership); In re Donaldson Ford, Inc., 19 B.R.

425, 430 (Bankr. N.D. Ohio 1982) (restraint of ability to file due to state court

receivership would be an unconstitutional deprivation of the right to federal bankruptcy

relief).

This issue was addressed recently by the bankruptcy court in In re Corporate and

Leisure Event Productions, Inc., 351 B.R. 724 (Bankr. D. Ariz. 2006). In that case, the

state court appointed a receiver and expressly authorized him to remove the officers,

directors, and other persons from the management of the corporate debtor (and related

corporate entities). In addition, the receivership order enjoined the defendants from

doing any act to interfere with the receiver’s custody and management of the receivership

assets, and specifically enjoined them from filing any petition on behalf of the debtor for

bankruptcy relief without permission of the state court. Nevertheless, the principal of the

debtor filed Chapter 11 petitions on behalf of the debtor and related corporations and

removed the state court proceeding to bankruptcy court. The receiver filed an

“Emergency Motion to Dismiss Unauthorized Chapter 11 Petition,” and the court denied

the motion.

The court first recognized that the Bankruptcy Code does not specify who has

authority to file a corporate petition, and that pursuant to federal common law,

bankruptcy courts generally look to state law to determine who is authorized to file a

voluntary petition for a corporation, partnership or other kind of organizational entity. Id.

at 731. But the court explained that:

[T]here is a federal common law exception to this reliance on state law when the

state law is in the form of a receivership order that attempts to preclude any of the

original constituents of the organizational entity from filing a petition on its

behalf, in order to maintain the state court remedy that has been obtained by the

creditors. It makes no difference whether the corporate officers and directors

were actually removed by the receiver or the receivership order merely enjoins

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their interference or filing of a petition. In either case, state law withdraws their

authority to file for bankruptcy relief yet in both cases the unanimous federal

common law holds that they are nevertheless entitled to do so. Id. at 731.

The court reasoned that “if removal of corporate officers and directors by a receivership

order were sufficient to prevent a bankruptcy filing, creditors who seek their state court

remedies to the exclusion of all others would routinely obtain receivership orders with

such boilerplate language. This is a tactic that bankruptcy law has prevented at least

since 1867.” Id. at 732, n.26.

The court also found that its analysis was not affected by the fact that the receiver

also might have authority to file on behalf of the debtor entities. The court stated:

Congress obviously intended bankruptcy relief to be available for the benefit of

many of the constituents of a business entity, including not only the creditor

interests but also the equity interests and perhaps those of employees and

customers as well. While bankruptcy law generally refers to state law to

determine who has eligibility to file the petition, it unanimously refuses to do so

(in the absence of an intracorporate dispute) when state law has provided a

creditor’s remedy to vest that authority in a receiver. Id. at 732.

The issue of who may file a bankruptcy petition when a state receiver has been

appointed also was considered recently by the bankruptcy court in In re Automotive

Professionals, Inc., 370 B.R. 161 (Bankr. N.D. Ill. 2007). In that case, the State of

Illinois moved to dismiss a Chapter 11 case filed by a financially distressed automobile

service provider. One of several arguments for dismissal made by the state was that

company’s directors lacked the authority to file a bankruptcy petition because of an Order

of Conservation issued by the state court. That order gave the Illinois Director of

Insurance the right to “immediately take possession and control of the property, books,

records, accounts, business and affairs, and all other assets” of the company. The state

argued that this order gave the Director complete control over the company and divested

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officers and directors of any authority over the company, including the power to file for

bankruptcy protection. Id. at 180. The court rejected this argument and, relying in part on

In re Corporate and Leisure Event Productions, Inc., the court explained:

Neither an Order of Conservation nor the filing of a complaint for rehabilitation

under the Illinois Insurance Code can impede API’s right to file for bankruptcy

protection. Otherwise, states could defeat any entity’s right to file for bankruptcy

protection simply by imposing some kind of receivership under state law before

the entity filed for bankruptcy. State law can suspend the operation of Title 11

only when a debtor is not eligible for relief under § 109 of the Bankruptcy Code.

Id. at 181.

The court concluded that the directors of the company had the authority to file a

bankruptcy petition. Id. at 181.

Thus it would seem that, even where directors and officers have been removed

or have been enjoined from interfering with the receiver’s administration of the company,

they can nevertheless undo this ouster by filing a Chapter 11 bankruptcy case. A

successful filing by management would put it back in control again. See 11 U.S.C.

§1107(a); but see 11 U.S.C. § 1104 (a trustee or an examiner can be appointed for cause

or in the interests of the creditors or shareholders). Language in the receivership order

forbidding such a filing would appear to be ineffective. But, as discussed below, a

bankruptcy court might be persuaded to dismiss the bankruptcy petition pursuant to

§305(a)(1) in favor of the state receivership proceeding, or excuse turnover in accordance

with § 543(d)(1).

III. Filing of Bankruptcy Petition after Assignment for Benefit of Creditors

An assignee does not typically have the power to sign a bankruptcy petition on the

debtor’s behalf. See Geoffrey Berman, GENERAL ASSIGNMENTS FOR THE BENEFIT OF

CREDITORS: THE ABCS OF ABCS 39 (2d ed. 2006). But courts generally have permitted

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parties to file for bankruptcy after making an assignment for the benefit of creditors. See,

e.g., Rosenberg v. Friedman (In re Carole’s Foods, Inc.), 24 B.R. 213 (B.A.P. 1st Cir.

