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News Room

MEMORANDUM

TO: National Bankruptcy Review Commission

Professor Elizabeth Warren
Professor Lawrence P. King

FROM: Stephen H. Case
Elizabeth I. Holland
George H. Singer

DATE: June 7, 1997

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

The Bankruptcy Code does not adequately address the complex issues that can arise when a bankruptcy petition is filed by or against a partnership. Indeed, the Code makes a few brief references aimed at addressing issues arising in connection with the bankruptcy of a partnership. [ FN: See, e.g., 11 U.S.C. §§303(b), 548(b), 723 (1994).] The National Bankruptcy Conference ("NBC") and the American Bar Association’s Ad Hoc Committee on Partnerships ("ABA") have spent a number of years studying the problems and issues that arise when bankruptcy law and state partnership law intersect. The Proposals which follow represent, for the most part, the considered recommendations of the NBC and ABA. [ FN: The Proposals which follow would not have been possible without the efforts of a number of individuals including: Deborah Fletcher, Professor Frank Kennedy, Morris Macey, Sally Neely and Gerald Smith.] The Small Business, Partnership, and Single Asset Real Estate Working Group ("Working Group") substantially adopts the proposals of those organizations. The recommendations and analysis with respect to the Proposals adopted by the Working Group are set forth below. Additional Proposals addressing injunctions in favor of nondebtor general partner(s) will follow in the near future.

Two fundamental principles provide the basic framework for the Proposals. First, it is axiomatic that under state law general partners are personally liable for some or all of the debts of the partnership. [ FN: U.P.A. §15; R.U.P.A. §306 (indicating that all partners are jointly and severally liable for the obligations chargeable to the partnership).] A creditor of the partnership therefore has special recourse against a general partner which transcends that which is ordinarily available to the general creditors of a corporation. It is essential for the Bankruptcy Code to recognize the obligations of general partners to the partnership creditors and to one another. The Bankruptcy Code fails to adequately address the rights and liabilities of general partners where thepartnership is a debtor under chapter 11 or 12. [ FN: Frank R. Kennedy & Gerald K. Smith, Some Issues in Partnership and Partner Bankruptcy Cases and Recommendations for Legislative Change , 1990 Norton Ann. Surv. of Bankr. L . 19.] With the exception of a single subsection, all of the Code provisions relating to the rights and liabilities of the partners and the partnership are generally limited to chapter 7 cases. [ FN: 11 U.S.C. §508(b) (1994).] A clear mechanism is needed for providing a complete resolution of the liability of general partners to partnership creditors (and the related contribution and indemnity claims of and against general partners [ FN: See U.P.A. §18(a), (b) (requiring the partnership to indemnify partners on account of any personal liability incurred in connection with the operation of the partnership and, if the partnership has insufficient assets, the partner would have a right of contribution against the other partners).] ) in connection with the bankruptcy case of the partnership. Such a mechanism should provide rules that govern both liquidation and reorganization.

Second, creditors of the partnership should under certain circumstances look to the assets of the partnership first before proceeding against general partners. This is particularly true if such sequencing can be accomplished with minimal risk to the partnership creditors. While the liability of general partners to the partnership creditors must be recognized and protected, there are often sound reasons to sequence the rights of partnership creditors.

A. Define the term "General Partner"

1. Proposal

A "general partner" should be defined under section 101 of the Code as any entity that as a result of an existing or former status as an actual or purported general partner in an existing, former, predecessor, or affiliated partnership, is liable under applicable nonbankruptcy law for one or more debts of the partnership.

2. Comment

Although the Bankruptcy Code declares that a partnership is a "person" [ FN: 11 U.S.C. §101(41) (1994).] and as such is eligible for relief, [ FN: Id. §§109, 303.] nowhere is the term "general partner" defined despite the Code’s repeated reference to a general partner. [ FN: See, e.g., id. §§303(b)(3), (d), 723.] Indeed, the Bankruptcy Code, among other things, specifically authorizes an involuntary case to be commenced against a partnership by less than all of the general partners. [ FN: Id. §303(b)(3).] The law is simply unclear as to whether the Code’s provisions aimed at addressing theliabilities and claims by or against a general partner are applicable in specific contexts. [ FN: See Marshack v. Mesa Valley Farms, L.P. (In re Ridge II), 158 B.R. 1016, 1023-24 (Bankr. C.D. Cal. 1993), aff ’d in part , 86 F.2d 1163 (Table), 1996 WL 285445 (9th Cir. 1996)(opining that it is simply unclear whether a limited partner that would be ineligible for limited liability under applicable nonbankruptcy law should be treated as a general partner under section 723(a)).] The Proposal is aimed at providing clarity and certainty. [ FN: A competing consideration should be noted. It can be argued that the Bankruptcy Code should not provide a specific definition of a "general partner " since such the determination of who is liable as a general partner is governed by nonbankruptcy law. Moreover, the authorities appear to be generally in accord with respect to such a determination. There might be a risk that a Bankruptcy Code definition could create problems and uncertainty. See infra note 20.]

The reference to the term "general partner" in the Bankruptcy Code under the Proposal would include any entity that is liable for the debts of the partnership by virtue of applicable nonbankruptcy law. Whether an entity was a general partner at the time of the Partnership’s bankruptcy filing is not material. As long as an entity has general partner liability for a prepetition debt, that entity qualifies as a general partner under the Proposal. Since the definition is a status-based definition, the term does not include an entity that may be liable solely by virtue of guaranteeing a partnership obligation. Included within the definition of the term "general partner," however, is any entity liable as a general partner by estoppel, [ FN: See U.P.A. §§7, 16 (partnership by estoppel; imposing partnership liability where such a relation in fact may not exist since equitable principles dictate that an apparent partner should be estopped from denying the existence of the relation).] as an implied general partner or otherwise under nonbankruptcy law. A limited partner, as a consequence of exercising management control or by virtue of estoppel, is also included in the definition if liability for partnership debts would attach under nonbankruptcy law. [ FN: See U.L.P.A. §303 (imposing general liability upon a limited partner if the limited partner participates in the general control of the business). See, e.g., Hoffman v. Ramirez (In re Astroline Communications Co. Ltd. Partnership), 161 B.R. 874, 879 (Bankr. D. Conn. 1993)(indicating that limited partners who would be liable to partnership creditors under state law can be pursued by a partnership trustee under section 544 or section 723(a)).]

