Phillips v. First City, Texas — Tyler, N.A. (In Re Phillips) ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 91-4765
_____________________
IN THE MATTER OF: HARRY S. PHILLIPS and
PHILLIPS & PHILLIPS, LTD.,
Debtors.
MARTHA J. PHILLIPS,
Appellant-Cross-Appellee,
versus
FIRST CITY, TEXAS )) TYLER, N.A., HARRY S.
PHILLIPS, and PHILLIPS & PHILLIPS, LTD.,
Appellees-Cross-Appellants.
_______________________________________________________
Appeals from the United States District Court for
the Eastern District of Texas
_______________________________________________________
( July 2, 1992 )
Before SNEED,1 REAVLEY and BARKSDALE, Circuit Judges.
REAVLEY, Circuit Judge:
The dispositive issue in this appeal is whether Harry S.
Phillips (HSP) had legal authority to file a voluntary petition
under the Bankruptcy Code's Chapter 11 on behalf of Phillips &
Phillips, Ltd. (P&P) after filing a similar petition on his own
behalf. The bankruptcy court held that Texas law did not deprive
HSP of that authority. On appeal, the district court held that
1
Senior Circuit Judge of the Ninth Circuit, sitting by
designation.
Texas partnership law would deprive HSP of authority, but that
federal Bankruptcy Rule 1004(a) preempted this Texas law. We
hold that Texas law deprived HSP of authority to file bankruptcy
on P&P's behalf, and we find no federal law that preempts this
Texas law. Consequently, we reverse the district court's order
that affirms the bankruptcy court's confirmations of the
reorganization plans of HSP and P&P.
I. BACKGROUND
Martha J. Phillips (MJP) and HSP divorced in 1976. Rather
than divide their extensive real estate and mineral interests,
they created P&P as a limited partnership and transferred their
community property to it. Their partnership agreement states
that MJP and HSP each own half of P&P and HSP is its sole general
partner.
In February 1988, a Texas court issued a Final Judgment in
accord with a jury's findings that HSP breached the partnership
agreement and his fiduciary duties to MJP. The Final Judgment
awarded MJP damages against both HSP and P&P, dissolved P&P, and
directed HSP, "as general partner of Phillips & Phillips," to
wind up P&P within 90 days by paying P&P's unsecured creditors
with its liquid assets and transferring an undivided one-half
interest in all of P&P's remaining property to MJP subject to all
existing encumbrances on that property.
HSP appealed from the part of the court's order that
dissolved P&P, and MJP appealed from the court's determination of
damages. In January 1989, HSP asked the Texas Court of Appeals
2
to dismiss his appeal. HSP filed a voluntary petition for
bankruptcy protection under 11 U.S.C. §§ 1101 et seq. (Chapter
11) for his personal estate on January 17, 1989, two days before
the Texas Court of Appeals was to hear oral argument on MJP's
appeal.2 Then, on February 2, 1989, the day before a Texas court
was to have considered MJP's motions for contempt and appointment
of a receiver for P&P, HSP filed a voluntary petition for
protection under Chapter 11 on behalf of P&P. HSP has not yet
complied with the Final Judgment's requirement that he wind up
P&P.
MJP asked the bankruptcy court to dismiss P&P's petition,
arguing, inter alia, that HSP did not have authority to file the
petition on P&P's behalf. The bankruptcy court held that Texas
partnership law did not prohibit HSP, as the sole general partner
of P&P, from filing a Chapter 11 petition on P&P's behalf even
though he had already filed one on his own behalf. The court
then held that, even if Texas law did prohibit HSP from placing
P&P in Chapter 11 proceedings, contrary provisions of the federal
Bankruptcy Code preempted Texas law under the Constitution's
Supremacy Clause.
The bankruptcy court also found that:
Any attempt to liquidate the assets of
Phillips & Phillips, Ltd. and Harry S.
Phillips other than through the present
pending Chapter 11 proceedings could result
2
The bankruptcy court permitted MJP to prosecute her
appeal; Texas courts determined that HSP owes MJP $535,302.14 for
breaching contractual and fiduciary duties. See Phillips v.
Phillips, 820 S.W.2d 785, 786-88 & n.2 (Tex. 1991).
3
in the diminution of both bankruptcy estates
to the point where not all creditors or
certain classes of creditors and/or parties
in interest would be paid.