1982); Moore v. Silverstein (In re Silverstein), 35 F.2d 497 (9th Cir. 1929).

The issue was discussed in In re Automotive Professionals, Inc., 370 B.R. 161

(Bankr. N.D. Ill. 2007). In that case, the State of Illinois, in arguing for the dismissal of

the debtor’s bankruptcy petition, noted that the corporate debtor had made an assignment

for the benefit of creditors before it filed its bankruptcy petition. The state pointed out

that § 541(a)(1) of the Bankruptcy Code limits the bankruptcy estate to the “legal and

equitable interests of the debtor in property as of the commencement of the case,” and

argued that because the debtor had transferred all of its assets before it filed for

bankruptcy, there was nothing to administer in the bankruptcy case and that it ought,

therefore, to be dismissed. Id. at 181-82.

The court rejected the state’s argument, finding that it was refuted by the text of

the Bankruptcy Code. The court noted that § 543(b) requires a “custodian” to turn over

to the trustee all property in his possession, and that the definition of “custodian” in §

101(11)(b) explicitly includes an “assignee under a general assignment for the benefit of

the debtor’s creditors.” Id. at 182. The court concluded that “[c]onsequently, assets in the

possession of the assignee must be turned over to the trustee and are part of API’s estate.

Thus, the transfer of API’s assets to the API Creditors’ Trust does not deprive API’s

estate of assets to administer. Id. at 182. See also Rosenberg v. Friedman (In re Carole’s

Foods, Inc.), 24 B.R. 213, 214 (B.A.P. 1st Cir. 1982) (citing legislative history evidencing

the intent of Congress that “property of the debtor” includes “property of the debtor at

the time the custodian took the property, but the title to which passed to the custodian.”)

IV. Abstention Pursuant to Section 305 in Voluntary Cases

Even where bankruptcy jurisdiction clearly exists, § 305(a)(1) of the Bankruptcy

Code provides that a bankruptcy court may dismiss a case, or may suspend all

proceedings in a case, “if the interests of creditors and the debtor would be better served

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by such dismissal or suspension.” See In re Williamsburg Suites, Ltd., 117 B.R. 216, 218

(Bankr. E.D. Va. 1990) (dismissal pursuant to § 305 was appropriate even where

petitioning creditors established a case for involuntary bankruptcy); see also Andrus v.

Ajemian (In re Andrus), 338 B.R. 746, 750 (Bankr. E.D. Mich. 2006) (Section 305 of the

Bankruptcy Code should be invoked if a party seeks suspension of all proceedings within

a case; 28 U.S.C. § 1334(c) is the proper vehicle if a party wishes the bankruptcy court to

abstain from a particular adversary proceeding); see generally 2 COLLIER ON

BANKRUTPCY § 305.01[1] (15th ed. rev. 2007). Because section 305(c) makes an order to

dismiss non-reviewable by courts of appeal (though reviewable by the district courts and

bankruptcy appellate panels), courts have noted that abstention is an extraordinary

remedy and that it should be used sparingly and not as a substitute for a motion to dismiss

under other sections of the Bankruptcy Code. See, e.g., In re Schur Mgmt. Co., Ltd., 323

B.R. 123, 129 (Bankr. S.D.N.Y. 2005); In re Corino, 191 B.R. 283, 287 (Bankr.

N.D.N.Y. 1995). The burden of proof is on the party seeking abstention. See In re

Statepark Building Group, Ltd., 316 B.R. 466, 476 (Bankr. N.D. Tex. 2004); In re

Sherwood Enterprises, Inc., 112 B.R. 165, 167 (Bankr. S.D. Tex. 1989).

A court should dismiss or abstain under § 305(a)(1) only where the best interests

of both the debtor and its creditors are better served. See Pennino v. Evergreen

Presbyterian Ministries (In re Pennino), 299 B.R. 536, 538 (B.A.P. 8th Cir. 2003); In re

Xacur, 216 B.R. 187, 195 (Bankr. S.D. Tex. 1997). The test requires that both creditors

and debtors benefit from the dismissal, rather than applying a balancing to determine if a

case should be dismissed. See In re Eastman, 188 B.R. 621, 624-25 (B.A.P. 9th Cir.

1995); GMAM Investment Funds Trust I v. Globo Communicacoes e Participacoes S.A.

(In re Globo Communicacoes e Participacoes S.A.), 317 B.R. 235, 255 (Bankr. S.D.N.Y.

2004). The legislative history to § 305(a) states its purpose as follows:

This section recognizes that there are cases in which it would be appropriate for

the court to decline jurisdiction . . . . Thus, the court is permitted, if the interests

of creditors and the debtor would be better served by dismissal of the case or

suspension of all proceedings in the case, to so order. The court may dismiss or

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suspend under the first paragraph, for example, if an arrangement is being worked

out by creditors and the debtor out of court, there is no prejudice to the rights of

creditors in that arrangement, and an involuntary case has been commenced by a

few recalcitrant creditors to provide a basis for future threats to extract full

payment. The less expensive out-of-court workout may better serve the interests

in the case. . . . See H.R. Rep. No. 95-595. 95th Cong., 1st Sess. 325 (1977); S.

Rep. 95-989, 95th Cong., 2nd Sess. 35 (1978)

Thus, § 305(a)(1) was intended to apply primarily in involuntary cases filed by dissident

creditors who seek to disrupt ongoing negotiations between the debtor and its creditors.