Designation under the Proposal as a "general partner" does not alter the limitations of liability a general partner would have for the deficiency in partnership assets under nonbankruptcy law. [ FN: See infra , Part D (limiting the liability of a general partner for any deficiency in the assets of the partnership "to the extent that, under nonbankruptcy law, such general partner is personally liable for such deficiency ").] As a result, a person that is admitted as a general partner in an existing partnership generally would not, under nonbankruptcy law, be personally liable for partnership obligations incurred prior toadmission. [ FN: See U.P.A. §§17, 41 (delineating the liability of an incoming partner).] Similarly, the personal liability of a former partner for the obligations of the partnership or any deficiency arising after withdrawal is generally limited. [ FN: See U.P.A. §36.]

B. Former Partners

1. Proposal

The Bankruptcy Code and Rules should be amended to clarify that, notwithstanding Proposal A (defining "general partner"), a former general partner of a partnership is not, absent a specific court order to the contrary, required to consent to a voluntary petition by a partnership, to be served with a petition or summons in an involuntary case against a partnership, or to perform the duties of disclosure or procedural duties imposed on a general partner of a debtor partnership.

2. Comment

Rule 1004(a) of the Federal Rules of Bankruptcy Procedure requires "all" general partners to consent to a voluntary petition filed by or on behalf of the partnership. Similarly, Rule 1004(b) requires a copy of an involuntary bankruptcy petition filed against a partnership under section 303 of the Bankruptcy Code and the summons to be served on "each" general partner who is not a petitioner. [ FN: Fed. R. Bankr. P. 1004.] Rule 1007(g) imposes various procedural requirements on general partners of a debtor partnership, such as preparing and filing the partnership schedules.

The Proposal makes clear that the expanded definition of "general partner" is not intended to encumber the commencement of voluntary or involuntary bankruptcy cases by or against a partnership by involving partners that have withdrawn from the partnership in the pleadings and service of process. [ FN: The NBC did not address this Proposal. The Proposal was developed by the ABA. See Proposed Amendments to the Bankruptcy Code Relating to Partnerships §561, at 2 (July 31, 1996)(hereinafter "ABA Report " ).] Likewise, the Proposal makes clear that amended definition of a "general partner" is not intended to impose disclosure duties on former partners. The Proposal does, however, give the court the discretion to direct such former partners to comply with the procedural and disclosure requirements of the Code and Rules in appropriate circumstances. [ FN: A competing consideration should be noted. This Proposal is ostensibly animated by the broad definition of a "general partner " set forth in Proposal A, which includes "former " partners in certain circumstances. Bankruptcy Rule 9001(5) defines a debtor for purposes of administrative responsibility to include "any or all general partners or, if designated by the court, any other person in control. " Fed. R. Bankr. P . 9001(5). Since former partners are not usually considered general partners for any purpose other than determining partnership liability, it is arguable that this Proposal is unnecessary.]

C. Bankruptcy Court Jurisdiction

1. Proposal

The court in which a partnership case is pending should have jurisdiction under 28 U.S.C. § 1334(b) to determine who is or may be liable as a general partner for the debts of the partnership and may determine the rights among the general partners with respect to the debts of the partnership. Such matters should constitute core proceedings under 28 U.S.C. § 157(b).

2. Comment

Values are maximized by providing a single, unitary forum for resolving the obligations of the general partners to the debtor partnership, the partnership creditors, and to each other. [ FN: Section 5d of the Bankruptcy Act purported to vest jurisdiction over all the general partners in the bankruptcy court which had jurisdiction over any general partner. This provision was, however, generally construed as a venue provision.] The Proposal confers jurisdiction on the bankruptcy court in which a partnership case is pending to determine the obligations of general partners to the trustee (or the partnership as debtor in possession) and to each other by reason of contribution or indemnification in connection with partnership liabilities. The Proposal also makes clear that the determination of liability of general partners for partnership debts is a core proceeding. [ FN: A competing consideration should be noted. The Proposal confers broad jurisdiction on the bankruptcy court to adjudicate claims by or against the general partnership estate as well as disputes among nondebtor general partners, by designating such matters core proceedings. It is significant to recognize that Constitutional concerns could arise in the context of adjudicating contribution claims between nondebtor general partners who have not filed a proof of claim or otherwise consented to the jurisdiction of the bankruptcy court. See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).]

D. Liability of General Partner for Deficiency in Partnership Case

1. Proposal

If there is a deficiency of property of the partnership estate to pay in full all allowed claims in a case under title 11, the trustee or debtor in possession shall have a claim against each general partner to the extent that, under applicable nonbankruptcy law, such general partner is personally liable for such deficiency. Payment on this claim should not be reduced on account of any right of contribution or indemnity among general partners. The amount of the deficiency should be estimated if its determination would unduly delay the administration of the case. Any action or proceeding to enforce liability under this section should be commenced no later than four years after the entry of the order for relief in the case concerning the partnership.

2. Comment

A basic principle of partnership law is that general partners are personally liable for some or all of the debts of the partnership. [ FN: U.P.A. §§15, 17.] Section 723 explicitly recognizes and preserves this principle in chapter 7 cases filed by or against a partnership. This Proposal is an adaptation of section 723(a) and holds general partners responsible to the extent liable under nonbankruptcy law. A number of clarifications to existing law are made and the Proposal clarifies its application to chapters 11 and 12 of the Code. Indeed, section 723 should be repealed in its entirety and reincorporated into chapter 5 of the Code. [ FN: References in the language of the specific Proposals to renumbered section 723 are designed to clarify the various proposals in light of existing law.] The Proposal has four components:

a. Contribution or Indemnity Claims Not Considered

The Proposal delineates the rights of the partnership trustee against a general partner upon the commencement of a case by or against a partnership. The first sentence of the Proposal is virtually identical to section 723(a), except that contribution or indemnity claims by or against general partners are not to be considered in determining the partnership trustee’s claim against a particular general partner. Thus, the liability of a general partner to a partnership creditor is not affected by that partner’s rights against the other general partners.

b. Estimation of Deficiency Claim

Recovery from a general partner under section 723(a) of the Code and this Proposal is limited by the amount of the deficiency of the partnership assets to pay allowed claims against the partnership estate. Thus, a final determination of that deficiency must await until an advanced stage of the case. A determination generally becomes possible only after the administration of the estate. The Proposal therefore amends the statute and permits the court to estimate the amount of the deficiency when deferral of that determination would unduly delay the administration of the estate. This aspect of the Proposal is not a foreign concept but, rather, employs the same standard that is used in connection with the estimation of unliquidated or contingent claims for purposes of allowance under section 502(c)(1) of the Code. [ FN: 11 U.S.C. §502(c)(1) (1994).]

