Update courtesy of David Simonds and Edward McNeilly (Hogan Lovells)
In re Mount Acadia Senior Props. LLC, No. BR 25-05308-JBM11, 2026 WL 319159, (Bankr. S.D. Cal. Feb. 5, 2026)
The United States Bankruptcy Court for the Southern District of California (the “Bankruptcy Court”) granted a creditor’s motion to dismiss a debtor’s chapter 11 case after finding that the debtor’s management lacked corporate authority to file a chapter 11 case for the debtor under state law.
Mount Acadia Senior Properties LLC (the “Debtor”), a California limited liability company, owns real property in San Diego, California that it has been developing into a senior and assisted living facility. On December 23, 2025, the Debtor filed a barebones chapter 11 petition. The petition was signed by the Debtor’s managing partner, who also executed the written consent purportedly approving the filing.
Before the bankruptcy filing, creditor Live Oak Banking Company (“Live Oak”) sued the Debtor and related affiliates, including the Debtor’s sole manager, Mount Acadia Ventures, LLC, in San Diego Superior Court, and eventually filed an application for receivership over the Debtor and the related affiliates (the “Mount Acadia Parties”). Following an evidentiary hearing, on December 9, 2025, the state court granted Live Oak’s application and appointed a receiver with broad powers over the Debtor and various affiliates (the “State Court Order”). Specifically, the receiver was granted all powers of the directors, officers and managers of the Mount Acadia Parties, and the authorities of the directors, officers and managers were suspended while the receiver was in place.
On December 24, 2025, the day after filing its bankruptcy petition, the Debtor moved (the “CRO Motion”) to appoint the receiver as its chief restructuring officer (the “CRO”) and sought an order under section 543 of the Bankruptcy Code requiring the receiver to turn the receivership property over to himself in his capacity as CRO.
Live Oak opposed the CRO Motion and moved to dismiss the bankruptcy case as unauthorized based on the State Court Order
The Debtor opposed the motion to dismiss, arguing that the State Court Order did not purport to replace the Debtor’s manager. The Debtor also argued that if it lacked authority to file the petition, then Live Oak lacked standing to challenge the validity of the petition based on a long-established Supreme Court case. Finally, the Debtor argued that if its chapter 11 petition was defective, the receiver ratified the petition by both his participation in the bankruptcy case and his failure to move to dismiss.
The Bankruptcy Court overruled the Debtor’s opposition and granted the motion to dismiss.
First, it found that Live Oak had standing to challenge the validity of the chapter 11 petition. The Debtor relied heavily on a 1933 United States Supreme Court case, Royal Indem. Co. v. Am. Bond & Mortgage Co., 289 U.S. 165, 53 S. Ct. 551, 77 L. Ed. 1100 (1933). In Royal Indemnity, a case decided under the Bankruptcy Act of 1898, the predecessor of the modern Bankruptcy Code, the Supreme Court examined whether creditors had standing to challenge a debtor’s bankruptcy petition, which was filed without the consent of that debtor’s stockholders as required under state law. The Supreme Court concluded that the creditors lacked standing to challenge the petition and adjudication of the debtor in bankruptcy. While Royal Indemnity remained good law, the Bankruptcy Court distinguished it because Live Oak was not challenging the Debtor’s authority to file a chapter 11 petition based on the failure to comply with California law on corporate formalities. Rather, Live Oak predicated its challenge to the validity of the chapter 11 petition on the State Court Order, which vested all powers of the Debtor’s manager in the receiver and simultaneously suspended the authority of the Debtor’s manager to act on behalf of the Debtor. Moreover, the Bankruptcy Act of 1898 (under which Royal Indemnity was decided) limited creditor participation in bankruptcy cases, whereas the Bankruptcy Code permits “parties in interest,” which includes creditors, to raise and be heard on any issue in a chapter 11 case.
Second, the Bankruptcy Court found that, even if Live Oak or any other party in interest lacked standing to raise, or failed to raise, the propriety of the chapter 11 filing, it had the inherent authority to examine whether a bankruptcy case was properly before it.
Finally, the Bankruptcy Court, applying the Ninth Circuit case of Sino Clean Energy, Inc. v. Seiden (In re Sino Clean Energy, Inc.), 901 F.3d 1139 (9th Cir. 2018) (“Sino Clean Energy”), found that the Debtor lacked authority to file the chapter 11 petition based on the State Court Order. In Sino Clean Energy, the Ninth Circuit Court of Appeal affirmed the lower courts’ decisions dismissing a chapter 11 case where a former officer and other former board directors of a corporate debtor filed a bankruptcy petition without necessary authority after the state court had previously appointed a receiver who replaced the debtor’s board of directors with a sole director. Because state law supplies the requirements for corporate authorizations and state law includes the decisions of state courts, the individuals who filed the petition were no longer directors and the filing, therefore, was unauthorized.
Here, the Debtor was a single manager California limited liability company subject to the California Revised Uniform Limited Liability Company Act. As the State Court Order divested the manager of its powers and vested those powers in the receiver, the receiver, not the managers, had the authority to file a chapter 11 petition. As the receiver had neither filed the petition nor ratified the manager’s filing of the petition, the filing was unauthorized and the case had to be dismissed.
This case serves as a reminder that, while bankruptcy protection is freely available to corporate debtors, state law corporate governance formalities must be observed or a case could be dismissed for lack of authority.