See, e.g., In re Trina Associates, 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991); in re Sun

World Broadcasters, Inc., 5 B.R. 719, 721-23 (Bankr. M.D. Fla. 1980).

But section 305(a)(1) is not so limited to this “paradigm case” for abstention that

is identified in the legislative history. Some courts have stated that the analysis as to

whether the interests of creditors and debtors would better be served by a dismissal

should be based on “the totality of the circumstances.” See, e.g., Wechsler v. Macke Int’l

Trade, Inc. (In re Macke International Trade, Inc.), 370 B.R. 236, 247 (B.A.P. 9th Cir.

2007); In re Mylotte, David & Fitzpatrick, No. 07-14109bf., 2007 WL 3027352 at *5

(Bankr. E.D. Pa. Oct. 11, 2007). Other courts have come up with various tests or factors

to consider, such as the court in In re NRG Energy, Inc., 294 B.R. 71 (Bankr. D. Minn.

2003), which surveyed a number of cases and came up with the following list of factors:

1. The economy and efficiency of administration;

2. The availability of another forum, or the actual pendency of an insolvency

proceeding in one;

3. The essentiality of federal jurisdiction to a just and equitable resolution;

4. The availability of alternative means for an equitable distribution of assets

and value;

5. The lesser cost of a non-bankruptcy process that would serve all interests

as well;

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6. The possibility that commencing administration in bankruptcy would

duplicate previous effort toward a workout in a non-bankruptcy setting;

and

7. The purpose for which bankruptcy jurisdiction was sought by the

petitioners. Id. at 80.

The support of a motion to dismiss under § 305(a)(1) by a majority of creditors has been

an important factor in the decision to dismiss by many courts. See, e.g., In re Rimpull

Corp., 26 B.R. 267, 272 (Bankr. W.D. Mo. 1982); In re Luftek, 6 B.R. 539, 548 (Bankr.

E.D.N.Y. 1980).

A number of courts, exercising their discretion pursuant to § 305(a)(1), have

dismissed an involuntary bankruptcy case where, prior to the filing of the bankruptcy

petition, the debtor had made an assignment for the benefit of creditors. See, e.g., In re

Cincinnati Gear Co., 304 B.R. 784 (Bankr. S.D. Ohio 2003); In re M. Egan Co., Inc., 24

B.R. 189 (Bankr. W.D.N.Y. 1982). Similarly, the court in In re Fortran Printing, Inc.,

297 B.R. 89 (Bankr. N.D. Ohio 2003) dismissed an involuntary case in favor of state

receivership proceedings. See also In re Sun World Broadcasters, Inc., 5 B.R. 719

(Bankr. M.D. Fla. 1980).

While most cases involving § 305(a)(1) have involved involuntary cases, it would

seem to apply also in voluntary cases. Commentators that have addressed this issue have

concluded that § 305 may apply in voluntary cases. See Reed, Sagar & Granoff, Subject

Matter Jurisdiction, Abstention and Removal Under the New Federal Bankruptcy Law,

56 AM. BANK. L.J. 121, 145 (1982) (“Although 305 will probably have its widest

applications in involuntary cases, the provision by its terms applies as well to voluntary

cases.”); Kennedy, The Commencement of a Case under the New Bankruptcy Code, 36

WASH. & LEE L. REV. 977, 1023 (1979) (“The authority of the court to abstain under

Section 305 extends to a case filed under Section 301, 302, 303, or 304.”) The court in

In re Colonial Ford, Inc., 24 B.R. 1014 (Bankr. D. Utah. 1982), relying in part on these

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commentators, decided that § 305(a)(1) applies in any case, voluntary or involuntary, and

reasoned:

[T]his reading is consistent with the policy to encourage workouts. It would be

anomalous to protect workouts from involuntary petitions while leaving them

vulnerable to voluntary petitions. Creditors would be protected from the

renegades in their number who sought involuntarily to commit a debtor to

bankruptcy, but they would have no similar check against debtors who compose

their debts with the promise that matters will be left out of court and then stage an

ambush in Chapter 11. Id. at 1020.

The court In re Iowa Trust, 135 B.R. 615 (Bankr. N.D. Iowa 1992), did in fact,

pursuant to § 305(a)(1), dismiss a voluntary Chapter 7 case in favor of a state

receivership. Thee court noted that the vast majority of creditors supported the dismissal,

and that dismissal also best served “the interests of efficiency and economy of

administration.” Id. at 623. In that case, the receiver, who moved to dismiss the

bankruptcy case, was able to demonstrate that the bankruptcy case “would add

unnecessary costs and duplication to efforts already under way.” Id. at 624.

The court in In re Corporate and Leisure Event Productions, Inc., 351 B.R. 724

(Bankr. D. Ariz. 2006), which dismissed a state receiver’s motion to dismiss a voluntary

case filed by the debtor, did so without prejudice to the receiver’s motion to excuse

turnover pursuant to § 543(d)(1), and to abstain or suspend the bankruptcy proceedings

pursuant to § 305(a)(1). The court explained:

The express powers to excuse turnover or abstain provide ample authority to

balance the equities based on the facts of each individual case, and provide a more

sensible and fact-based resolution than any bright-line test of corporate authority

or race to a courthouse could provide. That is obviously the remedy Congress

preferred and dictated, rather than the simple race to the courthouse on which the

Receiver and creditors rely. Id. at 733.