In November 1989, the court confirmed plans of reorganization for
both HSP and P&P under which HSP, as debtor-in-possession with
court supervision, was to liquidate P&P's assets over a four-year
period, pay all creditors, and share any remaining equity equally
with MJP.
The district court affirmed the bankruptcy court's plan
confirmations after ruling that, although Texas partnership law
prohibits a bankrupt partner from placing a partnership in
Chapter 11 proceedings, this law conflicts with Bankruptcy Rule
1004(a). The district court concluded that, under the
Constitution's Supremacy Clause, Bankruptcy Rule 1004(a) renders
HSP's personal bankruptcy legally irrelevant to his authority to
place P&P in Chapter 11 proceedings.
II. DISCUSSION
MJP attacks the district court's order affirming the
bankruptcy court's plan confirmations on several grounds. We
agree with her argument that the courts erroneously recognized
HSP's authority to file a voluntary bankruptcy petition on P&P's
behalf, and this error alone precludes confirmation of either
plan. We review the legal conclusions of the bankruptcy court
and the district court de novo. Pierson & Gaylen v. Creel &
Atwood (In re Consolidated Bancshares, Inc.), 785 F.2d 1249, 1252
(5th Cir. 1986).
4
A. HSP'S AUTHORITY UNDER TEXAS LAW
Texas' Uniform Partnership Act provides that a "partnership
is in no case bound by any act of a partner after dissolution ...
[w]here the partner has become bankrupt." TEX. REV. CIV. STAT. ANN.
art. 6132b § 35(3)(b) (Vernon 1970).3 We read this language to
prohibit HSP from placing P&P in Chapter 11 proceedings after the
Texas court dissolved P&P and HSP secured Chapter 11 protection
for himself.
Professor Bromberg, the chief draftsman of Texas' Uniform
Partnership Act, suggests that "the reason for [section 35(3)(b)]
may be the fear of binding the partnership to unwise transactions
entered into by the bankrupt partners." Allan R. Bromberg &
Larry E. Ribstein, BROMBERG & RIBSTEIN ON PARTNERSHIP § 7.16(d) (1991).
More specifically, upon securing bankruptcy-court protection, a
general partner who becomes a debtor-in-possession4 of her
personal estate necessarily assumes responsibilities to her
creditors that conflict with her responsibilities to her co-
3
Under Texas law, bankruptcy of any partner or the
partnership causes dissolution of the partnership. TEX. REV. CIV.
STAT. ANN. art. 6132b § 31(5). Thus, section 35(3)(b) simply
removes a bankrupt partner's authority to act on behalf of
partnerships.
4
If the bankruptcy court appoints a trustee instead of
leaving the debtor-partner in control of her bankruptcy estate,
the trustee assumes all of the debtor's partnership interests.
11 U.S.C. §§ 323 (trustee "is the representative of the estate"),
541(a)(1) (voluntary petition creates an estate that contains
"all legal or equitable interests of the debtor in property"
except power that the debtor may only exercise for the benefit of
a separate entity). Thus, federal law precludes a bankrupt
partner from relying on her status as a partner to act on behalf
of a partnership after the court has appointed a trustee to
administer her estate.
5
partners. See Skeen v. Harms (In re Harms), 10 B.R. 817, 822
(Bankr. D. Colo. 1981) (sole general partner of limited
partnership who becomes debtor-in-possession of personal estate
under Chapter 11 generates "an inherent conflict of interest
which precludes him from remaining as general partner" because
partners owe fiduciary duty to co-partners and debtors-in-
possession owe fiduciary duty to creditors); In re Map 1978
Drilling Partnership, 95 B.R. 432, 435 (Bankr. N.D. Tex. 1989)
(following Harms in requiring avoidance of conflict-of-interest
for debtor-partner in Chapter 11 proceedings by conditioning
reorganization of limited partnerships on naming of new sole
general partner); In re Royal Gorge Assoc., 77 B.R. 277, 278
(Bankr. D. Colo. 1987) ("flagrant conflict of interest" for law
firm to represent sole general partner, who was also creditor of
partnership, in his voluntary Chapter 7 case, while at the same
time representing partnership in its Chapter 11 case). Creditors
are wholly dependent on the party controlling an estate in
bankruptcy proceedings to protect their interests. Likewise,
partners, especially limited partners, must rely on general
partners to protect all partners' interests in partnership
property. Both the creditors and the partners are interested in
the same partnership property. Thus, Texas, which alone
regulates the creation and dissolution of business associations
within its borders, logically protects non-bankrupt partners from
bankrupt partners who acquire responsibilities under federal
bankruptcy law that could compromise the interests of the non-
6
bankrupt partners.
