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News Room

Small Business, Partnership and Single Asset Real Estate Working Group
Proposal #2: "Partnership" as Debtor in Bankruptcy (Part II)

The Proposals set forth below represent additional recommendations for reform developed by the National Bankruptcy Conference ("NBC") and the American Bar Association’s Ad Hoc Committee on Partnerships ("ABA"). The Proposals constitute the second part of an integrated effort to provide a comprehensive framework for reform when a partnership is a debtor in bankruptcy. This memorandum should therefore be read in conjunction with the memorandum dated June 7, 1997.

Where the general partners have sufficient resources to satisfy any portion of the deficiency of partnership assets to pay partnership obligations, providing general partners with the incentive to contribute to a plan of reorganization can provide a greater return for creditors. Thus, a collective proceeding in which the liability of nondebtor general partners can be resolved is advantageous. The alternative is that the partnership trustee and partnership creditors remain relegated under nonbankruptcy law to engage in the costly pursuit of individual general partners in an attempt to recover from nonexempt assets. The often inevitable result is the bankruptcy filing of general partners who may be located in different jurisdictions.

A. ‘Temporary’ Injunction of Proceedings or Acts Against Nondebtor General Partners

1. Proposal

The Bankruptcy Code should be amended to permit the court for cause, upon motion of a party in interest and after notice and hearing, to temporarily enjoin actions of creditors or general partners of a debtor partnership against nondebtor general partners or their property on accountof partnership obligations. [ The ABA Report details the requirements of the scope of the contemplated injunction: (a) The court in which a partnership case is pending may, without the filing of an adversary proceeding, on motion of a party in interest, after notice and a hearing, enjoin-- (1) the commencement or continuation of an action or proceeding against a general partner to recover on a claim against the partnership debtor that arose before the commencement of the partnership case; (2) the enforcement against a general partner, or against property of a general partner, of a judgment obtained against the partnership before the commencement of the partnership case; (3) any act by the holder of a claim against the partnership debtor to obtain possession of or from, to exercise control over, or to create, perfect, or enforce a lien against the property of a general partner for the purpose of collection or enforcing the holder ’s claim against the partners; or (4) the commencement or continuation of any action or proceeding by any entity other than the partnership to enforce contribution or indemnification with respect to any liability arising out of the general partner ’s relation to the partnership and any other general partner. ABA Report , at 10-11.] No injunction shall be granted under this Proposal unless the nondebtor general partner (i) consents to the jurisdiction of the bankruptcy court; (ii) makes or undertakes to make the disclosures required by Proposal D below; and (iii) the order granting the injunction precludes the debtor from incurring obligations or transfers of property except under specified circumstances.