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V. Turnover Pursuant to Section 543

The bankruptcy court’s exclusive jurisdiction over the property of the estate is

protected by the provisions found in § 543 of the Bankruptcy Code. The Bankruptcy

Code clearly contemplates that, in the usual course events, any “custodian” will not

remain in possession of the property. Section 543((a) provides that once the custodian

has knowledge of the commencement of the bankruptcy case, the custodian may not

make any disbursements from, or take any action in the administration of, the property of

the debtor, the proceeds, the product, offspring, rents, or profits of such property, or

property of the estate, that is in the possession, custody or control of the custodian, except

such action as is necessary as is necessary to preserve that property. Sections 543(b)(1)

and (2) require the custodian to deliver all such property to the bankruptcy trustee, and to

file an accounting of any property of the debtor.

It has been said that § 543 is “triggered” only if: (1) a custodian has possession,

custody, or control of property; and (2) that property is property of the debtor. See

Sovereign Bank v. Schwab, 414 F.3d 450 (3d Cir. 2005); Walsh v. Bracken (In re

Davitch), 336 B.R. 241,248 (Bankr. W.D. Pa. 2006). The term “custodian” is defined in

§ 101(11) of the Bankruptcy Code and includes “a receiver or trustee of any property of

the debtor, appointed in a case or proceeding not under this title,” as well as an “assignee

under a general assignment for the benefit of the debtor’s creditors.” A state appointed

receiver is a “custodian” within the meaning of § 101(11) and is subject to the mandates

of § 543. See In re Cash Currency Exchange, Inc., 762 F.2d 542, 553-54 (7th Cir. 1985)

(“custodian” includes administrative receivers as well as court-appointed receivers), cert.

denied, 474 U.S. 904 (1985). In re Lizeric Realty Corp., 188 B.R. 499, 506 (Bankr.

S.D.N.Y. 1995) (“custodian” includes a state court appointed receiver). The definition

of “custodian” clearly includes an assignee for the benefit of creditors. See 11 U.S.C.

§101(11)(B).

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Property of the debtor’s estate includes “all legal or equitable interests of the

debtor in property as of the commencement of the case. See 11 U.S.C. § 541(a)(1).

Property held by the receiver at the commencement of the bankruptcy case is property of

the debtor’s estate under § 541(a) and § 543. See Yellow Cab Coop. Ass’n v Mathis (In

re Yellow Cab Coop. Ass’n), 178 B.R. 265, 269-270 (Bankr. D. Colo. 1995); see also In

re Sundance, 149 B.R. 641, 650 (Bankr. E.D. Wash. 1993) (receivership property

becomes property of a bankruptcy estate upon the filing of a petition). Property that a

debtor has assigned for the benefit of creditors remains “property of the debtor,” and the

assignee, as a custodian of the debtor’s property, is subject to § 543’s turnover

provisions. See Rosenberg v. Friedman (In re Carole’s Foods, Inc.), 24 B.R. 213, 214

(B.A.P. 1st Cir. 1982). See also In re Automotive Professionals, Inc., 370 B.R. 161, 181-

82 (Bankr. N.D. Ill. 2007).

Therefore, because state appointed receivers and assignees are both “custodians”

in possession of “property of the debtor,” they generally are subject to § 543’s turnover

provisions. But a custodian may be excused by the bankruptcy court from complying

with certain provisions of § 543. Section 543(d)(1) provides that a court, after notice and

a hearing, may excuse a custodian from compliance with § 543(a), (b) and (c) (including

the prohibition on custodian action, the turnover obligation and the accounting

obligation) if the interests of the creditors (and, if the debtor is not insolvent, the equity

security holders) would be better served by permitting the custodian to continue in

possession, custody or control of the debtor’s property. This is consistent with the

general abstention provision found in § 305, which permits the court to decline

jurisdiction in an appropriate case. See In re Pine lake Village Apartment Co., 17 B.R.

829, 833 (Bankr. S.D.N.Y. 1982) (legislative history with respect to § 543(d) reveals that

it reinforces the general abstention policy found in § 305). It should be noted, though,

that unlike § 305, which requires that the interests of both the creditors and the debtor be

considered, § 543(d)(1) does not require an analysis of the interests of the debtor. In

considering whether to exercise its discretion under § 543(d)(1), the court in Dill v. Dime

Savings Bank (In re Dill), 163 B.R. 221, 225 (E.D.N.Y. 1994) noted that the following

factors have been considered by the courts:

15

1. whether there will be sufficient income to fund a successful reorganization;

2. whether the debtor will use the turnover property for the benefit of the

creditors;

3. whether there has been mismanagement by the debtor;

4. whether or not there are avoidance issues raised with respect to property

retained by a receiver, because a receiver does not possess avoiding powers

for the benefit of the estate; and

5. the fact that the bankruptcy automatic stay has deactivated the state court

receivership action.

The party seeking to excuse the custodian from turnover generally bears the

burden of proving, by a preponderance of the evidence, that allowing the custodian to

remain in possession will be in the best interest of the creditors. See In re Lizeric Realty

Corp., 189 B.R. 499, 506 (Bankr. S.D.N.Y. 1995); In re Northgate Terrace Apartments,

Ltd., 117 B.R. 328, 333 (Bankr. S.D. Ohio 1990); but see In re Kramer, 96 B.R. 972, 977

(Bankr. D. Neb. 1989) (“[T]his Court concludes that it is simply the burden of the debtors

at the hearing held this year to convince the Court that allowing them to take possession

as all other debtors do in Chapter 11 cases will, for the immediate future at least, be in the

best interest of the creditors. It is not the debtors’ burden to prove at a hearing on a

motion for turnover that a plan can be confirmed.”)