HSP presents three arguments in favor of a contrary
interpretation of section 35(3)(b).
1. Texas' Definition of "Bankrupt"
First, HSP contends that he has not become "bankrupt" within
the meaning of section 35(3)(b) because he filed his voluntary
petition under Chapter 11, which facilitates debtor
reorganization, as opposed to Chapter 7, which facilitates
liquidation. Thus, we must consider whether one who files a
voluntary petition for Chapter 11 protection is "bankrupt" within
the meaning of Texas partnership law. The Texas Uniform
Partnership Act states that "'bankrupt' includes bankrupt under
the Federal Bankruptcy Act." TEX. REV. CIV. STAT. ANN. art. 6132b §
2. This is a deceptively simple statement, and we must review
some legislative history to properly convey our difficulties in
construing section 2.
Congress consolidated federal bankruptcy law in the
Bankruptcy Act of 1898. See Act of July 1, 1898, c. 541, 30
Stat. 544. At that time, bankruptcy law only facilitated
liquidation. Not until 1933 did Congress amend the Bankruptcy
Act to permit reorganization of certain entities. See Pub. L.
No. 72-420, 47 Stat. 1474 (1933). In 1938, Congress amended the
Bankruptcy Act with the precursor to Chapter 11 to facilitate
general corporate reorganization. See Act of June 22, 1938, Pub.
L. No. 74-575, 52 Stat. 840 (1938). Until Congress substantially
revised the Bankruptcy Act with the Bankruptcy Reform Act of
7
1978, the Bankruptcy Act apparently referred to entities
undergoing Chapter 7 liquidation as "bankrupts," and those
undergoing Chapter 11 reorganization as "debtors." See S. REP.
NO. 989, 95th Cong., 2d Sess. 23 (1978), reprinted in Historical
and Revision Notes following 11 U.S.C.A. § 101(12) at 36 (1979),
and reprinted in 1978 U.S.C.C.A.N. 5787, 5809. But the
Bankruptcy Reform Act of 1978 removed all references to
"bankrupt" in federal bankruptcy law, created the Bankruptcy
Code, 11 U.S.C. § 1 et seq., and adopted "debtor" to refer to all
who seek protection under the Code, whether they do so through
liquidation under Chapter 7 or reorganization under Chapter 11.
See 11 U.S.C. § 101(12); see generally H.R. REP. No. 595, 95th
Cong., 2d Sess. 3-5 (1978), reprinted in 1978 U.S.C.C.A.N. 5963,
5965-66 (recounting Reform Act's history and purpose).
When the Texas legislature referred to the "Federal
Bankruptcy Act" in enacting section 2 in 1961, it could have
meant the Federal Bankruptcy Act as written in 1898, as it stood
in 1961, or as amended over time. The language of section 2
accords with any of these interpretations. Consistent with the
last interpretation, we think that, as a matter of statutory
construction and policy, Texas courts would consider one who
files a voluntary petition under Chapter 11 "bankrupt" within the
meaning of Texas partnership laws.
Section 2 is to be "interpreted and construed as to effect
its general purpose to make uniform the law of those states which
enact it." TEX. REV. CIV. STAT. ANN. art. 6132b § 4(4). Sections 2
8
and 4(4) are Texas' versions of the Uniform Partnership Act as it
existed in 1961. The current version of the Uniform Partnership
Act explains that "Federal Bankruptcy Act" in its section 2
explicitly refers to 11 U.S.C. § 1 et seq., the Bankruptcy Code.
See UNIF. PARTNERSHIP ACT § 2, 6 U.L.A. § 2 (1992 Supp.). Thus, the
current National Conference of Commissioners of Uniform State
Laws considers the present federal understanding of the term
"bankrupt" controlling under section 2 of the Uniform Partnership
Act.5 No federal or state court has addressed the meaning of
section 2, but the legislatures of Colorado, Georgia,
Pennsylvania, and Rhode Island have specified that "Federal
Bankruptcy Act" as used in section 2 means federal bankruptcy law
as currently amended. Only California has limited the definition
of "bankrupt" under section 2 to Chapter 7 liquidation
proceedings. See id. ("Action in Adopting Jurisdictions").
