Opinion ID: 512405
Heading Depth: 3
Heading Rank: 3

Heading: The Receivership Analogy

Text: 37 In arguing that Louisiana law provides no remedy to the creditors here, and therefore, any lawsuit which ultimately benefits only the creditors is barred, the appellees overlook the receivership provisions of Louisiana Nonprofit Corporation Law, La.Rev.Stat.Ann. Secs. 12:258-12:259 (West 1969), which would provide the creditors of an insolvent Louisiana corporation with a remedy from the directors and officers of that corporation for gross negligence, mismanagement and breach of fiduciary duty. Under section 12:258(A)(1), a creditor may institute a proceeding against a corporation for the appointment of a receiver, and the court will make the appointment if there is a showing that the directors or officers of the corporation are jeopardizing the rights of its members or creditors by grossly mismanaging the corporation. Our analysis here is properly guided by cases construing the meaning of the analogous provisions of Louisiana Business Corporation Law, La.Rev.Stat.Ann. Secs. 12:151-12:152 (West 1969), just as we looked to cases construing the Business Corporation Law in our discussion of the duties of directors and officers to the corporation. 7 This court has characterized the Louisiana receivership provisions as a recognition of the inadequacies of the relief afforded at law to stockholders and creditors of a corporation and an attempt to give them adequate relief where the corporate business is grossly mismanaged. Kohler v. McClellan, 156 F.2d 908, 912 (5th Cir.), cert. denied, 392 U.S. 781, 67 S.Ct. 203, 91 L.Ed. 670 (1946). In fact, in a case decided before the Louisiana Business Corporation Law and the Louisiana Nonprofit Corporation Law were adopted, the Louisiana Supreme Court explained the rights and duties of a receiver in circumstances similar to those before us: 38 Receivers succeed to all rights of the corporation and may undoubtedly assert all corporate rights against unfaithful officers and directors ... to a certain extent and in certain cases, receivers are also representatives of the creditors, and, like a bankrupt assignee, may, as such representative, impeach and attack transactions of the corporation itself with others to their prejudice. Raymond v. Palmer, 35 La.Ann. 276, 278 (La.1883). 39 Thus, the receivership provisions supply a mechanism through which a creditor may seek relief from the directors of a corporate debtor for breach of fiduciary duty. 40 The case law makes clear that this remedy is available to an individual creditor, Kaufman & Enzer Joint Venture v. Bethlan Production Corp., 459 So.2d 60, 63 (La.Ct.App.1984), and that the receiver, once appointed, is empowered to administer the corporation's affairs in a manner designed to safeguard the interests of the corporation's creditors, debtors and stockholders. Reynaud v. Uncle Sam Planting & Mfg. Co., 152 La. 811, 94 So. 405 (1922); J.B. Beaird Corp. v. Johnson, 152 So. 789 (La.App.2d Cir.1934). Kaufman, 459 So.2d at 62. The receiver, then, is a court officer who acts as a trustee on behalf of both creditors and the debtor corporation. In re Bryce Cash Store, 12 La.App. 365, 124 So. 544 (1929). Moreover, the Louisiana Supreme Court has even allowed creditors to bring suit on the corporation's behalf against a receiver disabled by a conflict of interest from bringing a suit in the name of the corporation against himself. Dilzell Engineering & Construction Co., Ltd. v. Lehmann, 120 La. 273, 45 So. 138, 141-42 (1907). 41 If the individual creditor is successful in obtaining a receiver, the receivership will benefit all of the creditors equally, Uncle Sam Planting & Mfg. Co. v. Reynaud, 157 La. 955, 103 So. 276, 277 (1925) (a receivership inures to the benefit of all creditors alike and gives no preference to plaintiff [i.e., the party seeking the receivership]). In the case before us, the fact that the creditors are suing not for themselves, but on behalf of the corporation, ensures an identical outcome. That is, any proceeds of this suit against the directors will go to the debtor-in-possession to be distributed pro rata among the creditors of the bankrupt. 42 Further, the appointment of a receiver, at least in the case of an insolvent corporation, is a remedy available to creditors in the absence of fraud. The language of the statute allows for the appointment of a receiver upon a showing that directors or officers ... are ... grossly mismanaging the corporation. La.Rev.Stat.Ann. 12:258(A)(1) (West 1969). The Louisiana Supreme Court, in In re Receivership of Webre-Steib, Co., Ltd., 136 La. 272, 67 So. 1 (1914), interpreted the identical language in the predecessor statute to section 12:151, saying whether the gross mismanagement, ultra vires acts, wasting, misusing, or misapplying of funds, or violation of charter rights specified in the statute are done purposely and fraudulently, or negligently and inefficiently; the result is the same--the innocent stockholder, or creditor, is the sufferer--and the intent of the law is to protect him from inefficiency and negligence. 67 So. at 3. In Kinnebrew v. Louisiana Ice Co., the supreme court, applying the predecessor statute, carefully reviewed the financial condition of the corporation before refusing to appoint a receiver on grounds of mismanagement. The court held that the rights and interests of plaintiffs were not being jeopardized and put in imminent danger as the result of gross mismanagement of the ... directors. Kinnebrew v. Louisiana Ice Co, Inc., 216 La. 472, 43 So.2d 798, 801 (1949). That is, in the absence of allegations of fraud, the court carefully reviewed evidence of gross mismanagement, finding it insufficient given the relative financial health of the company. 8 43 To summarize, the creditors of LWE would have had a remedy under Louisiana law from the directors and officers of LWE for gross negligence, mismanagement and breach of fiduciary duty. While they could not have brought such a suit against the directors and officers directly, they could have sued for the appointment of a receiver. Once appointed, the receiver would be in the position to sue the directors on behalf of the corporation. The fact that the proceeds of such a suit would ultimately end up in the hands of creditors would be of no significance under the Louisiana case law to the validity of the receiver's action. That is, there is no bar in Louisiana law to actions brought by or in the name of a corporation against the directors and officers of the corporation which benefit only the creditors of the corporation; indeed, the Louisiana law specifically recognizes such actions. The appellees' arguments to the contrary are simply wrong.