In addition, section 543(d)(2) , which was added by the 1984 amendments to the

Bankruptcy Code, provides that a court must, after notice and a hearing, excuse a

custodian from compliance with § 543(a) and (b)(1) (the prohibition on custodian action

and the turnover obligation) if that custodian is an assignee for the benefit of the debtor’s

creditors who was appointed or took possession more than 120 days before the date of the

filing of the bankruptcy petition, unless compliance with the requirements is necessary to

prevent fraud or injustice. It should be noted that § 543(d)(2) applies only to an assignee

for the benefit of creditors and not to a receiver. See In re Northgate Terrace Apartments,

Ltd., 117 B.R. 328, 331 (Bankr. N.D. Ohio 1990) (Case law indicates . . . that a state

court receiver generally is not an “assignee for the benefit of the debtor’s creditors.”

16

Rather, an assignee for the benefit of creditors is one to whom a debtor voluntarily

assigns it property to be administered for the benefit of its creditors.); In re Sundance

Corp., 83 B.R. 746, 749 (Bankr. D. Mont. 1988) (“Under § 543(d)(2) Congress

specifically elected to place the assignee for the benefit of creditors in a different position

than a state court receiver, obviously recognizing that the trust relationship reposed in the

assignee warranted continued possession of the Debtor’s property in that person, if the

assignment was made for 120 days before the Order of relief. The Washington state

court receiver simply does not fit into that definition as an assignee for the benefit of

creditors . . . . reliance on 543(d)(2) is without merit.”)

Once the custodian has turned the property over to the trustee and otherwise

complies with § 543, the receivership or assignment effectively ends. As the court in In

re Rimsat, 193 B.R. 499, 502 (Bankr. N.D. Ind. 1996) explained:

The import of § 543 is clear. Whether characterized as having been superseded,

terminated, deactivated, or devoid of power, the conclusion is the same. The

receivership is effectively over and done with; it has come to an end. Control

over and decisions concerning the receivership’s assets “become property of the

bankruptcy court,” and its authority is “paramount and exclusive.” Nothing

remains for the pre-petition receiver to do except to comply with § 543.

Where turnover is excused, however, the status of a receiver (or assignee) is not

as clear. As noted by the court in In re Uno Broadcasting Corp., 167 B.R. 189, 201

(Bankr. D. Ariz. 1994), “[t]here is no direct guidance in the Code on the powers, duties

and status of an ‘excused custodian.’” While deciding to put off “to another day” the

exact status of the receiver, the court found that the receiver was required to obtain prior

bankruptcy court approval to employ professional persons pursuant to § 327(a), just as is

required of trustees and debtors in possession. See also In re Posadas Associates, 127

B.R. 278, 281 (Bankr. D. N.M. 1991) (“Once excused from compliance [with turnover]

and allowed to remain in possession, a custodian is in the same fiduciary capacity as a

trustee or a debtor in possession. A custodian is required, just as a debtor in possession

17

and trustee are, to obtain prior court approval to employ professional persons pursuant to

§ 327(a)”) The court in In re Uno Broadcasting Corp. stated:

In this Court’s view, the receiver, as a custodian excused from compliance with

turnover in bankruptcy case, now must have obligations and responsibilities to all

creditors of the estate and, assuming solvency, to the equity security holders of

the estate. The Receiver is the functional equivalent of the trustee, although

having not been appointed as such. Once turnover is excused, it defies logic to

treat the Debtor as the “debtor –in-possession,” since the receiver is in possession.

Another option is to treat the receiver as an examiner with expanded powers and

to set out the terms and conditions of those powers under a separate order.” 167

B.R. at 201.

Thus, while the custodian may be allowed to remain in possession of the property

pursuant to § 543(d), that property remains subject to the bankruptcy court’s jurisdiction.

See In re 245 Associates, LLC, 188 B.R. 743, 748-49 (Bankr. S.D.N.Y. 1995) (pursuant

to § 543(d)(1), the bankruptcy case continues while the receiver remains in possession;

despite the continuation of the receivership, the debtor and, if exclusivity has ended, any

party in interest can file a plan).

VI. Right of Assignee to Pursue State Law Preference Claims

A. Sherwood Partners, Inc. v. Lycos, Inc.

It has long been recognized that only Congress, and not state legislatures, can

enact discharge provisions to discharge debtors of their previously incurred debts. See

International Shoe v. Pinkus, 278 U.S. 261, 265-66 (1929); Farmers & Mechanics’ Bank

v. Smith, 19 U.S. 131 (1821). Beyond this limitation, though, it was generally

understood that states are free to enact their own collective creditor schemes, including

statutes that provided for assignments for the benefit of creditors. See Pobreslo v. Joseph

M. Boyd Co., 287 U.S. 518, 526 (1933) (upholding Wisconsin’s assignment statute

18

requiring the equitable distribution of a debtor’s assets, stating that the state law was “in

harmony with the purposes of the federal [bankruptcy] act” and that the state law served

“to protect creditors against each other” and “to assure equality of distribution unaffected

by any requirement or condition in respect of discharge.”) It also was assumed that a

state statutory provision permitting such an assignee to recover a preferential transfer is

entirely permissible, and approximately fifteen states have statutes that do authorize an

assignee to recover preferential transfers. See Brief of Petitioner in Support of Petition for

a Writ of Certiorara, Sherwood Partners, Inc. v. Lycos, Inc., No. 04-1607, 2005 WL

1330291 (U.S.) at *9 n.1 (May 27, 2005). As one commentator explained:

Preference laws, like fraudulent transfer laws, are not unique to bankruptcy law

and are not in conflict with the provisions or purposes of the bankruptcy law.

