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Corporate Debtor and Attorney May Be In Hot Water For Failure to File Corporate Resolution

All corporate bankruptcy filings must be authorized by a quorum of the board of directors, which is then memorialized by a corporate resolutionWritten by Craig D. Robins, Esq.
 
Every now and then I come across a situation that I just find incredible.  I just met with a potential client who was being subpoenaed by the attorneys for a Long Island Chapter 7 bankruptcy trustee.
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The trustee is now going on a fishing expedition for assets involving a corporate Long Island Chapter 7 business bankruptcy filing.  The trustee retained counsel to assist in this endeavor. 
 
Apparently, the potential client and another fellow were each fifty-percent shareholders of a corporation that filed for Chapter 7 bankruptcy relief over a year and a half ago.  The amazing thing was that the potential client who I met with had just found out about the bankruptcy.  Consequently, we now have all sorts of sticky issues such as whether the corporate bankruptcy was filed in good faith or not.
 
Corporate Bankruptcy Filings Must Be Authorized
 
Here’s why: any time a corporation seeks bankruptcy protection, it must have authority to file the bankruptcy petition.  That typically means that the corporation’s board of directors must meet, agree to permit the corporation to file for bankruptcy, and then acknowledge this authorization by preparing a corporation resolution authorizing the bankruptcy filing.
 
In this case, there was no corporate resolution!  Local E.D.N.Y. Bankruptcy Rule 1074-1(a) states that any bankruptcy petition filed by a corporation shall be accompanied by a duly attested copy of the corporate resolution authorizing the filing.  Such a document was never filed – nor could it have since it would have required the consent of both shareholders.  The shareholder I met with never consented to the bankruptcy filing, let alone knew about it.
 
So, here is a corporate bankruptcy filing that is fatally deficient.  If a corporate bankruptcy is not duly authorized, it can be dismissed.
 
Authority to File Corporate Bankruptcy Requires Consent by a Majority of the Board of Directors
 
In order for a corporation to have the appropriate authority to file bankruptcy, there must an agreement by the majority of the directors, which is necessary to constitute a quorum to transact business.
 
Shareholders, themselves, lack the authority necessary to file bankruptcy because they do not have the power of management.  Thus, one shareholder cannot decide, on his own, that he wants to put the corporation into bankruptcy, even if that shareholder is the president, unless he has over 50% of the voting shares of stock.
 
What is also perplexing is that the shareholder who filed the bankruptcy failed to include his partner as an interested party, which would have enabled the partner to then receive notice of the filing.
 
What happens now?   If this is brought to the attention of the court, the judge would have no choice but to find that the court does not have jurisdiction over the case and would be constrained to dismiss it.  It also appears that the subpoena that my potential client received cannot be enforced.
 
In any event, this matter leaves some serious questions upon the attorney who filed the case, considering that he may have filed a frivolous case.  The attorney, who holds himself out as a business lawyer, should know better.
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