2. Comment

The personal liability of general partners for some or all of the obligations of the partnership under nonbankruptcy law [ FN: U.P.A. §15; R.U.P.A. §306.] can create problems in bankruptcy cases where the debtor is a partnership. Although the automatic stay protects a debtor partnership from creditor action, the general rule is that it has no application to nondebtor partners. [ FN: 11 U.S.C. §362 (1994). See, e.g., Patton v. Beardon, 8 F.3d 343, 348-40 (6th Cir. 1993);In re Two Appeals Arising Out of the San Juan DuPont Plaza Hotel Fire Litig., 994 F.2d 956, 969 (1st Cir. 1993); Teachers Ins. & Annuity Ass ’n v. Butler, 803 F.2d 61, 65 (2d Cir. 1986), appeal dismissed , 816 F.2d 670 (2d Cir. 1987). Unlike chapters 12 and 13, chapters 7 and 11 contain no provision which explicitly protects nondebtors who are jointly liable on a debt with the debtor . See 11 U.S.C. §§1201, 1301 (1994)(providing for a co-debtor stay).] Therefore, creditors may generally proceed against nondebtor general partners or their assets with impunity unless the bankruptcy court enjoins creditor action. Some courts have, however, looked beyond the literal language of the statute and extended the protection of the automatic stay to nonbankrupt third parties when "a debtorand nondebtor are so bound by statute or contract that the liability of the nondebtor is imputed to the debtor by operation of law." [ FN: See, e.g., A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.), cert. denied , 479 U.S. 876 (1986)(emphasizing that such third-party protection was limited to highly "unusual circumstances ").] Other courts have resorted to section 105 in order to augment the protection of the automatic stay in certain circumstances. [ FN: Section 105(a) provides that the "court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. " 11 U.S.C. §105(a) (1994). The legislative history to the Code makes clear that section 105 empowers bankruptcy courts to use their equitable powers in order augment the automatic stay: Under 11 U.S.C. §723(b) the court is empowered to order any such partner to provide assurance that the partnership ’s estate will be paid. Thus the court may use 11 U.S.C. §105 to enjoin creditors of the partner from levying on the partner ’s property or from obtaining liens thereon. This may need to be done because the judicial lien of the partnership ’s trustee under 11 U.S.C. §544(a) does not extend to property of the partners. H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1977).] Indeed, the legal relationships between a partnership and its general partners have required courts to frequently address the propriety of enjoining creditor action against nondebtor general partners. [ FN: See, e.g., Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 761 (5th Cir. 1995); Litchfield Co. of S.C. Ltd. Partnership v. Anchor Bank (In re Litchfield Co. of S.C. Ltd. Partnership), 135 B.R. 797, 805-07 (W.D.N.C. 1992); Myerson & Kuhn v. Brunswick Assocs. Ltd. Partnership (In re Myerson & Kuhn), 121 B.R. 145, 153-54 (Bankr. S.D.N.Y. 1990).]

The Bankruptcy Code generally resolves the tension between the rights of individual creditors and of creditors as a group in favor of the rights of the collective creditor body. [ FN: See, e.g., 11 U.S.C. §547 (1994).] A temporary injunction, much like the automatic stay, would serve to protect the property of nondebtor partners from the dismemberment that would otherwise occur during the formulation of the partnership plan. The injunction afforded nondebtor general partners under the Proposal would therefore halt the "race to the courthouse" under state law in favor of furthering the bankruptcy policy of equality of distribution in the partnership case. The Proposal is designed preserve asset values from dissipation through creditor action and provide nondebtor partners with a breathing spell in order to focus on rehabilitation or reorganization. [ FN: A competing consideration should be noted. An extended injunction may also afford a nondebtor general partner with the time to place assets beyond the reach of the creditors and the court. It could also increase the costs of the bankruptcy proceeding and reduce the incentive of nondebtor general partners to work toward a consensual resolution. See Larry E. Ribstein, The Illogic and Limits of Partners ’ Liability in Bankruptcy , 32 Wake Forest L. Rev. 31, 52 (1997). The ABA Recommendation providing for the termination of the temporary injunction within sixty- days, subject to renewal, might obviate some of these concerns. See infra note 10.]