c. Statute of Limitations

The last sentence of the Proposal resolves the conflict in the courts as to the applicable limitations period under section 723(a) of the Code. Some courts have treated the partnership trustee’s claim as one asserted under section 544(a), and thus subject to the two-year limitations period provided for avoidance actions under section 546. [ FN: Compare Andrew v. Coopersmith (In re Downtown Inv. Club III), 89 B.R. 59, 65 (Bankr. 9th Cir. 1988)(holding that the trustee ’s claim for a deficiency under §723(a) is a chose in action to be asserted under section 544(a)); McGraw v. Betz (In re Bell & Beckwith), 112 B.R. 863, 868-70, amended in other part , 112 B.R. 871, amendment denied , 112 B.R. 876 (Bankr. N.D. Ohio 1990)(opining that since a trustee ’s claim under section 723(a) is a chose in action that is to be asserted under section 544(a), it is subject to the limitations period provided in section 546) with Miller v. Spitz (In re CS Associates), 156 B.R. 755 (Bankr. E.D. Pa. 1993), aff ’d , 167 B.R. 3368 (E.D. Pa. 1994)(ruling that the statute of limitations period provided for avoidance actions in section 546 should not be "borrowed " for purposes of section 723(a)). The court in McGraw aptly observed that "[r]equiring the exact deficiency to be determined prior to allowing a trustee to file a complaint would result in §723(a) being unavailable in all but the most uncomplicated liquidations. " McGraw , 112 B.R. at 868-69.] The Proposal adopts a four-year limitations period due to the recognition that a claim under section 723(a) does not accrue until after the trustee has had an adequate opportunity to determine and assess the assets of, and the claims against, the partnership’s bankruptcy estate. As previously indicated, the determination of the deficiency only becomes clear in most cases at an advanced stage of the case after a considerable amount of time has elapsed. [ FN: A competing consideration should be noted. Although the determination of the deficiency claim is not determined at an early stage of the case, a "four-year " statute of limitations might further delay the resolution of partnership estates.]

d. Application of Section 723(a) Principles to all Chapters of the Code

The Proposal expressly clarifies the application of section 723(a) under current law. Section 723 currently applies only in chapter 7 partnership cases. [ FN: 11 U.S.C. §103(b) (1994).] The "best interests of creditors" test embodied in sections 1129(a)(7) and 1225(a)(4), however, makes the principles embodied in section 723 relevant in chapter 11 and 12 cases. The best interests test requires, as a condition of plan confirmation, that each holder of an impaired claim either accept the plan or "receive or retain" as much as the holder would receive had the case been liquidated under chapter 7. If a partnership reorganization case is commenced under chapter 7, the chapter 7 trustee would have the authority to seek payment from the general partners on behalf of the partnership estate. As a result of this interplay, a number of courts determine the extent of recovery that would be available to a chapter 7 trustee against the general partners and require that objecting partnership creditors actually receive at least as much or more in order to satisfy the "best interest of creditors" test. [ FN: See, e.g., In re Union Meeting Partners, 165 B.R. 553, 575-76 (Bankr. E.D. Pa. 1994), aff ’d , 52 F.3d 317 (3d Cir. 1995);In re Gramercy Twins Assocs., 187 B.R. 112, 125 (Bankr. S.D.N.Y. 1995);In re Eber-Acres Farm, 82 B.R. 889, 893 (Bankr. S.D. Ohio 1987)(decided under section 1225(a)(4));In re Monetary Group, 55 B.R. 297 (Bankr. M.D. Fla. 1985)(requiring general partners to file information regarding their personal assets and liabilities since the information was relevant to determining whether the best interests of creditors test of section 1129(a)(7) could be satisfied); Mbank Corpus Christi v. Seikel (In re I-37 Gulf Ltd. Partnership), 48 B.R. 647, 650 (Bankr. S.D. Tex. 1985)(concluding that section 1129(a)(7) must be read in conjunction with section 723 and therefore requires the court to make an assessment of "the net worth of each of the partners of the partnership "). See also Fed. R. Bankr. P . 1007(g) (providing that the bankruptcy court may order general partners to file a statement of personal assets and liabilities).] Other courts have concluded that recovery under section 723(a) need not be considered if the plan preserves the right of partnership creditors to enforce their state law rights against the general partners. [ FN: See, e.g.,In re Duval Mannor Assocs., 191 B.R. 622, 636-37 (Bankr. E.D. Pa. 1996).]

The case law is unclear with respect to whether the debtor partnership estate (under any chapter of the Code) includes the right to enforce the obligation of general partners to contribute to the partnership in order to satisfy its liabilities. Some courts have construed the broad language of section 541(a) and the provisions of the uniform partnership laws to empower a debtor in possession in a partnership case to compel contributions from each general partner to satisfy the claims of thepartnership. [ FN: See, e.g., Litchfield Co. of S.C. Ltd. Partnership v. Anchor Bank (In re Litchfield Co. of S.C. Ltd. Partnership), 135 B.R. 797, 803 (W.D.N.C. 1992)(holding that under sections 18(a), and 40(a), (d) of U.P.A., the assets of the partnership include the contributions of the general partners necessary to satisfy the liabilities of the partnership and empower a debtor in possession to compel such a contribution); Tatge v. Chandler (In re Judiciary Tower Assocs.), 175 B.R. 796, 802-03 (Bankr. D.D.C. 1994)(opining that the right of the partnership to seek contribution from a general partner is property of the bankruptcy estate under section 541(a)); Commercial Bank v. Price (In re Notchcliff Assocs.), 139 B.R. 361, 370-71 (Bankr. D. Md. 1992)(ruling that a chapter 11 partnership trustee is entitled to proceed against nondebtor general partners in order to satisfy the indebtedness of the partnership). Accord H.R. Rep. No. 595, 95th Cong., 1st Sess. 199-200 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6160.] Other courts refuse to grant relief against general partners to partnership creditors in reorganization cases. [ FN: See generally Russell, Jarvis, Estabrook & Dashiel v. Kaveney (In re Kaveney), 60 B.R. 34 (Bankr. 9th Cir. 1985)(opining that section 723(a) principles are applicable only in chapter 7 cases); Mbank Corpus Christi v. Seikel (In re I-37 Gulf Ltd. Partnership), 48 B.R. 647, 650 (Bankr. S.D. Tex. 1985).]

