Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.
The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)

Small Business and Partnerships: Partnerships
IDNameGroupOtherCode
Sec
Cross
Ref
Problem ReferencedProposed Solutions
NBRC-
0223
Frank R. KennedyProfessor, Michigan Law School; former Executive Director, Commission on the Bankruptcy Laws of the United States (1973)Cover letter discussing various areas of concern

Author provides a list of 30 "Topics for Consideration by Commission on Bankruptcy Laws." The recommended topic relating to partnerships is: Revision of provisions governing partnerships and limited liability companies.None.
NBRC-
0301
National Bankruptcy ConferenceNational Bankruptcy Conference (NBC), Bernard Shapiro - Chair


National Bankruptcy Conference believes that the following issue merits study by the NBRC: whether the law of partnerships should be "totally reconsidered."NBC concludes that partnership law should be "reconsidered." (No additional details are provided. The NBC Report, however, which discusses this position more thoroughly, has been "refined" and will be available to the NBRC.)
NBRC-
0303
Commercial Law League of AmericaCommercial Law League of America (CLLA)


The Commerical Law League of America believes that the following partnership issues should be considered by the NBRC: 1) Is a partnership agreement an executory contract (CLLA believes this issues should receive high priority; no additional details are provided) 2) Does the trustee exercise the rights of partners who are debtors or are those rights reserved to the debtor ("high priority" issue). 3) Are clauses automatically converting a general partner's interest to a limited partnership enforceable in bankruptcy Are clauses compelling the sale of the bankrupt partner's interest enforceable ("high priority" issue) 4) Under what circumstances may the bankrupt court stay creditor actions against non-debtor partners for their liability for partnership debts Are there differences during the pendency of the case and after a plan is confirmed and the case is closed ("high priority" issue) 5) Should the bankruptcy court have the power to prohibit general partners of the bankruptcy partnership from transferring non-partnership assets during the pendency of the case ("high priority" issue) 6) Should the bankruptcy court have the power to compel non-debtor general partners to disclose information about their financial condition Should this information be sealed ("high priority" issue) 7) What rights should the chapter 7 trustee have against general partners What rights should the chapter 11 estate have against the partners ("high priority" issue) 8) Should non-partnership creditors have priority over partnership creditors as to non-partnership assets of general partners who are in bankruptcy, or who are in bankruptcy ("high priority" issue) 9) Should § 1111 be calrified to provide that conversion of non-recourse debt to recourse debt does not create general partner liability on such debt ("high priority" issue) 10) Should the Code authorize creation of committees of partners ("high priority" issue) 11) What is the status of new partners, fomer partners, special partners and partners by estoppelThe issue of the status of new partners, fomer partners, special partners and partners by estoppel should be a "non-priority" because it is much too broad and probably could never be addressed effectively by statutory enactment.
NBRC-
0320
Robert M. Zinman, on behalf of the Bankruptcy InstituteAmerican Bankruptcy Institute ("ABI")Numerous position papers, memoranda and research material723Rule 1007(g)The author observes that: (1) most courts have found that partnership ageements are executory contracts; (2) that courts are split as to whether the trustee exercises the rights of the partners who are debtors, as opposed to those rights being reserved to the debtor; (3) most courts have found that clauses automatically converting a general partner's interest to a limited partnership enforceable in bankruptcy; (4) the majority of courts have found that the automatic stay does not protect non-debtor partners when the partnership files for bankruptcy relief; and (5) The extent of a partner's liability for partnership debts at state law determines whether, and to what extent, the partner may be compelled to contribute to a deficiency under current § 723;Code should be amended as follows: (1) Clarify the provisions regarding the court's power to prohibit general partners of the bankruptcy partnership from transferring non-partnership assets during the pendancy of a case. Such amendments should allow both partner and partner creditor requests for relief; (2) Provide the bankruptcy court with the power to compel non-debtor general partners to disclose information about their financial condition, as the information is relevant to many issues in the liquidation or reorganization of the debtor partnership; (3) Provide that the rights of the trustee contained currently in § 723 of the Code should be equally available to chapter 7 and chapter 11 trustees; (4) Give nonpartnership creditors and partnership creditors equal priority claims on the assets of general partners, and avoid return to the "jingle rule"; and (5) Clarify that § 1111 to provide that conversion of non-recourse debt to recourse debt does not create general partner liability on such debt; (6) Permit creation, where necessary, of a committee of partners;
NBRC-
0443
Samuel J. GerdanoExecutive Director, American Bankruptcy InstitutePartner and Partnership Bankruptcy: A Survey and Analysis of Case Law and Proposed Amendments to the Bankruptcy Code, by Robert J. Keach, Esq.