The injunction provided by the Proposal, while operating to temporarily stay creditor action, does not operate automatically. Rather, it is incumbent upon the party requesting the relief to demonstrate its entitlement to such extraordinary protection. [ FN: The ABA and NBC have recommended that the court employ a nonexhaustive set of factors in determining whether to issue a temporary injunction: (1) whether the failure to enter an injunction would impact adversely on the partnership ’s ability to formulate a plan; (2) whether the failure to enter an injunction would adversely impact on the partnership ’s property; (3) whether entry of an injunction is necessary to protect the partnership ’s interest in the property or property interests of the general partners; (4) whether the general partners will contribute assets to the partnership through a plan; (5) whether entry of an injunction would prevent a multiplicity of litigation between and among creditors, general partners, and the partnership; (6) whether entry of an injunction would assist in an efficient and equitable administration of the estate ’s assets; (7) whether entry of an injunction would maximize return to creditors; (8) whether absent an injunction, a general partner ’s willingness to contribute voluntarily toward a plan would be diminished; (9) whether absent an injunction, the partnership ’s capacity to marshal assets necessary for its plan would be diminished; or (10) whether the general partners are involved with the management of the debtor ’s business. ABA (Supp. VI-C) Report , at 2; NBC Draft Report , at 26.] The injunction is designed to operate only for a limited duration. [ FN: The ABA recommends that the injunction issued under this Proposal be terminated "sixty days after the commencement of the partnership case unless, after notice and hearing, it is extended or otherwise modified " by court order. ABA Proposal , at 12.] The Proposal would also make explicit that the court has the authority to issue a temporary injunction, not only with respect to obligations for which a nondebtor general partner is statutorily liable under nonbankruptcy law, but also those debts that the general partner has guaranteed. [ FN: A competing consideration should be noted. The courts have generally required a compelling justification prior to interfering with a bargained-for nonbankruptcy right to pursue a nondebtor guarantor. See generally Chase Manhattan Bank v. Third Eighty-Ninth Assocs. (In re Third Eighty-Ninth Assocs.), 138 B.R. 144 (S.D.N.Y. 1992); Old Orchard Inv. Co. v. A.D.I. Distribs. Inc. (In re Old Orchard Inv. Co.), 31 B.R. 599 (W.D. Mich. 1983).] The court in all cases has, however, the discretion to balance the respective interests of the parties in light of bankruptcy policy and fashion appropriate relief (including posting a bond) under the circumstances.

A request for injunctive relief under section 105 is governed by Part VII of the Federal Rules of Bankruptcy Procedure. [ FN: Fed. R. Bankr. P. 7001(7).] The decisional law has been consistent in ruling that the commencement of an adversary proceeding is therefore a prerequisite to obtaining injunctive relief. [ FN: See, e.g., State Bank v. Gledhill (In re Gledhill), 76 F.3d 1070, 1080 (10th Cir. 1996); Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 762 (5th Cir. 1995); Wedgewood Inv. Fund, Ltd. v. Wedgewood Realty Group, Ltd. (In re Wedgewood Realty Group, Ltd.), 878 F.2d 693, 701 (3d Cir. 1989); Ramirez v. Whelan (In re Ramirez), 188 B.R. 413, 416 (Bankr. 9th Cir. 1995).] The Proposal would dispense with the adversary proceeding requirement in favor of a more expeditious and less cumbersome mechanism for obtaining injunctive relief.

The Proposal would alter the current requirements with respect to standing to obtain injunctive relief under section 105. The courts have generally limited standing to commence an adversary proceeding to enjoin the actions of nondebtor third parties to the debtor, the debtor in possession or the trustee. [ FN: See, e.g., In re Munoz, 73 B.R. 283, 285 (Bankr. D.P.R. 1987).] The Proposal would permit any "party in interest," including nondebtor general partners, to request relief.

Finally, the injunctive relief authorized by the Proposal would not prevent separate creditor action against nondebtor general partners on account of their separate obligations, but only creditor action arising in connection with partnership obligations. [ FN: Contra supra note 11 and accompanying text (addressing the issue of those partnership obligations which are personally guaranteed by the nondebtor general partner).]

B. Relief from the Temporary Injunction

1. Proposal

The Bankruptcy Code should be amended to provide that the court, upon on request of a party in interest and after notice and hearing, may, for cause, grant relief from the temporary injunction provided pursuant to Proposal A. The relief available would include the termination, annulment, modification or conditioning the continuation of the injunction.

