Stumpf v. McGeeStumpf v. McGee
Fоr this Chapter 11 bankruptcy case, the executory partnership agreement at issue having been neither expressly assumed nor rejected, of primary concern is whether the Trustee is substituted for the Debtor as a partner and can maintain an action against the other partners for violations of transfer restrictions in the agreement and for distributions concerning those transfers, including whether the agreement was assumable under the Bankruptcy Code and Louisiana law. The bankruptcy court held the agreement passed through bankruptcy to the Reorganized Debtor, a liquidating trust managed by the Trustee. The district court re
I.
The facts are undisputed. In 1982, Mickey O’Connor (the Debtor), Ronald Case, Auby Smith, and Appellee John Stumpf formed a Louisiana general partnership, Westbank Inns. The partnership agreement restricts a partner’s ability to transfer or assign his interest: (1) he cannot substitute another person as a partner without the written consent of a majority of the partners; (2) a majority must give written consent before a partner can assign, mortgage, or sell his interest in the partnershiр or its assets; (8) his sale, exchange, transfer, or assignment of his right to share in the partnership’s profits or losses shall be valid only if his interest is first offered to the partnership, and then to the other partners; and (4) any transaction in violation of these restrictions will be null and void.
Shortly after its formation, Westbank Inns entered into a joint venture with La-Quinta Motor Inns, with Westbank Inns owning a 40 percent interest. The joint venture owns and operates a LaQuinta Inn in Gretna, Louisiana.
In May 1987, approximately five years after formation of Westbank Inns, O’Con-nor petitioned for relief under Chapter 11 of the Bankruptcy Code. O’Connor remained debtor-in-possession for almost fоur years; McGee was appointed Chapter 11 Trustee in 1991. Approximately two years later, the Trustee met with Appellee John Stumpf and his brother, Appellee Harry Stumpf, informing them that he was the Trustee of O’Connor’s bankruptcy estate and requesting that correspondence regarding Westbank Inns be sent to him.
In early 1994, the Trustee filed a Fourth Amended Disclosure Statement and a Second Amended Plan of Reorganization; no specific reference to the Debtor’s partnership interest is included in either. The Disclosure Statement, in describing the Debtor’s assets and liabilities, refers to a 1991 accountant’s report. In that report, the Debtor’s interest is valued at $150,000. The Disclosure Statement provides: “The Plan provides for the rejection of executo-ry contracts not previously assumed or rejected, if any”. (Emphasis added.) The seсtion of the Disclosure Statement dealing with executory contracts does not specifically refer to any:
All executory contracts, with or for the benefit of employees, agents or brokers, not heretofore assumed or terminated by agreement, or assured within the time frame set forth in this plan are*396 heretofore rejected. Debtor reserves the right to accept or reject executory contracts between the Effective Date and 60 days after the Effective Date.
(Emphasis added.) The “Effective Date” is defined as the date on which the order confirming the Plan becomes final and non-appealable.
The Plan establishes a liquidating trust, to which all of the Debtor’s assets will be transferred, with McGee as Trustee and the creditors as beneficiaries. Regarding executory contracts, the Plan contains language essentially identical to that in the Disclosure Statement. No motion to assume or reject the partnership agreement was filed. The Plan was confirmed in May 1994.
As mentioned in footnote 2 supra, between 1988 and January 1994, during the pendency of the bankruptcy proceedings, O’Connor’s partners engaged in various interest-transfers. Appellees John Stumpf and Lincoln Case each acquired one-half of Ronald Case’s; John Stumpf acquired Smith’s; and John Stumpf transferred a portion of his to his brother, Appellee Harry Stumpf. In April 1989, prior to transferring his interest, Ronald Case filed a petition for relief under Chapter 7 of the Bankruptcy Code. And, in March 1990, Smith’s interest was seized by one of his creditors, from whom John Stumpf acquired it. Therefore, as of January 1994, those claiming partnership in Westbank Inns were O’Connor, and Appellees John and Harry Stumpf and Lincoln Case.