Current law is ambiguous as to whether general partners must pay partnership obligations for which they are personally responsible in connection with partnership bankruptcy cases filed under any chapter other than chapter 7. [ FN: The NBC has concluded that the lack of statutory guidance in bankruptcy has actually eroded the protections state law affords creditors of a general partnership. General partners have frequently been able to escape liability to the creditors of the partnership for a number of reasons: (1) delays inherent in the chapter 11 process; (2) obtaining a section 105 injunction against the actions against general partners on debts of or related to the partnership; (3) uncertainty regarding the ability of a partnership trustee to pursue general partners with respect to their obligations to partnership creditors; (4) failure of the partnership debtor in possession to pursue the estate ’s rights against its general partners; and (5) confirmation of plans which attempt . . . to prevent pursuit by partnership creditors of their claims against general partners by various discharge, injunction or compromise provisions. Sally S. Neely, Draft Report of Committee on Partnerships of the National Bankruptcy Conference , at 7 (Sept. 11, 1996)(footnotes omitted) (hereinafter "NBC Draft Report " ).] The Proposal clarifies the present uncertainty with respect to the treatment of a general partner’s obligations to partnership creditors by extending the principles embodied in section 723(a) to chapters 11 and 12. The general partner’s nonbankruptcy law liability is preserved and subject to administration in a the partnership bankruptcy case.

By providing a unitary forum, the Proposal affords the debtor partnership, the general partners and creditors an opportunity to effectuate a complete adjudication of their rights and responsibilities in connection with the partnership. [ FN: A competing consideration should be noted. In a chapter 7 proceeding, the trustee is generally required to pursue the nondebtor general partners to satisfy deficiency claims. See 11 U.S.C. §§723(a), 704(1) (1994). The Proposal, although applicable in reorganization cases, is not couched in mandatory language as applied in the context of a reorganization. It can be argued that it is doubtful that a debtor in possession will diligently pursue deficiency claims against the general partners of the debtor-partnership. The argument and concern is similar to that raised where avoidance actions are not pursued against insiders, affiliates or significant creditors. However, the partnership creditors are afforded a number of protections. First, as noted, the Proposal resolves the present uncertainty with respect to the "best interests of creditors " test. Second, the requirement that the plan be proposed "good faith " can serve as a realistic check against undue self-interest. Third, creditors may seek the appointment of a trustee or seek to prosecute such actions for the benefit of the estate.]

E. Court Orders to Assure Payment of the Deficiency

1. Proposal

Renumbered section 723(b) of the Bankruptcy Code should be amended to provide that after notice and a hearing, the court in a partnership case may order any general partner that is not a debtor in a case under this title (i) to provide the estate, in such amount as the court shall determine to be appropriate under the circumstances, with indemnity for, or assurance of payment of, any deficiency recoverable from such general partner, or (ii) not to incur obligations or transfer property except under specified circumstances.

2. Comment

Section 723(b) governs the determination of a deficiency claim in a partnership bankruptcy case. The statute directs the trustee to first seek recovery of any deficiency from a nondebtor general partner. The purpose of such a requirement is to direct the trustee toward nonbankrupt general partners first, to the extent that recovery is possible, prior to seeking recovery from debtor general partners. Section 723(b) requires a trustee to seek recovery against nondebtor general partners, however, only "to the extent practicable." [ FN: 11 U.S.C. §723(b) (1994).]

The statute is also designed to preserve the status quo. Section 723(b) grants the court authority to order, in appropriate circumstances, any general partner to provide the estate with indemnity for, or assurance of payment of, any deficiency recoverable from the partner. Therefore, the bankruptcy court has the authority to require a nondebtor partner to post a bond or security to ensure that the rights of the partnership trustee do not materially deteriorate during the pendency of the partnership case. The statute also permits the court to issue an injunction ordering the nondebtorgeneral partner "not to dispose of property." [ FN: Id. §723(b).] The Bankruptcy Courts’ power to restrain a nondebtor general partner from depleting assets pending the administration of the partnership case is generally recognized. [ FN: See, e.g., Jonas v. Newman (In re Comark Ltd. Partnership), 53 B.R. 945 (Bankr. C.D. Cal. 1985).]

The Proposal is an adaptation of current law. It continues to recognize the importance of assuring that the rights of a partnership trustee against nondebtor general partners for the claims of partnership creditors are preserved during the pendency of the case. [ FN: Thus, the Proposal is consonant with current law by providing the bankruptcy court with the power to assure that the trustee ’s right of recovery does not unfairly diminish before the deficiency attributable to a general partner is adjudicated or estimated.] The changes that the Proposal effects to current law are essentially two-fold. First, it deletes the first sentence of section 723(b) and the requirement that the trustee must first seek recovery of any deficiency against nondebtor general partners. The remaining aspects of other Proposals make this approach no longer necessary. Second, the Proposal expands the reach of the current statute by giving the court the authority to order nondebtor general partners not to make any "transfers," as defined under the Code, or incur any obligations other than in the ordinary course or for reasonably equivalent value. The plain language of the current statute only grants the court the authority to enjoin unauthorized dispositions of property.

F. Trustee’s Recovery against the Estate of a Debtor General Partner

1. Proposal

Renumbered section 723(c) of the Bankruptcy Code should be amended to provide that notwithstanding section 728(c) , the trustee of a partnership has a claim against the estate of each general partner in such partnership that is a debtor in a case under title 11 for the full amount of all claims allowed in the case concerning the partnership for which such general partner would otherwise be personally liable as a general partner under applicable nonbankruptcy law. Notwithstanding section 502 of this title, there should not be allowed in such partner’s case a claim against the partner on which both the general partner and the partnership are liable, except to any extent that such claim is allowable and secured only by property of such general partner and not by property of such partnership.