2. Comment

The Proposal is an adaptation of section 362(d) of the Bankruptcy Code and recognizes that circumstances may warrant granting relief from the temporary injunction issued pursuant to Proposal A above. Therefore, a court is permitted to grant appropriate relief under the Proposal for cause. "Cause" would include the "absence of any reasonable likelihood of reorganization, inability to effectuate a plan within the time fixed by the court, denial of confirmation . . . revocation of an order of confirmation, inability to effectuate substantial consummation of a confirmed plan, material default with respect to a confirmed plan, termination of a plan by the reason of the occurrence ofa condition specified in the plan, or the nonpayment of fees or charges." [ FN: ABA Report , at 13.] "Cause" warranting relief from the temporary injunction would also exist if the creditor establishes that it would suffer irreparable harm or "if the reasons for the injunction or the protections afforded partnership creditors and other general partners in conjunction with the injunction do not, or cease to, exist in the case with respect to the nondebtor general partner." [ FN: NBC Draft Report , at 27. Thus, relief from the injunction should be afforded if, among other things: (a) the partnership creditor or creditors or other general partner or partners would be irreparably harmed by continuation of the injunction, (b) maintenance of the injunction is not meaningfully furthering either the reorganization of the debtor partnership or maximization of value available to pay creditors, [or] (c) the protected general partner fails to comply with the terms and conditions of the injunction. Id.]

C. ‘Postconfirmation’ Injunction of Proceedings or Acts Against Nondebtor General Partners Who Contribute to Plans

1. Proposal

The Bankruptcy Code should be amended to permit the court, in connection with the confirmation of a plan of reorganization in a partnership case, to enjoin partnership creditors and general partners from actions or proceedings against a general partner or its property to collect on partnership-related claims who has contributed or made an enforceable commitment to contribute an amount to the payment of debts in accordance with the plan or the order confirming the plan. The court, after notice and hearing, must determine that the plan complies with otherwise applicable requirements for confirmation in light of the personal assets of the nondebtor contributing partners and that the injunction will not discriminate unfairly or inequitably with respect to creditors of the partnership or the claims of the general partners for contribution or indemnity.

2. Comment

The confirmation of a partnership’s plan of reorganization generally operates to discharge all prepetition obligations of the partnership. [ FN: 11 U.S.C. §1141(d)(1)(A) (1994).] The discharge of a debtor in bankruptcy does not, however, operate to discharge the liability of a nondebtor liable on the same obligation. [ FN: See 11 U.S.C. §16 (1976)(repealed)( "The liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankruptcy. "). See also 11 U.S.C. §524(e) (1994)(providing that a "discharge of a debtor of a debtor does not affect the liability of any other entity on, or the property of any other entity for such debt ").] Therationale for the rule is based on the fundamental principle that the bankruptcy laws are not intended to benefit those who have not submitted themselves or their assets to the burdens of the bankruptcy process. [ FN: See, e.g., First Nat ’l Bank v. Poland Union, 109 F.2d 54, 56 (2d Cir.), cert. denied , 309 U.S. 682 (1940).] Under the Bankruptcy Act, the courts generally construed the narrow language of the discharge provision as barring a discharge or release in favor of third parties under a plan of reorganization. [ FN: See, e.g., Union Carbide Corp. v. Newboles, 686 F.2d 593, 595 (7th Cir. 1982)(This case is no different because the plan expressly purports to discharge guarantors of the bankrupt. The import of Section 16 is that the mechanics of administering the federal bankruptcy laws, no matter how suggestive, do not operate as a private contract to relieve co-debtors of the bankrupt of their liabilities. "); R.I.D.C. Indus. Dev. Fund v. Snyder, 539 F.2d 487, 490 n.3 (5th Cir. 1976), cert. denied , 429 U.S. 1095 (1977)( "The bankruptcy court can affect only the relationships of debtors and creditor. It has no power to affect the obligations of guarantors. "); Consolidated Motor Inns v. BVA Credit Corp. (In re Consolidated Motor Inns), 666 F.2d 189, 191 (5th Cir.), cert. denied , 457 U.S. 1140 (1982)(holding that "debts of nonpetitioning individual partners . . . to non-assenting creditors cannot be discharged by a partnership ’s plan "); Poland Union , 109 F.2d at 56.] A substantial number of courts under the Bankruptcy Code have adhered to the strict rule and interpret section 524(e) as prohibiting permanent injunctions and third-party releases in a plan of reorganization. [ FN: See, e.g., Landsing Diversified Properties II v. First Nat ’l Bank & Trust Co (In re Western Real Estate Fund), 922 F.2d 592, 601 (10th Cir. 1990), modified , 932 F.2d 898 (10th Cir. 1991); American Hardwoods Inc. v. Deutsche Creditor Corp. (In re American Hardwoods Inc.), 885 F.2d 621, 624, 626 (9th Cir. 1989); Underhill v. Royal, 769 F.2d 1426, 1432 (9th Cir. 1985); Seaport Automotive Warehouse v. Rohnert Park Auto Parts Inc. (In re Rohnert Part Auto Parts Inc.), 113 B.R. 610, 616-17 (Bankr. 9th Cir. 1990). The 9th Circuit Court of Appeals in Underhill held that "the bankruptcy court has no power to discharge the liabilities of a non-debtor pursuant to the consent of creditors as part of a reorganization plan. " Underhill, 769 F.2d at 1432.] Some courts, however, recognize the value of a permanent injunction and make limited exceptions. [ FN: See, e.g., SEC v. Drexel Burnham Lambert Group (In re Drexel Burnham Lambert Group), 960 F.2d 285 (2d Cir. 1992), cert. denied , 506 U.S. 1088 (1993); A.H. Robins Co. v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir.), cert. denied , 493 U.S. 959 (1989); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir.), cert. denied , 488 U.S. 868 (1988);In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660, 667 (Bankr. D.D.C. 1992)(opining that the permanent injunction was "essential to provide a maximum payout and a fair distribution under the plan "). See generally Paul R. Glassman, Third-Party Injunctions in Partnership Bankruptcy Cases , 49 Bus. L. 1081 (1994). Howard C. Buschmann II & Sean P. Madden, The Power and Propriety of Bankruptcy Court Intervention in Actions between Nondebtors , 47 Bus. L. 913 (1992).] Congress has also recently recognized the virtue of channeling injunctions to augment the discharge of debtors in chapter 11 cases. [ FN: See 11 U.S.C. §524(g), (h) (1994).]