Thus, by adopting the majority view of "Federal Bankruptcy Act,"
our interpretation accords with the mandate of the Texas Uniform
Partnership Act's section 4. We also note that section 2 only
states what is included within "bankrupt" without explicitly
limiting that term's significance. We understand Texas, to the
extent that its legislature considered the issue now before us,
5
Federal conflation of the terms "debtor" and "bankrupt"
only means that there is no longer any difference between these
two terms. The opposite conclusion )) that, for purposes of
state laws that retain the term "bankrupt," there is no such
thing as "bankrupt" under federal law )) would considerably
change the significance of bankruptcy in states' partnership
laws. We cannot countenance such a drastic change without some
indication of legislative intent or reason for doing so.
9
to have simply ceded to the federal government concurrent
authority to define "bankrupt" for purposes of Texas partnership
law.
Most importantly, however, we would create an unnecessary
loophole in Texas partnership law by interpreting it to treat
those who seek Chapter 7 protection differently from those who
seek Chapter 11 protection. See In re Sandy Ridge Devel. Corp.,
881 F.2d 1346, 1352 (5th Cir. 1989) ("although Chapter 11 is
titled 'Reorganization,' a plan may result in the liquidation of
the debtor"). Would it follow Sandy Ridge, then, that parties
who wish to liquidate could simply file their petitions under
Chapter 11 to avoid the state-law implications of bankruptcy? We
think not.
Only one reported case withheld the label "bankrupt" from an
entity that sought Chapter 11 protection: In re Safren, 65 B.R.
566, 569-70 (Bankr. C.D. Cal. 1986). We think that Safren is
wrongly decided. California adopted section 31(5) of the Uniform
Partnership Act, which states that "[d]issolution is caused ...
[b]y the bankruptcy of any partner or the partnership." The
Safren court held that filings for protection under Chapter 11 do
not invoke section 31(5). Id. The court reasoned that the
National Conference of Commissioners on Uniform State Laws
drafted the Uniform Partnership Act almost 20 years before
Congress first amended the liquidation provisions of the
Bankruptcy Act to facilitate reorganizations. From this, the
court concluded that the drafters of the Uniform Partnership Act
10
only envisioned the extant liquidations when they used the term
"bankrupt" in section 31(5). Id. But the information available
to the drafters of the Uniform Partnership Act is much less
important than that available to California's legislature when it
adopted section 31(5) in 1949. See id. at 569 n.2. By that
time, Chapter 11 had existed for eleven years and California's
legislature could have understood "bankrupt" to apply to anyone
seeking protection under any chapter of the federal bankruptcy
laws.
The Safren court also based its decision on its
understanding of public policy. The court explained as follows:
If a partnership is to be reorganized and to
continue in business, state law should not be
permitted to dissolve it. Upon confirmation
of a plan of reorganization, the assets of
the bankruptcy estate, which was created by
the filing of the case, are revested in the
partnership, subject to those debts provided
for in the plan; unpaid partnership
liabilities are discharged. The partnership,
like a corporation, then emerges from Chapter
11 to continue in business.
In addition, the dissolution of a
partnership upon the filing of its Chapter 11
case may have substantial tax consequences,
that could render its reorganization
difficult or impossible.
Id. at 569. The court's entire policy argument concerns how to
interpret state law to effectuate a federal objective:
partnership reorganization. But the purpose of the state law
construed by the court is not to preserve the life of
partnerships; as we have previously explained, that law mandates
partnership dissolution upon partner bankruptcy to protect the
conflicting interests of the many interested parties when the
11
legal nature of the parties' relationships change as a result of
federal law. See generally Woodruff v. Bryant, 558 S.W.2d 535,
539 (Tex. Civ. App. -- Corpus Christi 1977, writ ref'd n.r.e.)
("Dissolution is an act that actually changes the legal
relationship of the partnership, and has nothing to do with
whether or not the partnership business is continuing or winding
up.").