2. Comment

The financial condition of a general partnership and the concomitant personal liabilities of general partners for the obligations of the partnership often forces a general partner to also seek relief under the Bankruptcy Code. Section 723(c) currently provides that a trustee has a claim against the estate of each debtor general partner in the partnership for the "full amount of all claims of creditors"notwithstanding section 728(c). [ FN: 11 U.S.C. §723(c) (1994). Section 728(c) provides for the treatment of a governmental unit ’s tax claim against a general partner for state and local taxes owed by the partnership if bankruptcy cases are pending for both a general partner and the partnership. The government ’s claim is "a claim only in the partnership ’s bankruptcy case and not in the partner ’s bankruptcy case " to the extent that the claim arose from inclusion in the general partner ’s taxable income of earnings that were not withdrawn by the partner. Id. §728(c).] The trustee’s rights against the estate of a debtor general partner in bankruptcy follow from the right of a trustee to pursue a nondebtor general partner for a deficiency claim under section 723(a). The Proposal has three prongs:

First, section 723(a) provides (in two different places) that the trustee may seek recovery from a nondebtor general partner only to the extent of claims against the partnership for which a partner is personally liable under nonbankruptcy law. Section 723(c) contains no such explicit limitation. The law is unclear and arguably provides for a dichotomous treatment of partnership claims depending upon whether or not the general partner is a debtor in bankruptcy. The limitations placed on the trustee’s right to recover a deficiency claim under section 723(a) were added by Congress after the promulgation of that provision. Section 723(c) was inexplicably unaltered. There is some indication, however, in the legislative history that the failure to amend paragraph (c) was inadvertent and that Congress intended that the limitations provided in paragraph (a) would also apply to paragraph (c). [ FN: See H.R. Rep. No. 835, 103d Cong., 2d Sess. 47 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3356 ( "This section clarifies that a partner of a registered limited liability partnership would only be liable in bankruptcy to the extent a partner would be personally liable for a deficiency according to the registered limited liability statute under which the partnership was formed. "). Accord 6 Collier on Bankruptcy ¶ 723.04[1][a], at 723-15 (Lawrence P. King et al. eds., 15th revd. ed. 1996).] The Proposal makes the two provisions consistent and clarifies that a claim of a partnership trustee against the estate of a debtor general partner is limited to those claims that are allowed under applicable nonbankruptcy law.

Second, the Proposal expands the trustee’s claim against the general partner’s estate to include the amount of administrative expense claims for which the debtor general partner would otherwise be liable. As noted above, the statute currently limits the trustee’s claim to the "full amount of all claims of creditors" and therefore does not include the amount of administrative expenses incurred in the chapter 7 case. [ FN: See 11 U.S.C. §101(10)(A) (1994) (defining "creditor " to mean an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor ").]

Third, the Proposal deletes the last sentence of section 723(c) which provides for the abrogation of the "jingle rule" in chapter 7 cases. Part G, below, addresses this issue as a separate Proposal.

G. Repeal of the "Jingle Rule" in All General Partner Bankruptcy Cases

1. Proposal

Chapter 5 of the Bankruptcy Code should be amended in order to provide that the claim of a trustee of a partnership debtor, or the claim of a creditor of a partnership that is not a debtor in a case under this title, is entitled to share in the distribution in a general partner’s bankruptcy case in the same manner and to the same extent as any other claim of the same class of a creditor of such general partner.

2. Comment

The "jingle rule" is a rule of priority which evolved from the common law during the nineteenth century and was codified in section 5g of the Bankruptcy Act. The jingle rule was later incorporated into the Uniform Partnership Act when promulgated in 1914, so that state partnership law would correspond to bankruptcy law. [ FN: U.P.A. §40 (setting forth the distributional rules for the assets and liabilities of the partnership and the distribution of a partner ’s property upon insolvency).] The rule provided that the partnership assets were to be distributed first to creditors of the partnership; and the assets of an insolvent general partner were to be distributed first to the personal creditors of the general partner. [ FN: Id. §40(i).] Partnership creditors would be allowed to receive a distribution only if there was a balance remaining. Therefore, partnership creditors were, under the jingle rule, effectively subordinated to personal creditors of the general partner.

Congress specifically abrogated the jingle rule in chapter 7 cases in the last sentence of section 723(c). [ FN: The legislative history to section 723(c) provides: The final sentence of 11 U.S.C. [ FN: §] 723(c) makes clear that the jingle rule is abolished with respect to the partnership creditor ’s rights in the assets of a partner; the trustee of the partnership is entitled to share pro rate with unsecured creditors of a partner in dividing the partner ’s estate. This recognizes the traditional rights of creditors of the partnership to share on an equal basis with other creditors of a partner under some bankruptcy laws adopted before the Uniform Partnership Act. On the other hand, . . . the jingle rule still applies in principle with respect to the partners [sic] interest in the partnership. The partners [sic] interest is worthless until all administrative expenses and partnership claims have been paid. H.R. Rep. No . 595, 95th Cong., 2d Sess. 200-01 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6161.] It provides that the claim of a trustee is entitled to share equally in the bankruptcy case of the general partner under section 726(a), the same as any other claim of a kind specified in that provision. The trustee’s claim in the debtor general partner’s bankruptcy case is not subordinate to the claims of other creditors of the general partner but, rather, has an equal priority for purposes ofdistribution in a chapter 7 case. However, section 723(c) does not effectuate a wholesale repeal of the jingle rule. The provision is only applicable in chapter 7 cases and only becomes operative when a partnership and one of its general partners is a debtor.

The Proposal implements the legislative intent of the drafters of section 727(c) by extending the application of the statute to the claims of partnership creditors against a debtor general partner who is not in bankruptcy. The Proposal definitively extends the application of the principles of section 727(c) and the repeal of the jingle rule to all other chapters of the Code. [ FN: Compare In re Safren, 65 B.R. 566, 574-75 (Bankr. C.D. Cal. 1986)(holding that §723(c) indicates a Congressional intent to abolish the jingle rule in bankruptcy and applying the statute when the partnership was in chapter 11) with Frank R. Kennedy, Partnerships and Partners Under the Bankruptcy Code: Claims and Distributions , 40 Wash. & Lee L. Rev. 50, 59-60 (1983)(opining that the abrogation of the jingle rule in section 723(c) does not, absent a strained construction, affect the applicability of the jingle rule in any cases other than chapter 7).] It therefore also simplifies the application of the "best interests of the creditors" of the creditors test and facilitates plan confirmation.

H. Allocation of Expenses of Administration of a Partnership Case

1. Proposal

Chapter 5 of the Bankruptcy Code should be amended to provide that the expenses of administration of a partnership case under section 503 of the Bankruptcy Code should be paid from the property constituting recoveries from general partners under this section and from other property of the estate in such proportions as the court shall determine are fair and reasonable after notice and hearing.