The prospect of obtaining extended or permanent injunctive relief from partnership creditors and other general partners provides nondebtor general partners with the incentive to contribute substantially to a plan of reorganization. The Proposal contemplates that recoveries of partnership creditors would, in a significant number of cases, be enhanced. Since plan contributions on account of partnership obligations would often come from postpetition earnings, exempt property and other assets not otherwise available to partnership creditors, the quid pro quo of permanent injunctive relief would maximize recoveries by encouraging individual contributions. Indeed, it has been noted that:

The direct result of [a permanent injunction] is that creditors are able to receive from general partners on a consensual basis funds that would otherwise be difficult, if not impossible, for them to recover.

Without [the permanent injunction,] individual creditors would sue individual general partners, and general partners would then cross-claim against each other for contribution and sue the debtor for indemnification. The probable result would be a costly and time-consuming web of litigation replete with attendant attachments, garnishments and executions. Personal bankruptcy would be a likely consequence for many. By preventing a haphazard scramble for the assets of general partners, and by facilitating an orderly distribution scheme, the permanent injunction . . . ensures that general partners will be protected and that creditors’ recoveries will be maximized. [ FN: Michael J. Crames & Joseph T. Moldovan, Section 105 Injunctions Offer Protections to Members of Professional Partnerships , 209 N.Y.L.J. 5 (March 29, 1993).]

