565 B.R. 835
Bankr. S.D. Ohio2017Background
- Debtor and two creditors (Crain 35%, Chiles 10%) formed ET Building Partnership in 1991; Debtor held 55% and served as managing partner; Partnership owned 3508 W. Galbraith Rd. (leased to the Debtor’s business Enterprise Travel).
- Debtor entered rehab in 2015; Movants assumed management duties and alleged accounting irregularities and unauthorized distributions during Debtor’s management.
- Movants sued in state court (Jan. 26, 2016) to dissociate Debtor and wind up the Partnership; Debtor filed Chapter 13 on March 8, 2016, automatically staying state proceedings.
- On April 27, 2016, Movants (without Debtor) voted to dissociate him, elected Crain managing partner, caused Partnership to borrow $100,000 from Crain secured by a mortgage on Galbraith Rd., and later contracted to sell the property.
- Debtor argues the post-petition votes and mortgage violated the automatic stay and ipso facto dissociation under Ohio law; Movants seek relief from stay to allow the state winding-up and distribution of sale proceeds.
Issues
| Issue | Plaintiff's Argument (Movants) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| 1. Did April 27, 2016 acts violate the automatic stay? | Actions concerned state winding-up and were permissible; state law dissociation occurred on bankruptcy filing. | April 27 votes and mortgage altered Debtor’s partnership status and economic/managerial interests in violation of §362. | Court: The votes and mortgage were post-petition acts that interfered with Debtor’s estate interests and thus violated the automatic stay. |
| 2. Are the post-petition acts void or voidable? | Movants treated dissociation as effective by operation of Ohio law; acts should stand. | Debtor contends acts are void as stay violations. | Court: Actions are voidable, not automatically void; equitable exception applies because Debtor likely used the stay to avoid unfavorable state proceedings. |
| 3. Should the stay be annulled or modified to allow state winding-up? | Relief should be granted to permit state court to complete dissolution/winding-up and distribute proceeds. | Opposes annulling stay; asserts ipso facto protection and staying post-petition dissociation under §365/§541. | Court: Grant relief from stay under §362(d) to allow state winding-up; annulled as to the April 27 acts (replacement and $100,000 mortgage). |
| 4. Should the bankruptcy court abstain from resolving partnership winding-up issues? | Movants favor state court resolution. | Debtor seeks federal resolution and protection of estate assets. | Court: Permissive abstention warranted; state court is better forum to wind up Partnership and adjudicate distribution; bankruptcy court will retain limited jurisdiction and receive status report after state proceedings. |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (Federal law does not displace state property law for determining interests in property)
- Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir.) (stay violations are invalid/voidable; limited equitable exceptions permit denying stay protection)
- In re Newman, 875 F.2d 668 (8th Cir.) (debtor’s partnership interest is property of the bankruptcy estate)
- In re Farris, 41 F.3d 1506 (6th Cir.) (state law determines nature/extent of partnership interests in bankruptcy)
- In re Jones, 63 F.3d 411 (5th Cir.) (circuits split on whether stay violations are void or voidable)
- Woskob v. United States (In re Woskob), 305 F.3d 177 (3d Cir.) (discusses interplay of state partnership law and federal bankruptcy provisions)
- Citibank v. White Motor Corp. (In re White Motor Credit), 761 F.2d 270 (6th Cir.) (federal courts should hesitate to exercise jurisdiction when state issues predominate)