Preference avoidance is no more a distinctive feature of bankruptcy law than is

fraudulent transfer avoidance, judicial lien avoidance, unperfected security

interest avoidance, or other provisions which are designed to achieve equality of

distribution among creditors of the same class. Since state preference statutes like

state fraudulent transfer statutes are designed to achieve equality of distribution

among creditors, they are not, in principle, in conflict with the bankruptcy law and

are not to be invalidated without a clear and definite expression of such intent by

Congress. State preference and fraudulent transfer laws may co-exist with the

Bankruptcy Code . . . . Kupetz, Assignment for the Benefit of Creditors: Exit

Vehicle of Choice for Many Dot-Com, Technology, and Other Troubled

Enterprises, 11 J. BANKR. L. & PRAC. 71, 79 (Nov./Dec. 2001).

Indeed, the United States Supreme Court on several occasions has upheld, against

preemption attack, state statutes that incorporated preference avoidance powers to be

exercised solely by assignees, though those cases did not specifically address the

particular provisions that permitted the assignees to recover preferences. See Pobreslo v.

Joseph M. Boyd Co,, 287 U.S. 518 (1933); Johnson v. Star, 287 U.S. 527 (1933).

19

In Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005), cert.

denied, 546 U.S. 927 (2005), the Court of Appeals for the Ninth Circuit specifically

considered whether the Bankruptcy Code preempts a California statute permitting

avoidance of a preferential transfer in an assignment for the benefit of creditors. A

divided panel concluded that Cal. Civ. Proc. Code § 1800, which since 1979 has given

the assignee the right to recover preferential transfers under provisions substantially the

same as § 547 of the Bankruptcy Code, is preempted by federal bankruptcy law.

It should be emphasized that the court did not question the general validity of

voluntary assignments for the benefit of creditors, recognizing that such assignments had

“a venerable common-law pedigree,” that they had been upheld by the United States

Supreme Court, and that they are specifically contemplated in several sections of the

Bankruptcy Code. Id. at 1206 n.8. Instead, the court characterized the issue on appeal

rather narrowly as “whether the Bankruptcy Code preempts a state statute that gives an

assignee selected by the debtor the power to avoid preferential transfers that could not be

avoided by an unsecured creditor.” Id. at 1200. The court first noted that, in the absence

of explicit preemptive language, preemption may be inferred when “it is clear from the

statue and surrounding circumstances that Congress intended to occupy the field, leaving

no room for state regulation.” Id. at 1200. The court stated that “[t]here can be no doubt

that federal bankruptcy law is ‘pervasive’ and involves a federal interest ‘so dominant’ as

to ‘preclude enforcement of state laws on the same subject,’” but also recognized that

“[a]t the same time, federal law coexists peaceably with, and often expressly

incorporates, state laws regulating the rights and obligations of debtors (or their

assignees) and creditors.” Id. at 1201. The court saw its task as determining whether the

California statutory provision “is merely another creditor rights provision of the kind that

is tolerated by the Bankruptcy Code, or whether it gives the state assignee powers that are

within the heartland of bankruptcy administration.” Id. at 1201.

Sherwood Partners contended that § 544(b) of the Bankruptcy Code, which allows

a bankruptcy trustee to avoid any transfer voidable by unsecured creditors under

applicable law (including state law), demonstrated congressional intent not to preempt

20

state preference statutes. The court rejected this argument, pointing out that an assignee

is a “custodian” and not a “creditor”, and therefore found that “section 544(b) of the

Bankruptcy Code, and its partial incorporation of state transfer avoidance law, does not

save the California statute from preemption.” Id. at 1202.

The court then stated that Chapter 7 of the Bankruptcy Code embodies two ideals:

(1) giving the individual debtor a fresh start by giving him a discharge, and (2) ensuring

equality of distribution among creditors. Id. at 1203. After noting that the United States

Supreme Court has on several occasions made clear that state statutes that purport to give

debtors a discharge are preempted, the court went on to state, in language very troubling

because of its generality and because of its lack of any authority, that “[w]hat goes for

state discharge provisions holds true for state statutes that implicate the federal

bankruptcy law’s other goal, namely equitable distribution.” Id. at 1203. The court noted

that avoidance powers are among the major powers given to a Chapter 7 trustee to ensure

equitable distribution, and recognized that, in a bankruptcy case, a trustee’s exercise of

those powers is subject to a number of procedural and substantive protections. The court

explained that those powers of a trustee could be exercised only under the supervision of

the federal courts, and the trustee exercising those powers is not handpicked by the

debtor, as was Sherwood, but appointed and supervised by the United States Trustee, or

elected by the creditors to ensure impartiality. The court also pointed out that federal law

protects creditors, particularly out-of-state creditors like Lycos, from the trustee’s

possible conflicts of interest and other possible sources of self-dealing, and generally

provides extensive disclosure. Id. at 1204 (citations omitted).