Thus, we repudiate Safren and side with the many bankruptcy
courts that have interpreted various states' versions of the
Uniform Partnership Act to include Chapter 11 petitioners as
"bankrupts" under those states' partnership laws. See, e.g., In
re Sunset Developers, 69 B.R. 710, 711-12 (Bankr. D. Idaho 1987);
In re Minton Group, Inc., 27 B.R. 385, 390 (Bankr. S.D.N.Y.
1983), aff'd, 46 B.R. 222 (S.D.N.Y. 1985); In re Harms, 10 B.R.
at 821-22.6
2. Third Parties
Next, HSP relies on the title and comments7 to section 35 to
argue that this law only limits the authority of bankrupt
partners to bind partnerships to third parties, and it does not
6
See also In re Corky Foods Corp., 85 B.R. 903, 904 (Bankr.
S.D. Fla. 1988) (completely misreading Safren to hold that, while
state law includes Chapter 11 petitioners as "bankrupts," some
state partnership laws that apply to bankrupts conflict with
federal bankruptcy law); cf. Safren, 65 B.R. at 570 n.5 (decision
rests wholly on interpretation of state law without reaching
conflict issue).
7
Section 35 is entitled "Power of Partner to Bind
Partnership to Third Persons after Dissolution." TEX. REV. CIV.
STAT. art. 6132b § 35; see also id. Source and Comments )) Alan
R. Bromberg.
12
otherwise limit their authority to wind up partnership affairs.
HSP explains that he placed P&P in Chapter 11 proceedings as a
means of winding up that partnership, and because MJP is an
insider and not a third party, section 35 did not prevent him
from filing a voluntary petition on P&P's behalf even if he is
"bankrupt" under Texas law. We disagree.
Even if we accept HSP's argument that section 35 only
eliminates a bankrupt partner's authority to bind a partnership
to third parties, it would preclude him from placing P&P in
Chapter 11 proceedings. By securing bankruptcy protection for
P&P, HSP changed the legal relationship between P&P and third-
party creditors; indeed, we can scarcely imagine a partnership
liquidation or reorganization plan that does not change the legal
obligations of )) or "bind"8 )) a partnership to third parties.
HSP emphasizes one of Professor Bromberg's comments to
section 35: "In all instances, authority continues to wind up
affairs and complete unfinished transactions...." TEX. REV. CIV.
STAT. ANN. art. 6132b § 35, Source and Comments )) Alan R.
Bromberg at 386. But Texas' legislature mandates that "the
partners who have not wrongfully dissolved the partnership or the
legal representative of the last surviving partner, not bankrupt,
has the right to wind up the partnership affairs." TEX. REV. CIV.
STAT. ANN. art. 6132b § 37 (emphasis added); see also Normandin v.
Normandin (In re Normandin), 106 B.R. 14, 16 (Bankr. D. Mass.
8
See BLACK'S LAW DICTIONARY 153 (5th ed. 1979) (to "bind" is
"to obligate [or] place under definite duties or legal
obligations").
13
1989) (interpreting Massachusetts' identical section 37 to deny
partner who files a bankruptcy petition the right to participate
in wind-up process). Moreover, both immediately before and after
the comment that HSP relies upon, Professor Bromberg acknowledges
that section 37 limits partners' authority to wind up a
partnership's affairs. TEX. REV. CIV. STAT. ANN. art. 6132b § 35,
Source and Comments at 384, 386. He notes that sections 35 and
37 "are rather complicated and sometimes overlap." Id. at 384.
While we cannot say what Professor Bromberg's comment to section
35 means, we refuse to add the gloss to section 35 that HSP
advocates when that gloss conflicts with section 37, and is
nowhere supported in the text of section 35.
3. MJP's Consent
Finally, First City, Texas - Tyler, N.A., a creditor of HSP
and P&P who sides with HSP in this appeal, argues that HSP's
authority to wind up P&P derives from the Final Judgment, and
because MJP did not challenge this aspect of the Final Judgment,
HSP's authority to wind up P&P is legitimated by consent. But if
MJP consented to anything, she consented to having HSP wind up
P&P within 90 days by conveying to her an undivided one-half
interest in all of P&P's real estate and mineral interests. She
has consistently contested HSP's authority to manage P&P's assets
beyond the Final Judgment's directives, and she sought a receiver
for P&P as a result of HSP's disregard for the Final Judgment.