2. Comment

The Proposal adopts the view that it may be appropriate, in certain instances, to impose a share of the expenses of administration upon general partners. The partnership bankruptcy case may serve as a vehicle by which the assets of general partners are marshaled in order to satisfy the claims against the general partnership as well as an avenue for resolving claims among partners. The Proposal gives the court the discretion to apportion the expenses of administration among the nondebtor partners where appropriate. The Proposal is therefore consistent with the bankruptcy maxim that the expenses of administration should, whenever possible, be borne by the assets administered. [ FN: See, e.g., 11 U.S.C. §506(c) (1994).]

I. Distribution of Recoveries from General Partners

1. Proposal

Renumbered section 723 of the Bankruptcy Code should be amended to provide that notwithstanding section 726 of the Bankruptcy Code (except as provided in the Proposal set forth in Part H above), the trustee should apply any recovery obtained from a general partner only to the payment of deficiencies on claims for which such general partner is personally liable as a general partner under applicable nonbankruptcy law. Any property constituting recoveries from general partners or the estates of general partners under this Proposal not applied to the proper deficiencies as herein provided or to satisfy administration expenses (as provided in the Proposal set forth in Part H above), shall be fairly and equitably distributed by the trustee to such general partner or to such general partners’ estates as may be ordered by the court after notice and hearing.

2. Comment

The Proposal outlines the manner by which the trustee allocates and distributes the recoveries obtained from a nondebtor general partner in a partnership bankruptcy case. Additionally, the Proposal further implements the policy of conforming the partnership/partner provisions of the Code to the respective rights of partnership creditors and general partners under applicable nonbankruptcy law. This Proposal has two main features:

First, as noted in the opening sentence of the Proposal, the application of recoveries on account of a deficiency by a trustee from each general partner or the partner’s estate is limited to the claims supporting the right to a recovery. In other words, the Proposal specifically limits the application of any recovery on account of a general partner’s deficiency on those claims that the general partner is personally liable for under applicable nonbankruptcy law, plus any proportionate share of the expenses of administration, if any, allocated by a court. The Proposal therefore recognizes that a general partner may not be liable under applicable nonbankruptcy law for all of the obligations of the partnership.

Under section 723, recoveries from a general partner or a general partner’s estate are added to the bankruptcy estate of the partnership under section 541(a)(3) and included in the distributions to creditors holding allowed claims against the partnership in accordance with section 726. [ FN: See 11 U.S.C. §541(a)(3) (1994)(specifically including deficiency recoveries under section 723 in the definition of property of the estate).] There may, however, be claims against the debtor partnership for which a particular general partner is not liable under applicable nonbankruptcy law. [ FN: The personal liability of a general partner for the debts of the partnership may be limited in several ways: (1) by the existence of a contract or statute which limits the partner ’s liability; (2) by virtue of the fact that the liability arose prior to the admission of the general partner to the partnership; or (3) by virtue of the fact that the liability arose after the withdrawal of the general partner from the partnership. See supra notes 16-17 and accompanying text.] In such instances, the recovery from a general partner under section 723 may be used to pay claims for which the general partner is not personallyresponsible. Moreover, the effect of section 1111(b) on the personal liability of a general partner for a nonrecourse deficiency claim of the partnership may effectively require the general partner to pay twice. [ FN: The NBC Draft Report explains: [I]n applying the principles of current section 723 to chapter 11, where an undersecured creditor ’s nonrecourse deficiency claim is treated as a recourse claim under section 1111(b)(1)(A), recoveries from general partners could be used to pay the undersecured creditor, leaving significant unpaid claims of creditors to whom the partner would remain liable. NBC Draft Report , supra note 33, at 17.]

The Proposal recognizes the principle of equality of distribution among similarly situated creditors. As a result of this aspect of the Proposal, however, partnership creditors might receive different distributions in the partnership bankruptcy case based upon differences in their rights against general partners. Taking into account Proposal J (below), governing the distribution of property of the partnership estate, each creditor of the partnership would have the right to share in two funds upon the commencement of a case by or against a partnership under chapter 7: (1) a pro rata share in the assets of the partnership estate based upon the priority scheme set forth in the Bankruptcy Code; and (2) a pro rata share in the recovery obtained against the general partner in proportion to the partner’s liability to the specific creditor. Under the second fund, only those recoveries from general partners that are personally liable to that creditor would be available to pay its claim. The disparity a creditor’s rights against a general partner under applicable nonbankruptcy law in relation to other creditors determines its right to a distribution from the recovered deficiency claim. A contrary result (embodied by present law) could effectively enable a partnership creditor to enhance its recovery in bankruptcy to the detriment of other creditors.

Second, the last sentence of the Proposal is an adaptation of current section 723(d) of the Code. It is possible that the trustee recovers more from the general partners and from the estates of debtor general partners than may be necessary to pay the costs of administration and the allowed claims of the partnership creditors in full. The Proposal therefore provides a mechanism by which the court may allocate the surplus in an equitable manner based on the relative liability of each of the general partners under the partnership agreement or applicable nonbankruptcy law. [ FN: An allocation of the surplus among the general partners based upon their respective "liability " is more appropriate than an allocation based upon profit sharing since the redistribution of any surplus is akin to mitigating a loss rather than a distribution of profit. See 4 Collier on Bankruptcy ¶ 723.05[1], at 723-20 (Lawrence P. King et al. eds., 15th revd. ed. 1996).]

J. Distribution of Property of the Partnership Estate

1. Proposal

Renumbered section 723 of the Bankruptcy Code should be amended to provide that notwithstanding section 726 of the Code, and except as set forth in Proposal H above (treatment of expenses of administration), the trustee should distribute property of the partnership estate which is not recovered from general partners or the estates of debtor general partners to allowed claims against the partnership in accordance with otherwise applicable provisions of this title without consideration of such recoveries or the distribution thereof.

2. Comment

The estate of the debtor partnership may be comprised of property resulting from the recoveries by the trustee against the general partners together with partnership assets. Proposal F above sets forth the distributional rules with respect to claims against the general partners on account of a deficiency. This Proposal contemplates that, as under current law, property of the partnership is to be distributed to the holders of allowed claims against the partnership. It, however, excludes recoveries obtained from general partners or the estates of debtor general partners on account of each partner’s deficiency.