The court also observed that, if a state assignee under the California statute were

to recover a preferential transfer under that statute, a federal trustee would not be able to

recover the same sum if a federal bankruptcy proceeding were subsequently commenced:

The creditor who disgorged the transfer cannot disgorge it twice; the creditors

who later received the money may be impossible to identify; and even if they can

be identified they may be gone or in financial difficulty themselves. The

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distribution of the recovered sum will then have been made by a state assignee

subject to state procedures and substantive standards, rather than by the federal

trustee subject to bankruptcy law’s substantive standards and procedural

protections. Id. at 1204.

Finally, the court was concerned that, once state proceedings begin, “they will

affect the incentives of various parties as to whether they wish to avail themselves of

federal bankruptcy law. The creditor whose ox is being gored by the state assignee may

have a new incentive to begin an involuntary federal proceeding; other creditors . . . may

have diminished incentives” because they may share in sums recovered by the assignee,

and “might therefore have no interest in invoking the potentially more expensive and

time-consuming federal processes.” Id. at 1205. The court stated that the Bankruptcy

Code delineates the circumstances under which federal bankruptcy proceedings are to be

initiated, and did “not believe that Congress contemplated state laws that would sharpen

or blunt the effect of those statutory incentives.” Id at 1205.

The court therefore concluded that:

We believe that statutes that give state assignees or trustees avoidance powers

beyond those that may be exercised by individual creditors trench too close upon

the exercise of the federal bankruptcy power. Congress has thought carefully

about how collective insolvency proceedings are to be conducted and set both

substantive standards and elaborate procedural protections to ensure a result that

is fair to debtors and creditors alike. The exercise of the preference avoidance

power by Sherwood under the authority of section 1800 is inconsistent with the

enactment and operation of the federal bankruptcy system and is therefore

preempted. Id. at 1205-1206.

Senior Circuit Judge Nelson dissented from the Sherwood majority. She noted

that California’s preference recovery statute is, by design, virtually identical to the

Bankruptcy Code’s preferential transfer statute. If the same transfer can be avoided in

22

both the state and federal systems, she failed to see how the state system interfered with

bankruptcy’s goal of equitable distribution. Id. at 1207. Judge Nelson was concerned that

the reasoning of the majority “would preempt any number of state laws governing

voluntary assignments for the benefit of creditors because those laws have the effect of

altering the incentives of various affected parties to initiate bankruptcy proceedings.” Id.

at 1206. She noted that “[u]nder the majority’s reasoning, any state statutory scheme,

including those governing voluntary assignments for the benefit of creditors, that ‘give[s]

state assignees or trustees avoidance powers beyond those that may be exercised by

individual creditors trench[es] too close upon the exercise of the federal bankruptcy

power.’” Id. at 1206. Judge Nelson pointed out that state voluntary assignments, by

definition, give the assignee more power than may be exercised by an individual creditor.

Id. at 1206. Judge Nelson expressed her concern that:

When the majority’s reasoning is carried to its logical extension, it has the effect

of pushing corporations threatened with insolvency from the less stigmatic, and

less costly, voluntary assignment scheme into the world of federal bankruptcy.

This should not have to be the case. I believe that both voluntary assignments and

the bankruptcy system can “peaceably coexist” as twin mechanisms aimed at

distributing the resources of an insolvent debtor. That voluntary assignments are

incorporated into bankruptcy law, and that they have existed alongside

bankruptcy law since its inception without causing an interference with the goal

of equitable distribution, supports my conclusion that state voluntary assignments,

and the laws that effectuate them, should not be preempted by bankruptcy law.

“[F]ederal regulation of a field of commerce should not be deemed preemptive of

state regulatory power in the absence of persuasive reasons—either that the nature

of the regulated subject matter permits no other conclusion, or that Congress has

unmistakably so ordained.” Here, Congress has not indicated that voluntary

assignments, generally, or preferential transfer avoidance statutes, specifically, are

to be preempted. Nor is the nature of the regulated activity—distribution of a

debtor’s assets—such that it is impossible to conclude that the state and federal

schemes could not co-exist. The majority privileges federal bankruptcy law by

23

suggesting that these collective proceedings are the only ones that Congress

intended for the equitable distribution of debt to creditors. Because I am

convinced that the two systems should co-exist, I respectfully DISSENT. Id. at

1208.

Shortly after the Sherwood Partners decision was handed down, commentators

were quick to share Judge Nelson’s concern that the decision’s holding could be far-

reaching. See Nathan, Sherwood Partners Threatens Viability of State Law Preference,

24 AM. BANKR. INST. J. 16, AT *66 (May 2005) (decision, if upheld, “will virtually

eliminate the ability of an assignee in an ABC (or similar fiduciary) to bring a preference

action in states within the Ninth Circuit); Crabbe, Preemption and the Bankruptcy Code:

Lessons from Sherwood Partners, 24AM. BANKR. INST. J. 5, at *63 (June 2005) (decision

“casts a large shadow over” state alternatives to bankruptcy).

