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Franchise Servs. of N. Am. v. United States Trs. (In re Franchise Servs. of N. Am.)

United States Court of Appeals for the Fifth Circuit

May 22, 2018, Decided; May 22, 2018, Filed

No. 18-60093

Opinion

 [*202]  KING, Circuit Judge:

Under longstanding Supreme Court precedent, state law dictates the procedures a corporation must follow to authorize a bankruptcy filing. When those procedures place the decision in the hands of the corporation's creditors, [**2]  some courts have allowed the bankruptcy to proceed even though the creditors withheld consent. This case presents a related but distinct question: when the certificate of incorporation requires the consent of a majority of the holders of each class of stock, does the sole preferred shareholder lose its right to vote against (and therefore avert) a voluntary bankruptcy petition if it is also a creditor of the corporation?

In this case, the shareholder made a $15 million investment in exchange for 100% of the debtor's preferred stock. At the same time, the debtor reincorporated in Delaware and amended its certificate of incorporation. As a prerequisite to filing a voluntary bankruptcy petition, the amended certificate requires the consent of a majority of each class of the debtor's common and preferred shareholders. Following the ill-fated acquisition of a new subsidiary, the debtor filed for bankruptcy. Fearing that its shareholders might nix the filing, it never put the matter to a vote. The sole preferred shareholder filed a motion to  [*203]  dismiss the bankruptcy petition as unauthorized. But the debtor argued that the shareholder had no right to prevent the filing. The shareholder's parent [**3]  company, explained the debtor, was an unsecured creditor by virtue of a $3 million bill the debtor refused to pay. The bankruptcy court disagreed and dismissed the petition. On appeal, the debtor asks us to reverse and to allow it to proceed with the bankruptcy.

We decline to do so. ] Federal law does not prevent a bona fide shareholder from exercising its right to vote against a bankruptcy petition just because it is also an unsecured creditor.1 Under these circumstances, the issue of corporate authority to file a bankruptcy petition is left to state law. The debtor is a Delaware corporation, governed by that state's General Corporation Law. Finding nothing there that would nullify the shareholder's right to vote against the bankruptcy petition, we AFFIRM.

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891 F.3d 198 *; 2018 U.S. App. LEXIS 13332 **; 65 Bankr. Ct. Dec. 196; 2018 WL 2325909

In Re: FRANCHISE SERVICES OF NORTH AMERICA, INCORPORATED, Debtor, FRANCHISE SERVICES OF NORTH AMERICA, INCORPORATED, Appellant v. UNITED STATES TRUSTEE; MACQUARIE CAPITAL (USA), INCORPORATED; MICHAEL JOHN SILVERTON; DANIEL RAYMOND BOLAND; BOKETO, L.L.C., Appellees

Subsequent History: As Revised, June 14, 2018.

Prior History:  [**1] Appeal from the United States Bankruptcy Court for the Southern District of Mississippi.

CORE TERMS

shareholder, bankruptcy court, blocking, fiduciary duty, veto, controlling shareholder, voluntary bankruptcy, Holdings, courts, bankruptcy petition, actual control, state law, golden, certificate of incorporation, voluntary petition, questions, holder, minority shareholder, unsecured creditor, preferred stock, appointment, certificate, federal law, bona fide, convertible, stockholder, lender, shares, cases, file for bankruptcy

Bankruptcy Law, Bankruptcy, Debtor Benefits & Duties, Eligibility, Business & Corporate Law, Corporate Governance, Shareholders, Shareholder Duties & Liabilities, Voluntary Cases, Filing Requirements, Filing of Petition, Judicial Review, Standards of Review, Clear Error Review, De Novo Standard of Review, Procedural Matters, Bankruptcy Appeals Procedures, Criminal Law & Procedure, Appeals, Appellate Jurisdiction, Certified Questions, Constitutional Law, The Judiciary, Case or Controversy, Advisory Opinions, Jurisdiction, Civil Procedure, Commencement of Case, Involuntary Cases, Standing, Liquidations, Estate Property Distribution, Unsecured Priority Claims, Administrative Expenses, Priority, Preliminary Considerations, Federal & State Interrelationships, Erie Doctrine, Governments, Courts, Judicial Precedent, Business & Corporate Compliance, Business & Corporate Law, Corporations, Articles of Incorporation & Bylaws, Directors & Officers, Scope of Authority, Limitations on Authority, Corporate Formation, Corporate Existence, Powers & Purpose, Powers, Reviewability of Lower Court Decisions, Preservation for Review, Shareholder Duties & Liabilities, Controlling Shareholders, Fiduciary Duties, Controlling Shareholders