Following plan-confirmation, the Trustee filed an adversary complaint in bankruptcy court against John and Harry Stumpf and Lincoln Case. Of particular importance to this interlocutory appeal, as discussed infra, Westbank Inns was not sued. Nor did the Trustee seek to recover the economic vаlue of the Debtor’s interest. Instead, the complaint concerned only the interest-transfers. The Trustee sought: (1) a declaration that they were void for violating the partnership agreement restrictions; (2) a declaration of the Chapter 11 estate’s proportionate ownership of the terminated interests of Ronald Case and Smith; and (3) an accounting for partnership distributions Appellees received attributable to the interest-transfers.
Following a trial, the bankruptcy court held: Ronald Case’s partnership ceased upon his Chapter 7 filing in April 1989; Smith’s partnership ceased in March 1990, when his interest was seized by a creditоr and the seizure was not revoked within 30 days; all of the interest-transfers were void because, contrary to the agreement, the interests were not first offered to the partnership and then the other partners; the value of the interests formerly held by Ronald Case and Smith, as of the time their partnerships ceased, must be paid to them after determining the value in an evidentiary hearing; the Trustee did not specifically assume or reject the agreement; it passed through bankruptcy; O’Connor’s interest is the property of the Reorganized Debtor’s estate and it remains a partner; and the Trustee is therefore entitled to distributions and is probably entitled to purchase the former partners’ interests. The parties were directed to schedule the evidentiary hearing to determine the value of the interests of Ronald Case and Smith at the time their partnerships ceased.
The district court affirmed in part, and reversed in part. It held the agreement was not assumable under
II.
The Trustee contends: the district court lacked jurisdiction because leave to appeal was denied previously or because Appel-lees’ notices of appeal were not timely; Appellees have no standing because they failed to challenge the bankruptcy court’s finding that the transfers were void; the district court erred in holding that the partnership agreement passed through bankruptcy to the Debtor rather than to the Reorganized Debtor (liquidating trust); alternatively, the agreement was assumed; and Appellees did not raise the theory adopted by the district court.
“We review the decision of the district court by applying the same standards of review to the bankruptcy court’s findings of fact and conclusions of law as applied by the district court.” Kennard v. MBank Waco, N.A. (Matter of Kennard),
A.
The Trustee contends the district court lacked jurisdiction because leave to appeal had been denied previously or because Ap-pelleеs’ notices of, and motions for leave to, appeal were not timely filed. Although raised in district court, it did not address this issue.
District courts may hear appeals from interlocutory orders, such as the bankruptcy court’s partial judgment, “with leave of the court”, pursuant to
If a required motion for leave to appeal is not filed, but a notice of appeal is timely filed, the district court ... may grant leave to appeal or direсt that a motion for leave to appeal be filed.... Unless an order directing that a motion for leave to appeal be filed provides otherwise, the motion shall be filed within 10 days of entry of the order.
The Bankruptcy Rules do not expressly provide the time for appealing an interlocutory order. Rule 8001(b) states an interlocutory appeal “shall be taken by filing a notice of appeal, as prescribed in subdivision (a) of this rule”. Fed. R. Baner. P. 8001(b). Subdivision (a), governing the manner for appealing as of right, provides an appeal “shall be taken by filing a notice of appeal ... within the time allowed by Rule 8002”.
The notice of appeal shall be filed with the clerk within 10 days of the date of the entry of the judgment, order, or decree appealed from. If a timely notice of appeal is filed by a party, any other party may file a notice of appeal within 10 days of the date on which the first notice of appeal was filed, or within the*398 time otherwise prescribed by this rule, whichever period last expires.
Except in circumstances not at issue here, the bankruptcy court may extend the time for filing the notice, if the request is “made by written motion filed before the time for filing a notice of appeal has expired”.
In short,
The bankruptcy court’s partial judgment was entеred 7 May 1998. John Stumpf filed a timely notice of appeal within ten days, on 15 May.