Author of letter is forwarding copy of "a detailed analysis and proposed amendments to the Bankruptcy Code relating to partnerships" prepared by Robert J. Keach, Esq., Chair of the Subcommittee on Partnerships of the ABI Committee on Business Reorganization.
NBRC-
0517
Morris W. MaceyAttorney, Former Chairman, Ad Hoc Committee of the ABAProposed amendment to §569 of the Code; copy of article by author and Professor Kennedy from The Business Lawyer, May, 1995.569
Author is forwarding copy of Amendment to §569 of the Bankruptcy Code proposed by an Ad Hoc Committee of the ABA.Contained in proposed amendment
NBRC-
0666
Richard LevinAttorney, Skadden, Arps, Slate, Meagher & Flom


Author addresses the April 3 draft memorandum on the partner as debtor concepts, addressing specific numbered paragraphs with his analysis and suggestions.
NBRC-
0676
Stanley WalkerCitizen


Author writes concerning his testimony before the Commission and forwarding a copy of his letter to Professor Jack Williams. Author was involved in a partnership which built a shopping center. He filed to force the partnership into Chapter 11 bankruptcy, under which a trustee was appointed who ran the business for four years and opposed all efforts to convert to a Chapter 7. During the four year period of the trustee's running of the business, the business made money because of the trustee's ability to avoid certain payments, among these the taxes. At the end of that time, trustee claimed that the taxes were owed by the partners, which the IRS agreed with, but author felt that the taxes should be paid by the partnership's estate.Congress needs to address the inconsistencies between the Bankruptcy Code, Internal Revenue Code, and partnership law.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.365
Author agrees that the partnership relationship should not be treated as an executory contract.Partnerships and LLC's should each have a unique statutory definition and treatment. It should be clear in the statute that such agreements are also not to be treated as financial accommodations under current §365(e)(2)(b).
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees that all ipso facto clauses should be void. The author does have concerns, however, that parties may manipulate the non-ipso facto provisions.No specific proposals.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.541
Author agrees that the economic value of the partnership should be part of the estate under §541; however, he notes that this may require some greater definition.No specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees with the basic concept that the agreement among the partners should determine the transferability of interests; however, he raises some concerns with the details.No specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees that buy-out rights and values which have general application should generally be enforceable, but questions the exclusion from the estate and from the valuation methodology of "Interests which arise, accrue or are exercisable after the order for relief." Author raises other related questions.No specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees that the DIP should be able to exercise management rights; however, this raises a number of questions concerning liability for losses. Author agrees that the DIP or trustee should be able to decline the responsibility and liability, but does this create a vacuum in management which itself causes liabilityNo specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees that there may be partnerships and situatioins where the identity and role of the general partner is so insignificant that the partners and partnership agreement should not be able to preclude and assignment of the interests to a new partner; but author is concerned whether the drafting of such a test will not result in people drafting around the test in their agreements. He has a similar concern with the use of separate agreements as a mechanism to evade the policy being implemented.No specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.105362Author opposes the use of §105 in the context of partnership and partners cases. There may be circumstances where it is appropriate for the intervention of the court to forestall or deter abuse. Author also agrees with the reluctance to change §362 in the context of partnerships or partners alone.No specific proposal.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & Berger
Comments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.
Author agrees with Sally Neely's comments concerning the status of prepetition partnership debts and with respect to curable breaches of the partnership agreement.The estate should have the obligation to provide adequate assurance, not just the opportunity to do so.
NBRC-
0709
Laurence J. KaiserAttorney, Fisher, Fisher & BergerComments of Laurence J. Kaiser on (1) The 4/15/97 proposal; (2) Sally Neely's 5/5/97 comments; and, (3) The 5/5/97 Revised Staff Proposal.

Author agrees that the resolution of disputes between the trustee and the individual debtor is a problem. The concept of agency makes sense, but author is concerned by the increased potential for conflicts of interest arising from the fragmentation or diffusion of authority and responsibility engendered by the proposal to separate ownership from management, future profit and loss from existing economic rights, and management of future economic rights from management of past economic rights.No specific proposal.
NBRC-
0786
Richard B. LevinAttorney, Skadden, Arps, Slate, Meagher & Flom LLP365, 541(c)(1), 363(l)

How to treat the relationships among the owners of an LLC or partnership when one of their number files a bankruptcy petition.For partnership or LLC purposes, the trustee (or the estate) of a bankrupt partner would be entitled to "the economic value of the debtor's ownership interest int he partnership and nothing more." "That is, the trustee should not be able, by succeeding to the ownership interest of the partner/LLC member under section 541 to start running the place and to make management decisions." Author also discusses the ramifications of his general concept for the NBRC proposals on the effect of a General Partner or LLC member's bankruptcy filing,
NBRC-
0797
Marcia L. GoldsteinChair, Committee on Bankruptcy & Corporate Reorganization, The Association of the Bar of the City of New York


