Today we continue to review situations involving distressed commercial real estate. There has been a lot of press recently about huge institutional real estate funds holding portfolios of commercial property with values of $7 billion-$10 billion, but there are thousands of commercial real estate entities—often operated as limited liability companies or partnerships with a limited number of investors—that own and operate commercial real estate. Usually, the debt structure is fairly straightforward. In those entities, when the property loses tenants and requires redevelopment or refinancing, issues often arise among the members of the entity on how to address redevelopment of the property and loan indebtedness. If not resolved, the members may initiate state court proceedings against each other, which may include a request to appoint a receiver to manage the entity and the property during the pendency of the litigation. And of course the lender may institute its own proceedings to collect the loan and appoint a receiver during the pendency of the proceeding. One question is whether, and how, a receiver impacts the authority of the managing member or general partner to file a Chapter 11 case for the entity.

In 530 Donelson, Case No. 3:24-bk-00879, the U.S. Bankruptcy Court for the Middle District of Tennessee (the Bankruptcy Court) recently considered whether orders entered by a Tennessee state court appointing and empowering a receiver deprived the limited liability company’s owners of authority to file a bankruptcy case for the company. The Bankruptcy Court held the managing members retained the ability to file a bankruptcy petition for the company because the orders entered by the state court did not expressly give the receiver exclusive authority to do so. The Bankruptcy Court also cautioned that, even if they had, the supremacy clause of the U.S. Constitution may mandate the owners’ retention of the right to file a bankruptcy under the doctrine of preemption.

A ‘Plain Vanilla’ Receiver Was Appointed by State Court