K. Subordination of Certain Partnership Interests

1. Proposal

Section 510(b) of the Bankruptcy Code should be amended to provide that, for purposes of distribution, a claim arising from the rescission of a purchase or sale of a security or an interest of a debtor who is a general or limited partner in a partnership for damages arising from the purchase or sale of such a security or interest shall be subordinated to all claims and interests that are senior or equal to the claim or interest represented by such security or other interest in the bankruptcy case of a general partner.

2. Comment

The purpose of this Proposal is to expand section 510(b) of the Bankruptcy Code to include general partnership interests. Section 510(b) is designed to ensure that the holders of securities of the "debtor or an affiliate of the debtor" would not be permitted to elevate their equity interests to general unsecured claims through rescission. It therefore mandates the automatic subordination of a claim for rescission or damages in connection with the purchase or sale of a "security" until the claims of that class of creditors have been satisfied. [ FN: 11 U.S.C. §510(b) (1994).] As presently enacted, the statute does not apply to general partnership interests. [ FN: See id. §101(49) (defining a "security ").] The rationale for section 510(b) is that the general creditors rely on having priority over equity interests in the event of a bankruptcy. Stated differently, the statutereflects the differences in risks taken by investors and creditors in an enterprise. The Proposal reflects the view that the same rationale should apply to interests asserted in the bankruptcy case of a debtor general partner. [ FN: The ABA has not taken a position with respect to this Proposal.] The proposed amendment to section 510(b) would subordinate the claims of general or limited partners arising from the purchase or sale of interests in the debtor partnership to the claims of partnership creditors.

L. Involuntary Cases

1. Proposal

Section 303(b)(3) of the Bankruptcy Code should be amended to permit the trustee of a partnership in a case commenced under Title 11 to file an involuntary petition against a general partner without regard to the number, nature or amount of creditors otherwise required under section 303(b)(1) and (2).

2. Comment

Section 303 of the Bankruptcy Code authorizes creditors of a general partner to commence an involuntary case under chapter 7 or chapter 11. [ FN: 11 U.S.C. §303 (b) (1994).] Although section 303 permits an otherwise qualified partnership creditor to be able to file an eligible involuntary petition against a general partner, [ FN: See, e.g.,In re Elsub, 66 B.R. 172 (Bankr. D.N.J. 1986)(indicating that partnership creditors should be counted as creditors for determining the requisite number of creditors in connection with an involuntary filing against the general partner);In re Lamb, 40 B.R. 689, 692-93 (Bankr. E.D. Tenn. 1984).] the statute does not give standing to a trustee of a partnership. A trustee of a partnership is, by virtue of section 723, a creditor of each general partner for the full amount of all allowed claims of creditors in the partnership bankruptcy case. As such, the trustee may proceed against the general partners to enforce their liability for the deficiency. It may, however, be more administratively efficient for the partnership trustee to administer the estate of a general partner within the confines of the Bankruptcy Code. The Proposal accords the partnership trustee standing to commence an involuntary chapter 7 or chapter 11 case against a general partner regardless of the number, natureor amount of creditors of the partner or the partnership. [ FN: A competing consideration should be noted. The requirements of section 303(b) of the Code are very specific and require "three or more " creditors with noncontingent, undisputed claims which must "aggregate at least $10,000. " 11 U.S.C. §303(b) (1994). The statutory requirements reflect the policy that an involuntary case should not serve as vehicle by which recalcitrant creditors harass an honest debtor. In re Skye Mktg. Corp., 11 B.R. 891, 897 (Bankr. E.D.N.Y. 1981)(indicating that the numerosity requirement alleviates the concern that an involuntary bankruptcy not serve as an "engine of oppression "). It could be argued that dispensing with the number of creditors and the monetary requirements of the statute undermines protections the Code affords debtors and gives a trustee in a partnership case too much leverage. The Proposal would, for instance, ostensibly permit a trustee to commence an involuntary petition against an entire law firm. The trustee is, however, a fiduciary and is not similar to other creditors who may have an improper agenda.] The requirements and safeguards otherwise applicable in involuntary cases would remain applicable. [ FN: See 11 U.S.C. §303(h) (1994)(requiring a trial and the entry of the order of relief against a debtor in an involuntary case only if "the debtor is generally not paying such debtor ’s debts as such debts become due unless such debts are the subject of a bona fide dispute ").]

M. Appointment of Committee of General Partners

1. Proposal

Chapter 11 of the Bankruptcy Code should be amended to provide that, on request of a party in interest, the court may authorize the United States Trustee to appoint a committee of general partners that is fairly representative of the interests of all general partners.

2. Comment

The ABA and the NBC do not agree whether the appointment of a committee of general partners should be permitted in certain circumstances. The ABA has embraced the view that the Code should authorize the appointment of such a committee. The NBC considered a proposal permitting the appointment of a committee of general partners, but disapproved of such a measure. The Working Group endorses the Proposal.

chapter 11 authorizes the appointment of a committee of creditors and, upon the request of a party interest, a committee of equity security holders. [ FN: 11 U.S.C. §1102 (1994).] The appointment of a committee of equity security holders is rare and usually only authorized by the court in the larger chapter 11 cases involving publicly-traded corporations. A fundamental consideration in the determination of whether to form an committee of equity interests is whether the formation is more likely to accelerate or impede the reorganization process.

The Bankruptcy Code does not authorize the appointment of a committee of general partners and such interests have been represented through the formation of unofficial committees. [ FN: See In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 85 B.R. 13, 17 (Bankr. S.D.N.Y. 1988).] Some of the same considerations that apply to the formation of committees of equity security holders in corporate cases are applicable in the context of large, professional partnership cases. A committee of general partners can, in certain instances, facilitate the collection of partnership receivables and other assets of the business. A partnership committee could also aid in the determination of appropriate allocations with respect to the liability of the general partners for the deficiency of partnership assets to pay partnership debts. Additionally, the uniqueness of problems arising in partnership cases which involve a large number of general partners renders a committee of general partners especially suited to facilitate the resolution of differences and disputes with the partnership, among the partners themselves, and with partnership creditors. [ FN: The NBC has concluded that the self-interest of general partners will provide the necessary incentive for partners to assist the partnership trustee in marshaling partnership assets since the success of their efforts will reduce any deficiency for which the partners would be liable. The NBC also expressed the concern that the appointment of an official committee of general partners could exacerbate the conflicting interests of general partners in certain circumstances. The NBC contends that informal committees could serve the appropriate function in the large, professional partnership cases in which the perceived need for such a committee is the greatest.]

