10.4 Partnership Interests in Bankruptcy
The general rule that a creditor has the status of a mere transferee has been tested in bankruptcy. A partnership agreement is an executory contract. Section 365 of the Bankruptcy Act permits the trustee broad control over executory contracts, except for “personal service” contracts. Bishop & Kleinberger, The Bankruptcy of an LLC Member: Does the Trustee Run the Company? ABA Section of Business Law (2005 Annual Meeting at Chicago, Ill. Aug. 5-9 2005) (Available from ABA website).
In re Antonelli, 148 B.R. 443 (D. Md. 1992) involved a Chapter 11 proceeding of the general partner. The partnership operated parking lot facilities in Washington, D.C. and other real estate projects. [As of 1991 the Antonelli bankruptcy was the largest Chapter 11 ever filed in the District of Maryland, “involving almost 2,000 creditors, claims of over $200 Million and assets of over $100 Million.”] The plan called for the liquidation of the Antonelli interests to be handled by a committee comprised of creditors. The Plan required Mr. Antonelli to cast his vote as a general partner on partnership matters as directed by the committee. If Mr. Antonelli believed that a specific direction would violate his fiduciary duty to the partnership, he was to file a motion with the bankruptcy court for instructions. Some of the limited partners objected to this arrangement.
In re Antonelli, the court upheld the vote-by-committee plan. In doing so, the court distinguished between partnerships where the identity of the general partner is significant (partners in a law firm) and not as significant (a “mature” real estate project):
“Obviously, a reorganization plan could not require that a law firm accept as a partner the assignee of one of their partners who had become bankrupt. The nature of the duties which law partners owe, not only to one another but to their clients, make their identities material to the very existence of the partnership. Real estate partnerships, however, cannot be so strictly categorized. As one commentator has noted, the question of whether or not interests (including the exercise of management power) in a real estate partnership should be assignable under Section 365(c) properly depends upon the stage that the real estate project has reached and the substantiality of the duties which the partners must continue to perform.”
In re Antonelli, 148 B.R. 443, 448-9 (D. Md. 1992).