On that same day (within the ten-day period), the bankruptcy court granted Harry Stumpf s motion for an extension of 20 days to file his notice.
Also on 15 May, within the time allowed under
Therefore, Appellees’ notices of appeal were timely. But, only Harry Stumpf timely filed the requisite motion for leave to appeal. Nevertheless, the district court had authority to treat John Stumpf s and Lincoln Case’s timely notices as such motions. See
In bankruptcy court in July 1998, Case moved, inter alia, to amend the partial judgment. Because the motion was filed more than ten days after entry of that judgment, the motion did not affect the previously filed notices. See
On 16 April 1999, the bankruptcy court entered an order denying Case’s motion. He filеd his notice and motion on 26 April 1999, within ten days of entry of that order. John Stumpf filed his notice and motion on 30 April, within ten days of the date on which Case’s notice was filed. See
The Bankruptcy Rules do not provide guidance as to the time for appealing under such circumstances. Appellees are not appealing the bankruptcy court’s April 1999 denial of Case’s motion. They are, instead, appealing the May 1998 partial judgment, which they initially timely appealed. But, the district court dismissed thеir appeals without prejudice, stating they would be entitled to seek leave to appeal if the bankruptcy court denied Case’s then pending motion. The Rules do not answer the question whether the notices of appeal filed after the order denying Case’s motion must be filed within ten days when, as here, Appellees are not appealing that order. If the ten-day rule applies, John Stumpfs and Case’s appeals were timely; Harry Stumpfs was not.
“In order to obtain prompt appellate review, often important to the administration of a case under the [Bankruptcy Code]”, the time to appeal bankruptcy orders is shorter than that provided for other civil appeals. See
This conclusion is consistent with the interpretive policy expressed in Bankruptcy Rule 1001: “These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding”.
Contrary to the Trustee’s assertion, nothing in the Bankruptcy Rules prohibits the district court from denying leave to appeal without prejudice and concomitantly authorizing the parties to move for leave to appeal after the bankruptcy court has ruled on the pending motion that prompted the dismissals. The decision to
B.
The Trustee maintains Appellees (except as to John Stumpfs original interest) lack standing to contend the Trustee is not a partner because they did not challenge the bankruptcy court’s ruling that the interest-transfers to them, in violation of the partnership agreement restrictions, were void. In their appeals to the district court, each Appellee contended that, because the Trustee never acquired the status and rights of a partner, he had no right to assert any claims against them regarding distributions and interest-transfers.
Therefore, although Appellees did not specifically challenge the bankruptcy court’s interpretation of the agreement and its ruling that the transfers were void, they contended that the bankruptcy court had no basis for so ruling, because the Trustee, as a non-partner, lacked standing to assert any claims against them. The district court agreed with Appellees’ assertions in that respect. As prevailing parties in district court, Appellees have standing to defend the district court’s judgment.
C.
Subject to various conditions, “the trustee, subject to the court’s approval, may assume or reject any executory contract ... of the debtor”.
In a Chapter 11 case, the trustee may assume or reject an executory contract at any time before plan-confirmation,
1.
The bankruptcy court held the agreement an executory contract. The district court also treated it as one, noting that the parties did not dispute that characterization. Likewise, because the parties do not dispute that here, we will assume the partnership agreement was executory at the time of O’Connor’s bankruptcy filing.
2.
Before addressing whether, under
John Stumpf was a creditor, was listed on the mailing matrix, and received notices regarding O’Connor’s bankruptcy, but he had settled his claim against the estate prior to plan-confirmation. Neither West-bank Inns nor the other partners’ names aрpeared on the matrix, and they did not receive notices regarding the bankruptcy. The bankruptcy court held Appellees’ pre-plan-confirmation actual knowledge of the bankruptcy satisfied due process.
