United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Honorable Thomas M. Durkin United States District Judge
September 12, 2019, the Court entered an Order Appointing
Receiver over the Defendants and their assets. That order
contained an anti-litigation injunction barring all persons
and entities from commencing any action that would affect the
receivership estate. On October 16, 2019, creditors Ralco,
LLC, South Middle Creek Road Association, and San Luis
Central Railroad Co. filed an involuntary bankruptcy petition
against Defendant San Luis & Rio Grande Railroad in the
United States Bankruptcy Court for the District of Colorado,
despite knowing of the Order Appointing Receiver and its
contents. Upon the Receiver's emergency motion to
determine the effect of that petition on this Court's
jurisdiction to proceed, the Court held that the creditors
violated the anti-litigation injunction and declared the
petition void ab initio and of no force and effect.
The petitioning creditors subsequently filed a motion for
reconsideration or, in the alternative, for an order granting
leave to file an involuntary bankruptcy petition [R. 101].
That motion is granted in part and denied in part.
San Luis & Rio Grande Railroad (“SLRG”)
operates a 150-mile long railway in Colorado that primarily
transports grain, minerals, rock products, and produce. Mt.
Hood Railroad Company provides freight services and offers
excursion and dinner trains along a 22-mile long track in
Oregon (SLRG and Mt. Hood will collectively be referred to as
the “Defendants”). SLRG wholly owns Mt. Hood, and
Permian Basin Railways, Inc. wholly owns SLRG. Iowa Pacific
Holdings, LLC, in turn, wholly owns Permian Basin. Iowa
Pacific provides management services to all of its
subsidiaries (including the Defendants), such as insurance,
payroll, human resources and benefits.
2017, Plaintiff Big Shoulders Capital entered into a Loan and
Security Agreement with Iowa Pacific and its material
subsidiaries, including SLRG and Mt. Hood (the
“Borrowers”). The Loan Agreement granted Big
Shoulders a security interest in all of the Borrowers'
personal property assets (the “Collateral”), and
further imposed joint and several liability on the Borrowers.
The Borrowers defaulted, and Big Shoulders sued SLRG and Mt.
Hood to recover the money owed. In addition, Big Shoulders
moved for the appointment of a receiver, due to the
Defendants' alleged inability to operate their business
and maintain and preserve the Collateral. The Defendants did
not oppose Big Shoulders' motion, and the Court entered
an order appointing Novo Advisors (the
“Receiver”) as receiver over the Defendants on
September 12, 2019 (“Order Appointing Receiver”).
5 of the Order Appointing Receiver provides in relevant part:
On the Effective Date, Defendants (and, where applicable,
Defendants' officers, shareholders, directors, partners,
assigns, agents, servants, employees, accountants, and
attorneys), all persons and entities claiming by or through
Defendants, and all other person and entities . . . except by
leave of the Court, shall be enjoined, restrained, stayed,
and prohibited from (a) commencing, prosecuting, continuing
or enforcing any suit or proceeding against or affecting
Defendants or any part of the Receivership Assets, except
that such actions may be filed to toll any statutes of
R. 19 ¶ 5(ii). On October 16, 2019, unsecured creditors
Ralco, LLC, South Middle Creek Road Association, and San Luis
Central Railroad Co. (the “Petitioning
Creditors”) filed an involuntary chapter 11 petition
against SLRG in the United States Bankruptcy Court for the
District of Colorado (the “Petition”). Under 11
U.S.C. § 362(a), the filing of a bankruptcy petition
“operates as a stay, applicable to all entities, of the
continuation . . . of a judicial, administrative, or other
action or proceeding against the debtor that was or could
have been commenced before” the bankruptcy petition. 11
U.S.C. § 362(a).
October 17, the Receiver filed an emergency motion to
determine the effect, if any, of the automatic stay on this
Court's jurisdiction to proceed. R. 77. The following
day, the Court held a status hearing so that the attorneys
responsible for filing the Petition could explain why it did
not violate paragraph 5(ii) of the Order Appointing Receiver.
The attorneys explained that while they were aware of the
Order Appointing Receiver, they did not believe Paragraph
5(ii) covered creditor petitions for involuntary bankruptcy.
The Court subsequently held that the Petition violated
paragraph 5(ii) of the Order Appointing Receiver and declared
the Petition void ab initio and of no force and
effect. As such, the Court determined that the automatic stay
did not apply. R. 87.
Petitioning Creditors and the Board of Commissioners of Rio
Grande County, Colorado thereafter filed a motion for
reconsideration, arguing that the Order Appointing
Receiver's injunctive provisions should not apply to
creditors filing involuntary bankruptcy petitions. In the
alternative, the Petitioning Creditors sought leave to pursue
an involuntary bankruptcy petition.
styled a motion for reconsideration, the Court invited the
Petitioning Creditors to submit written briefing so that it
could further review the issues raised in the Receiver's
emergency motion. The Court will thus consider the
Petitioning Creditors' arguments de novo rather
than under the standard for motions to reconsider.
Court must answer three questions to resolve the Petitioning
Creditors' motion. First, did the filing of the Petition
violate paragraph 5(ii) of the Order Appointing Receiver?
Second, on the facts of this case, does this Court have the
authority to enjoin non-parties from filing involuntary
bankruptcy petitions with respect to property in the
receivership? And ...