The Proposal would not necessarily require full payment plans in all instances. [ FN: The NBC appears to favor limiting the extension of the permanent injunction to cases in which there is a full payment plan or cases in which a settlement is reached with partnership creditors outside the context of a plan or reorganization ( i.e., preconfirmation settlement of a partnership trustee ’s claims against the nondebtor general partners for recovery of the deficiency). See NBC Draft Report , at 19, 20 & 23. The Commission should consider whether a "best efforts " plan, i.e., anything less than full payment, would justify a permanent injunction.] It would, however, furnish partnership creditors with the protections provided in the confirmation requirements of sections 1129 and 1225 of the Code and therefore require substantial creditor agreement. Therefore, like under current law, the existence of the injunction and the required confirmation requirements would often entail a compromise of outstanding claims. The Proposal would also clarify that the "best interests of creditors" test would require the court to assess, as part of plan confirmation, the personal assets and liabilities of nondebtor general partners. [ FN: A competing consideration should be noted. The required liquidation analysis necessitated by the best interests of creditors test would enable partners to take advantage of generous state law exemptions and pre-bankruptcy planning since the calculation is made with reference to the nondebtor general partner ’s nonexempt assets. This concern may, however, be vitiated if Congress adopts the Commission ’s recommendation with respect to uniform exemptions.]

The Proposal (postconfirmation injunction) would not preclude the enforcement of claims of a partnership creditor against a nondebtor general partner, or against the property of a nondebtor general partner, who has not contributed or assumed a commitment to contribute to the payment of debts of the partnership in accordance with the confirmed plan. Similarly, the Proposal would not preclude nondebtor partners from reserving the right under the plan to pursue nonparticipating general partners for their proportionate share of the distribution to the partnership creditors.

E. Revocation of Injunction

1. Proposal

The Bankruptcy Code should be amended to provide that the injunction issued with respect to any nondebtor general partner under Proposal D above should be terminated or revoked on the request of a party in interest if, after notice and hearing, the court determines (i) that the protected nondebtor general partner has failed to perform a material commitment under the plan; (iii) that the order confirming the plan in which the injunction was issued is revoked under sections 1144 or 1230 of the Code; or (iii) that the nondebtor general partner has procured the injunction by fraud. The Bankruptcy Code should be further amended to provide that a request for revocation for fraud under provision (iii) should be made at any time with two years [ The ABA Report recommends a four-year statute of limitations for revoking the permanent injunction.] after the date of the entry of the order for relief.

2. Comment

The Proposal reflects the policy that the injunction issued pursuant to a confirmed plan is only available if the nondebtor general partner performs in accordance with its terms and has been candid with the court and creditors.

D. Duty of Disclosure by Nondebtor General Partners

1. Proposal

The Bankruptcy Code should be amended to provide that, unless otherwise ordered by the court for cause, each nondebtor general partner shall, within thirty days [ The NBC Draft Report was not specific as to time within which the required disclosures were to be made. The Rules require debtors to file most of the schedules and statements within fifteen days of the petition if the petition is accompanied by a list of the debtor ’s creditors. Fed. R. Bankr. P. 1007.] after the entry of the order for relief in a partnership case or within such time as the court shall fix, produce information concerning such partner’s financial condition and affairs similar to that provided by a debtor, together with such additional information and periodic reports as may be required by the court from time to time.

2. Comment

When a bankruptcy petition is filed by or against a general partnership, it is probable that there will be a deficiency in the assets to satisfy the claims of partnership creditors. The personal liability of nondebtor general partners for that deficiency makes the need for the partnership and partnership creditors be informed of the extent and location of individual partner’s assets. Bankruptcy Rule 1007(g) provides that "[t]he court may order any general partner to file a statement of personal assets and liabilities within such time as the court may fix." [ FN: Fed. R. Bankr. P. 1007(g).] Some courts construing Rule 1007 have required nondebtor general partners to file information regarding nonpartnership assets and liabilities in connection with determining whether to confirm the plan of a debtor partnership. [ FN: See, e.g., In re Monterey Group, 55 B.R. 297, 299 (Bankr. M.D. Fla. 1985); MBank Corpus Christi, N.A. v. Seikel (In re I-37 Gulf Ltd. Partnership), 48 B.R. 647, 650 (Bankr. S.D. Tex. 1985)(authority opining that the "best interests of creditors " test of section 1129(a)(7) requires the court to make an assessment of "the net worth of each of the partners of the partnership " which, in turn, requires personal disclosure).] Rule 1007(g) is, however, discretionary. In addition, the information required to be provided under the Rule is limited.