The Proposal sanctions the appointment and status of a committee of general partners in a partnership case where appropriate. The court retains the discretion to determine whether the formation of a committee of general partners will facilitate or impede the reorganization process and whether the benefits of formation outweigh the concomitant expenses.

N. Section 523 & Imputed Conduct or Liability

1. Proposal

Section 523 of the Bankruptcy Code should be amended to provide that nothing in this section shall preclude the discharge of a general partner from a debt which is otherwise nondischargeable under this section solely as a result of imputing to the general partner the conduct or liability of a copartner or agent.

2. Comment

Bankruptcy law is grounded upon the public policy of freeing the "honest" debtor from the financial burdens of prepetition indebtedness and thereby allowing the debtor to make an unencumbered fresh start. [ FN: See Neal v. Clark, 95 U.S. 704 (1877); Local Union Co. v. Hunt, 292 U.S. 234, 244 (1934).] Section 523 embodies the principle that the benefit of the discharge should not inure to the dishonest. Partnership law, by contrast, prescribes vicarious liability by for partners to remain mutually liable for partnership debts incurred by any partner in the ordinary courseof partnership business. [ FN: U.P.A. §15. ] The mutual or vicarious liability imposed under partnership law is applicable regardless of whether or not the acting partner incurred the debt in a manner that was reasonable, negligent or fraudulent. [ FN: Id. §13.] Thus, state law holds passive partners vicariously liable for the intentional wrongdoing of an active partner.

The United States Supreme Court in Strang v. Bradner [ 114 U.S. 555 (1985).] ruled that an obligation of an individual general partner for fraudulent misrepresentations of a copartner could be imputed to all of the other general partners of the firm despite their lack of knowledge. [ FN: See id.] Although the debtor in Strang personally benefitted from the fraud of his copartner, a significant number of courts following Strang have relied upon the principle of vicarious liability to deny the discharge a partner’s obligation without requiring a showing that the debtor, partner benefitted from the fraud. [ FN: See, e.g., BancBoston Mortgage Corp. v. Ledford (In re Ledford), 127 B.R. 175, 181-85 (M.D. Tenn. 1991), aff ’d , 970 F.2d 1556 (6th Cir. 1992), cert. denied , 507 U.S. 916 (1993).]

Commentators have criticized the analysis and result in Strang with respect to the nondischargeability of vicarious liabilities where the debtor, partner has engaged in no wrongdoing. "The denial of discharge in bankruptcy is punitive, both in purpose and effect, and is based on the debtor’s moral culpability for fraudulent conduct. Consequently, a judicial rule denying discharge should examine the moral culpability of individual debtors." [ FN: Steven H. Resnicoff, Is it Morally Wrong to Depend on the Honesty of Your Partner or Spouse? Bankruptcy Dischargeability of Vicarious Debt , 42 Case W. Res. L. Rev. 147 (1992).] The effect of Strang and its progeny is to withhold the benefit of a bankruptcy discharge to an honest debtor general partner that had no knowledge of the partner’s fraudulent acts and may not have benefitted from it. The imposition of vicarious liability in such circumstances frustrates the Code’s fresh start policy, provides no meaningful deterrent for intentional misconduct, and is inconsistent with the treatment in recent reported decisions that permit the discharge of vicarious obligations arising under other provisions of the Code. [ FN: See, e.g., Jones v. Whitacre (In re Whitacre), 93 B.R. 584, 585 (Bankr. N.D. Ohio 1988)(refusing to impute a child ’s intent to parents); Ordmann v. Hoppa (In re Hoppa), 31 B.R. 753, 754-55 (Bankr. E.D. Wis. 1983)(finding that an employer ’s obligation for drunk driving liability of his employee is dischargeable); Thatcher v. Austin (In re Austin), 36 B.R. 306, 309-11 (Bankr. M.D. Tenn. 1984)(opining that there is nothing in the legislative history of section 523 to suggest that the nonbankruptcy vicarious liability rule should be "appended to the statutory exceptions to discharge in bankruptcy "). But see, e.g. , McIntyre v. Kavanaugh, 242 U.S. 138 (1916), Bear, Stearns & Co. v. Powell (In re Powell), 95 B.R. 236, 240 (Bankr. S.D. Fla.), aff ’d , 108 B.R. 343 (S.D. Fla. 1989), aff ’d , 914 F.2d 268 (11th Cir. 1990).]

It should be noted that this Proposal is narrowly tailored to address a specific issue arising in the context of partnerships and agency relations. However, the rationale for this Proposal is equally applicable to any obligation for which any debtor is vicariously liable. [ FN: At least one of the groups that has appeared before the Commission has recommended an addition to the Code which would eliminate from the purview of section 523 all vicarious liability. See Professor Jeffrey W. Morris et al., Report of Discharge and Dischargeability 27-28 (May 30, 1997).]

O. Section 1111(b)

1. Proposal

Section 1111(b) of the Bankruptcy Code should be amended to clarify that, except as otherwise provided in a confirmed plan of a partnership debtor or the order confirming the plan, a general partner is not liable on a nonrecourse claim against the partnership except to the extent that the general partner is personally liable on such claim under applicable nonbankruptcy law.

2. Comment

Section 1111(b) provides that the undersecured deficiency of a nonrecourse claim secured by property of the estate shall be treated as a recourse claim, whether or not the lender actually has recourse rights. [ FN: 11 U.S.C. §1111(b)(1) (1994). The exceptions to the conversion or recourse treatment are (i) if the class of which such claim is a part elects otherwise, or (ii) if the property is sold. Id.] The purpose of the provision is to assure equitable treatment for the undersecured nonrecourse lender in a chapter 11 plan. The Bankruptcy Code is not clear on whether the transformation from nonrecourse to recourse has an effect on the personal liability of general partners. [ FN: The few reported decisions which have addressed the issue have concluded that a nonrecourse deficiency claim does not result in personal liability for nondebtor general partners. See, e.g., Travelers Ins. Co. v. Bryson Properties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 502 n.12 (4th Cir.), cert. denied , 506 U.S. 866 (1992).] In other words, there is concern as to whether the conversion of a nonrecourse claim against the property of the partnership creates a recourse claim against the individual general partners who are liable for the partnership obligations absent a nonrecourse covenant. The Proposal provides clarity and certainty with respect to desirable financing transactions. Thus, a claim remains a nonrecourse claim against the individual general partners who are not liable under nonbankruptcy law, although the claim becomes recourse against the debtor partnership.

 

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