Although a plan may provide for the assumption of an executory contract, that authorization is “subject to
In any event, notwithstanding
Neither the Disclosure Statement nor the Plan made any specific reference to the agreement. The former states that “[t]he Plan provides for the rejection of executory contracts not previously assumed or rejected, if any”; and reserves the right to accept or reject executory contracts for 60 days after the order confirming the Plan becomes final. Consistent with language in the Disclosure Statement, the Plan provides that executory contracts “with or for the benefit of employees, agents or brokers ... are hereby rejected ”, and that “[a]ll ... executory contracts, other than contracts with or for the benefit of employees, agent[s] or brokers, not rejected prior to time [sic] set forth herein will be assumed ”. (Emphasis added.)
By using the phrase “will be” to refer to assumption of executory contracts, as contrasted with the phrase “are hereby rejected” to refer to rejected executory contracts, the Plan implies that something more than plan-confirmation is necessary for assumption. Moreover, interpreting the Plan’s boilerplate language as providing for assumption of the agreement would be inconsistent with
The bankruptcy court’s interpretation is consistent with the conclusions by other courts that an executory contract may not be assumed either by implication or through the use of boilerplate plan language. See In re Swollen’s, Inc.,
The bankruptcy court did not consider whether the agreement was assumable. The district court held it was not.
As stated,
The trustee may not assume or assign any executory contract ... of the debt- or, whether or not such contract ... prohibits or restricts assignment of rights or delegation of duties, if ... applicable law excuses a party, other than the debtor, to such contract ... from accepting performance from or rendering performance to an entity other than the debtor ... and ... such party does not consent to such assumption.
Under Louisiana law, a partner cannot make a third person a member of the partnership without his partners’ consent. La. Civ. Code art. 2812. Appellees did not consent to substituting the Trustee for the Debtor. Accordingly, the district court correctly held the agreement was not assumable under
4.
The bankruptcy court held: the agreement passed through bankruptcy; the Debtor’s interest was property of the Reorganized Debtor (liquidating trust established by the Plan and administered by the Trustee fоr the benefit of the creditors); the estate remained a partner in Westbank Inns; and the Trustee was entitled to distributions on account of the estate’s interest and was probably entitled to purchase the interests of former partners Ronald Case and Smith.
The district court agreed that the agreement passed through bankruptcy, but held that, rather than the pass-through resulting in the agreement’s becoming part of the estate, the agreement was unaffected by the bankruptcy proceedings and remained binding on the Debtor, who alone was entitled both to claim rights to his share of the distributions and to determine the validity of the interest-transfers.
a.
The Trustee contends that, even if he could not become a partner, Louisiana partnership law permits a partner, without his partners’ consent, to share his economic interest in the partnership with a third person. Therefore, according to the Trustee, the district court erred by holding: O’Connor’s economic interest in the partnership is not property of the estate; and only O’Connor can claim a right to the distributions. Appellees acknowledged at oral argument that, for thе estate, the Trustee may be entitled to recover the value of the Debtor’s interest. On the other hand, they contend: the Trustee did not seek such relief; and, in any event, the partnership is the entity against whom such an action must be brought.
The Trustee is correct that, under Louisiana law, “[a] partner may share his interest in the partnership with a third person without the consent of his partners”. La. Civ. Code art. 2812 (emphasis added). First Federal Savings & Loan Association of Warner Robins v. Delta Towers, Ltd.,
In any event, the Trustee’s contention ignores his not having sued to recover the economic value of O’Connor’s interest. Again, hе sought only: (1) a declaration that the interest-transfers to Appellees were void because they violated the agreement’s restrictions; (2) a declaration of the Chapter 11 estate’s proportionate ownership of the terminated interests of Ronald Case and Smith; and (3) an accounting of the distributions Appellees received as a result of their acquisitions of those interests.