The Proposal makes personal and comprehensive disclosure by nondebtor general partners the general rule, rather than the exception, when a partnership seeks relief under title 11. The disclosures contemplated by nondebtor general partners would be made under penalty of perjury and be in substantially the same form and made at substantially the same time as presently required under the Code and Rules. [ FN: See 11 U.S.C. §521 (1994)(requiring debtors to file "a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor ’s financial affairs "); Fed. R. Bankr. P. 1007 (setting forth the required filings and time parameters).] The court could also require the information to be supplemented on a periodic basis. Under the Proposal, the court has the discretion, for cause, to modify the disclosure requirements and to prescribe conditions for the examination of the information provided by general partners. This provision comports with present bankruptcy law and policy.

The Proposal reinforces the power of the partnership trustee or debtor in possession to require contributions from nondebtor general partners on account of their liability for any deficiency. [ FN: See Proposals D & E in Part I of the Partnership Proposal, at 5-11 (Memorandum dated June 7, 1997)(setting forth the allocation of any deficiency, permitting estimation and permitting the court to issue an order to assure payment of account of deficiency claims).] A provision requiring the disclosures contemplated by this Proposal expedites the administration of the partnership estate for the benefit of partnership creditors by providing the trustee, creditors and other parties in interest with extensive, current and accurate information. The information is necessary not only to enable the partnership trustee or debtor in possession to allocate to the nondebtor partners their respective shares of the deficiency but also to prepare a plan ofreorganization. Indeed, the financial information provided would serve to establish the liquidation value of the individual partner’s assets. The information furnished by a nondebtor general partner under the Proposal would also be of critical importance to the court in ascertaining whether or not to grant a temporary injunction under Proposal A, above. [ FN: A competing consideration should be noted. The fact that information about the financial condition or affairs of individual partners may often be unreliable and difficult, if not impossible, to verify raises serious concerns.]

E. Access to Information

1. Proposal

The Bankruptcy Code should be amended to provide that the trustee, debtor in possession or other entity designated by the court in a partnership bankruptcy case should maintain and promptly provide to parties in interest in the case, on reasonable request, certain important information regarding the nondebtor general partners of the debtor partnership.

2. Comment

The Proposal does not require the information provided by a nondebtor partner under Proposal D above to be filed with the court. If such information were required to be filed with the court, it would be of public record and "open to examination by an entity at reasonable times without charge." [ FN: 11 U.S.C. §107(a) (1994). See id. §107(b); Fed. R. Bankr. P. 9018 (providing the court with the authority to protect certain confidential information).] The trustee, debtor in possession or other entity designated by the court in a partnership case would, under the Proposal, be the charged with the responsibility of serving as the custodian of information disclosed by nondebtor general partners and other important information. [ FN: The other information contemplated by the Proposal includes a list of the names and addresses of the general partners that are protected by the automatic stay or the temporary injunction issued in connection with Proposal A above; the disclosure requirements that may be applicable to such general partners; and what orders have been issued by the court to assure the recovery of any deficiency from nondebtor general partners.] The information should be easily accessible to parties in interest without the need for unnecessary litigation. Such information would enable creditors to protect their interests during the partnership case. The information furnished would not, however, be made publicly available. [ FN: A competing consideration should be noted. It could be argued that the parties seeking the benefits of a collective proceeding that provides a permanent injunction should be required to bear the burdens of compliance by filing the information required under Proposal with the bankruptcy court. The court would have the ability to protect confidential information in appropriate circumstances. The delay and problems associated with policing compliance would also be minimized if the documents were required to be filed with the court.] The court alsoshould have the discretion under the Proposal to establish conditions for access as appropriate to protect reasonable confidentiality concerns of nondebtor general partners.

 

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