B. Case Law after Sherwood Partners

Soon after the Sherwood Partners decision, two California District Courts of

Appeals expressly rejected the reasoning of the majority in that opinion, agreeing instead

with the reasoning expressed by Judge Nelson in her dissent. In Haberbush v. Charles

and Dorothy Cummins Family Ltd. Partnership, 139 Cal. App. 4th 1630 (2d Dist. 2006),

the court found that it was “undisputed that Congress intended, in general, to permit the

coexistence of state laws governing voluntary assignments for the benefit of creditors,”

and that “Sherwood Partners reaches too far in suggesting that any state law that

‘implicate[s]’ the federal bankruptcy law’s second major goal of equitable distribution is

preempted.” Id. at 1637. The court agreed with Judge Nelson’s observation that state

voluntary assignments, by definition, give the assignee powers beyond those that may be

exercised by individual unsecured parties, and concurred with Judge Nelson that the

majority’s reliance on this distinction was misplaced, as it “would cast doubt on the

validity of all voluntary assignment statutes, not merely those allowing the assignee to

avoid preferential transfers.” Id. at 1638. The court conceded that the majority in

Sherwood Partners was likely correct that incentives to use federal bankruptcy may be

24

affected by the existence of a less expensive and time consuming alternative to formal

bankruptcy proceedings, but did not see this as interfering with or as an obstacle to the

Bankruptcy Code’s objective of equitable distribution. Id. at 1639. The court concluded

that the California statute is not preempted by the Bankruptcy Code.

The conclusion reached in Haberbush was soon echoed by a second California

court in Credit Managers Assoc. of California v. Countrwide Home Loans, Inc., 144 Cal.

App. 4th 590 (4th Dist. 2006). After noting that lower federal court decisions on federal

questions are persuasive authority, but not binding on California state courts, the court

relied largely on the Haberbush court’s analysis in finding that the California statute is

not preempted by the Bankruptcy Code.

Two federal district courts in Wisconsin also recently considered this preemption

issue in the context of a Wisconsin statute that enables an assignee or receiver to recover

preference payments. The Wisconsin preference provision, like the California preference

provision, is substantially similar to the federal provision (thought the Wisconsin statute

allows avoidance of a preference transfer within 120 days rather than 90 days). The court

in APP Liquidating Co. v. Packaging Credit Co., LLC., No. 05-C-846, 2006 U.S. Dist.

LEXIS 60195 (E.D. Wis. Aug. 24, 2006), found the majority’s reasoning in Sherwood

Partners “unpersuasive,” and stated that it failed to see how a preference recovery scheme

that assists in equitable distribution to creditors somehow interferes with the federal

bankruptcy law’s identical goal of equitable distribution. See 2006 U.S. Dist. LEXIS

60195 at *6-7. Agreeing with Judge Nelson’s dissent in Sherwood Partners, the court

found that state voluntary assignment laws generally act in harmony with the purpose of

the federal Bankruptcy Code to equitably distribute assets to competing creditors, and

that “[p]reference provisions and voluntary assignment laws merely effectuate that

purpose, and are perfectly legitimate.” 2006 U.S. Dist LEXIS 60195 at * 8. The court,

therefore, refused to strike down Wisconsin’s preference provision.

The court in Ready Fixtures Company v. Stevens Cabinets, 488 F. Supp.2d 787

(W.D. Wis. 2007), also held that Wisconsin’s insolvency preference was not preempted

25

by federal bankruptcy law. After stating that the problems with the Sherwood decision

“are manifold,” the court concluded that “[t]he Wisconsin statute does not interfere in any

way with the goals or operation of the bankruptcy code.” Id. at 790-91. The court noted

that, while equitable distribution is important, the focus of the Bankruptcy Code is on

debtors, not creditors, and explained:

Wisconsin insolvency proceedings provide debtors with an efficient, inexpensive

way to liquidate their remaining assets equitably among their creditors. Within

that system, [Wisconsin’s preference statute] provides receivers with a means of

insuring that no one creditor gets more than his fair share of a debtor’s estate.

Although Wisconsin law gives receivers slightly more power to recover

preferential transfers than the bankruptcy code gives trustees, those differences do

not prevent the “equitable distribution” of the debtor’s assets in a manner that

would justify rendering the state procedure inoperable. To find that the state

statute is preempted would force insolvent debtors always to file for bankruptcy,

even when simpler, less expensive state proceedings are available to them. That

result is ahistorical and, if anything, undermines the bankruptcy code’s focus on

protecting (rather than exploiting) the debtor. Id. at 791.

C. Sherwood Partners and the Future

It has been noted that, while it may be too early to tell whether there is a decided

tend away from the holding in Sherwood Partners, “the post-Sherwood Partners cases

and commentary have certainly lessened the decision’s initial impact and eased fears that

state-created preference avoidance powers—and possibly, assignments and other

nonbankruptcy proceedings—were threatened with extinction.” See Berman & Vance,

State Law Preference Actions: Still Alive After Sherwood Partners v. Lycos, 26 AM.

BANKR. INST. J. 24 at *84 (December/January 2008). It also should be remembered that

the voluntary assignment laws of only about fifteen states authorize an assignee to

recover preferential transfers and that at least five of those fifteen states also empower

individual unsecured creditors to recover potential transfers. See Respondent’s Brief in

26

Opposition to Petition for a Writ of Certiorari, Sherwood Partners, Inc. v. Lycos, No. 04-

1607, 2005 WL 1596480 (U.S.) at *15 (July 5, 2005). If the ruling in Sherwood Partners

is limited to “special avoidance rights” not available to individual unsecured creditors,

then the rationale of Sherwood Partners may be applicable in only ten states.