Appeal from an order of the United States District Court for the Southern District of New York (William C. Conner, Judge) staying a Chapter 11 petition filed by defendant Royal Business Funds Corporation.
Newman and Winter, Circuit Judges, and Maletz, Senior Judge.*fn*
The Royal Business Funds Corporation ("Royal") appeals from Judge Conner's order staying its Chapter 11 bankruptcy proceeding. 29 Bankr. 777. Royal contends that it has an absolute right to file a petition in bankruptcy notwithstanding its consent to a Stipulation and Order appointing the Small Business Administration ("SBA") as a receiver and limiting the powers of Royal's board of directors. We affirm.
Royal is a small business investment company ("SBIC") licensed by the SBA to provide capital to small businesses. From 1962 through 1978, Royal and its predecessor in interest borrowed from the SBA almost $20,000,000, most of which was never repaid. By 1978, Royal had lost at least $5,000,000 of its original $6,000,000 capital. Since the SBA loans were conditioned on a $6,000,000 capitalization, the SBA had the right at that time to cause a liquidation.
In early 1978, Royal merged with the Bonan Equity Corporation ("BEC"), a corporation controlled by Seon Pierre Bonan and his wife. Bonan had successfully developed several hundreds of millions of dollars of real estate and was interested in developing a section of land in Colorado, known as Conquistador, owned by BEC.
Under the merger agreement, Bonan and his wife received 49% of the stock of the new company and Bonan became Royal's chief operating officer. Royal benefitted from the merger because it gained control of Conquistador, which, if properly developed, OBNN might result in land sales of $20-40 million, a sum sufficient to pay off the total combined indebtedness of Royal and BEC to the SBA.
Between 1978 and July of 1982, Royal's obligation to the SBA increased from approximately $17 million to over $23 million. On July 13, 1982, the SBA accelerated all of Royal's outstanding obligations to it. It also brought this action under 15 U.S.C. § 687c, alleging violations of the Small Business Investment Act and regulations promulgated thereunder and requesting the appointment of a receiver.*fn1 On July 14th, Royal's board of directors voted to file for bankruptcy.
Royal's bankruptcy was forestalled when negotiations with the SBA led to a Stipulation and Order entered in the present case by Judge Conner on July 15, 1982. The Stipulation recognized the SBA's appointment as Receiver of Royal and granted the SBA "exclusive power" to collect and administer Royal's assets under the district court's supervision. The Stipulation also limited the powers of Royal's Board of Directors to the appointment and replacement of counsel. Finally, the Stipulation provided that the SBA would lend Royal $385,000 to repay Royal and a subsidiary's indebtedness to Chemical Bank, loans personally guaranteed by Bonan.*fn2 Judge Conner's Order affirmed the terms of the Stipulation, and he took exclusive jurisdiction over Royal and enjoined all other legal proceedings concerning the company.*fn3
Pursuant to the Stipulation and Order, the SBA took control of Royal's assets and commenced management of its affairs. It named Allen I. Slaman to act as its agent in the receivership. In reliance on the Stipulation, and with Judge Conner's approval, the SBA loaned Royal an additional $3.5 million, partly for use in developing Conquistador. Neither Bonan nor any other Royal shareholder objected to these loans at the time they were made.
However, Bonan argued with Slaman over Slaman's management of the company and demanded that he, Bonan, be given control over Royal's daily management notwithstanding the provisions of the Stipulation and Order. As a result of this disagreement, Royal's Board of Directors authorized Bonan to file a Chapter 11 petition. On March 28, 1983, Royal filed the petition and Bankruptcy Judge Lifland ordered the SBA to show cause why it should not be required to deliver the debtor's property and file a written report with respect to that property. After a motion by the SBA, Judge Conner stayed the Chapter 11 proceeding. This appeal followed.
We believe that the consensual receivership and subsequent provision of fresh capital by the SBA limit Royal's right to file a Chapter 11 petition without the district court's consent. Royal is a licensed SBIC, heavily financed by SBA loans and subject to a regulatory scheme enacted by Congress to provide capital for small businesses which is not available commercially. 15 U.S.C. §§ 631 et seq. While we perceive no reason why Royal might not have freely filed the bankruptcy petition before consenting to the Stipulation and Order, its consent to the ...