The May 5, 1997 version of Proposal #3 of the Small Business Working Group contemplates that, with respect to management rights only, the automatic stay would not apply to actions of the partnership against the partner in bankruptcy in implementing rights under the partnership agreement. The Committee is troubled by this proposed exception to the automatic stay." "First, it is often difficult to separate management rights from economic rights." "More importantly, we are concerned that the loss of management rights and the economic consequences of that loss could have a dramatic effect on the partner's creditors and the reorganization process..." "The proposed exemptions to the automatic stay also creates incentives for partnership agreements to be drafted with very broad rights to remove partners." "The Committee is also concerned that under the Proposal, partners and the partnership would be permitted to exercise rights under the partnership agreement without first obtaining relief from the automatic stay notwithstanding the fact that the exercise of similar rights under another type of agreement would be subject to the automatic stay." "Finally, because the proposed exception to the automatic stay deals only with management rights, it may appear to protect a partner in circumstances where, arguably, there may be a stronger justification for an exception to the automatic stay.""If an exception to the automatic stay will permit actions to divest a partner of his or her management rights, without any consideration of the appropriateness of these actions or the impact that these actions may have on the partner's creditors and the reorganization process, the Committee believes that the definition of the term "transfer" in Section 101 of the Bankruptcy Code should be modified to ensure that an amendment to a partnership agreement may be a voidable "transfer" if the requirements for a fraudulent transfer under Section 548 are satisfied." In light of its concerns, the Committee asks that, in lieu of the proposed exception to the automatic stay, you consider a modification to Section 362 to augment the meaning of "cause" for purposes of obtaining relief from the automatic stay to permit partners or the partnership to exercise their respective rights under the partnership agreement. Proposed language is given.
NBRC-
0797
Marcia L. GoldsteinChair, Committee on Bankruptcy & Corporate Reorganization, The Association of the Bar of the City of New York


"The Proposal would permit a sale of the 'Partner's Interests' under Section 363, but only 'for cause shown,' and 'unless the Partner's Interests are or are more likely than not to be retained as an asset pursuant to a plan confirmed or more likely than not to be confirmed under chapters 11, 12, or 13 of the Bankrkuptcy Code.' The Committee supports your efforts to ensure that the debtor partner will be able to realize the value of its interests in the partnership. However, in our view, the Proposal creates multiple opportunities for litigation over whether "cause" is shown, whether the Partner's Interests 'are or are more likely than not to be retained' and whether an actual or, worse, a hypothetical plan is 'more likely than not to be confirmed.'" "The Committee is particularly concerned that the Proposal would allow a buyer of the Partner's Interests to be admitted to the partnership as a partner, notwithstanding objections that may be raised by other partners ..." The Committee believes that the protection offered by the Proposal is insufficient."We feel that the standards that are currently set forth in Section 363, as these standards have been developed by the courts in considering asset sales generally, are sufficient for a sale of the Partner's Interests." "The Committee feels that if any partner objects to the admission of a buyer to the partnership, the buyer should not be admitted to the partnership except as permitted by the partnership agreement or other applicable law." The Committee also proposes a revision of Part V.D.2. of the Proposal, for which the revised language is given.
NBRC-
0797
Marcia L. GoldsteinChair, Committee on Bankruptcy & Corporate Reorganization, The Association of the Bar of the City of New York


"The Committee believes that the non-debtor partners, the partnership and creditors of the partnership should be entitled to protection of their respective interests pending a decision by the partner in bankruptcy to assume or reject the partnership agreement."The Committee proposes specific language to modify the Bankruptcy Code as outlined above.
NBRC-
0890
Larry E. RibsteinGMU Foundation Professor of Law, George Mason UniversityWake Forest Law Review article by author entitled "The Illogic and Limits of Partners' Liability in Bankruptcy"

In general, author believes that bankruptcy law should not supplant state law in the area of partnerships and LLC's without a compelling reason for doing so. "First, federal prohibitions on ipso facto clauses unnecessarily interfere with efficient private contracts." "Second, state competition and experimentation are more likely to produce rules that efficiently balance partner and creditor interests than imposing a single federal law." "Third, state partnership law is better able than federal law to take into account rapidly changing circumstances affecting business organizations." "Fourth, by trupming state law rights, bankruptcy law gives partners and creditors perverse incentives to initiate costly and unnecessary bankruptcy proceedings." Author goes on to discuss particular suggestions he finds objectionable.1) adopt Proposal A to clarify that Code §365 does not apply to partnerships, LlCs or analogous firms; 2) clarify the enforceability of partnership and analogous agreements regarding rights of bankrupt partners; 3) clarify that neigher §362 nor any other Code provision interferes with the effectuation of these agreements; 4) provide that a bankrupt member's rights in a partnership or analogous firm and whether these rights are property of the estate under §541 and subject to control and disposition under §363 are governed by state law.