Moreover, the Trustee did not sue the partnership. “A partnership is a juridical person, distinct from its partners.” La. Crv. Code art. 2801 (emphasis added). As such, it can be sued. La. Code Civ. P. art. 737 (“A partnership has the procedural capacity to be sued in its partnership name.”); see also Peck & Vantine v. Hebert,
The “partnership ... is primarily liable for its debts”. La. Civ. Code art. 2817. Thus, regarding a partnership obligation, a partnership creditor must first exhaust his rights against the partnership before he can recover from the partners. See Brackley & Voelkel,
Again, the Trustee did not seek the value of O’Connor’s interest, and did not sue the partnership. Therefore, whether O’Connor’s economic interest is property of the bankruptcy estate was not at issue, and the district court did not address it. Instead, the district court held: the partnership agreement (as opposed to O’Con-nor’s economic interest in the partnership) was not assumable and, therefore, was not part of the Debtor’s estate; and, because it was not, the Trustee had no rights under that agreement to challenge the validity of the interest-transfers or to claim a right to distributions made pursuant to them. Restated, the district court addressed only the Trustee’s claimed right to proceed as a partner under the partnership agreement, and did not address the Trustee’s authority, under the Bankruptcy Code, to proceed against the partnership to recover the value of the Debtor’s interest in it. Accordingly, and contrary to the Trustee’s assertion, the district court’s ruling does not create a new category of exempt property or deprive the Chapter 11 estate of valuable property rights.
b.
As discussed supra, the partnership agreement is not assumable. The Bankruptcy Code does not address what happens to an unassumable executory contract after a plan is confirmed in a Chapter 11 case (or, for that matter, an assumable executory contract which is neither assumed nor rejected in a Chapter 11 case). Under the former Bankruptcy Act, the Fourth Circuit held an “executory contract ... remains in force ... until it is rejected, and unless rejected, it passes with other property of the debtor to the reorganized corporation”. Consol. Gas Elec. Light & Power Co. of Baltimore v. United Rys. & Elec. Co. of Baltimore, 85 F.2d 799, 805 (4th Cir.1936) (emphasis added), cert. denied,
There appears to be general agreement that the “pass-through” theory continues to apply in Chapter 11 cases governed by the Code, at least where an assumable executory contract is neither assumed nor rejected, and the Reorganized Debtor continues to operate the debtor’s pre-bank-ruptcy business. See, e.g., In re Day,
The parties did not cite, nor did we find, any cases applying the pass-through theory when, under
The Trustee contends that, under the pass-through theory, the contract passes to the Reorganized Debtor, rather than to the pre-bankruptcy Debtor (O’Connor). But here, the Reorganized Debtor is a liquidating trust and the executory contract is a partnership agreement; the contract could not pass through bankruptcy unaffected if it passed to the Reorganized Debtor. It would be affected: the Trustee would become a partner without the consent of the non-debtor partners, constituting a de facto assumption prohibited by
Accordingly, the district court correctly held that the partnership agreement did not pass through bankruptcy to the Reorganized Debtor. Instead, it passed through to the pre-bankruptcy Debtor, unaffected by the bankruptcy proceedings.
III.
For the foregoing reasons, the judgment of the district court dismissing the Trustee’s claims is AFFIRMED. This case is REMANDED to the district court with instructions to remand it to the bankruptcy court for such further proceedings, if any, as may be appropriаte, consistent with this opinion.
AFFIRMED and REMANDED.
Notes
. As discussed infra, during the pendency of O’Connor’s bankruptcy, it is claimed changes occurred concerning some of the partners, with the Debtor and Appellee John Stumpf supposedly being joined by Appellee Lincoln Case and Appellee Harry Stumpf pursuant to interest-transfers by John Stumpf and original partners Ronald Case and Auby Smith.
. Other courts have likewise treated partnership agreements as executory contracts when the issue was not disputed. See, e.g., Summit Inv. & Dev. Corp. v. Leroux,
. To the extent the Trustee maintains
. Contrary to the Trustee's contention, the pass-through theory adopted by the district court was raised by Appellees in district court.
. It is not necessary to address Appellee Lincoln Case's alternative grounds for affirmance (acquisitive prescription and good faith possession).