Moreover, HSP was not bankrupt when he received authority to
wind up P&P under the Final Judgment. The Texas court that
14
issued the Final Judgment did not sanction a conflict-of-interest
on HSP's part because none existed at that time. The court could
appropriately depend on section 35(3)(b) to protect MJP and HSP's
creditors from any conflict that would arise if HSP sought
bankruptcy protection after the Final Judgment, and nothing in
the Final Judgment is inconsistent with this understanding.
We conclude that, under Texas law, HSP lacked authority to
file a voluntary Chapter 11 petition on P&P's behalf.
B. FEDERAL PREEMPTION OF TEXAS LAW
While the district court understood Texas law to divest HSP
of authority to act on P&P's behalf after he sought Chapter 11
protection, it held that Bankruptcy Rule 1004(a) negates the
effect of section 35(3)(b) in this case. FED. BANKR. R. 1004(a)
states: "A voluntary petition may be filed on behalf of the
partnership by one or more general partners if all general
partners consent to the petition." The district court cited In
re Westover Hills, Ltd., 46 B.R. 300, 305 (Bankr. D. Wyo. 1985)
in support of its decision that rule 1004(a) preempts section
35(3)(b). The Westover Hills court interpreted rule 1004(a) to
mean that, "[w]here a limited partnership contains only one
general partner, and that general partner files a voluntary
petition, then the bankruptcy case is properly commenced." Id.
But the sole general partner in Westover Hills was not bankrupt
when it filed a voluntary petition on behalf of the partnership,
and the Westover Hills court did not address any conflict between
federal and state law. Thus, while the Westover Hills court's
15
interpretation of rule 1004(a) is correct on the facts of that
case, it is irrelevant to this case.
Whether rule 1004(a) preempts section 35(3)(b) depends on
whether we find an actual conflict between federal and state law.
See California Fed. Sav. & Loan Ass'n v. Guerra, 479 U.S. 272,
280-81, 107 S. Ct. 683, 689 (1987); Perry v. Mercedes Benz of
North Am., Inc., 957 F.2d 1257, 1261 (5th Cir. 1992).9 An actual
conflict "occurs either because 'compliance with both federal and
state regulations is a physical impossibility,' or because the
state law stands 'as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.'"
Guerra, 479 U.S. at 281, 107 S.Ct. at 689 (citations omitted).
We thus examine the operation and purpose of rule 1004(a)
and section 35(3)(b) to determine whether they conflict. Rule
1004(a) provides that any "general partner" may file a voluntary
petition on behalf of a partnership. But no federal law defines
"general partner;" this is exclusively the task of state
partnership law. See Westover Hills, 46 B.R. at 303-05 (applying
Wyoming law to determine whether a partner is a limited or
general partner for purposes of rule 1004(a)). Texas defines a
general partner as one who has "all the rights and powers and
[is] subject to all the restrictions and liabilities of a partner
in a partnership without limited partners." TEX. CIV. STAT. ANN.
art. 6132a § 10(a) (emphasis added). Section 35(3)(b) is one of
9
The parties raise, and we recognize, no issue concerning
either express or implied preemption. See id.
16
these restrictions that defines a "general partner" in Texas. An
entity that has all of the rights and responsibilities of a
general partner under Texas law, but can also act on behalf of
the partnership after filing for bankruptcy protection, is
something more than, and therefore different from, a general
partner under Texas law.
Thus, when rule 1004(a) employs the term "general partner,"
it either imports all authority limitations with the definition
of "general partner" from state law or, pursuant to the Supremacy
Clause, it augments the authority of those whom states label
"general partner." Any such augmentation constitutes a
substantive change in the authority of general partners. But
when Congress accorded the Supreme Court authority to promulgate
the Bankruptcy Rules, it stated, "[s]uch rules shall not abridge,
enlarge, or modify any substantive right." 28 U.S.C. § 2075
(emphasis added); see also FED. BANKR. R. 1001 (Bankruptcy Rules
"govern procedure in United States Bankruptcy Courts") (emphasis
added); In re Hanover Indus. Mach. Co., 61 B.R. 551, 552 (Bankr.
E.D. Pa. 1986) ("the [Bankruptcy] Code defines the creation,
alteration or elimination of substantive rights but the
Bankruptcy Rules define the process by which these privileges may
be effected"). So rule 1004(a), by itself, cannot augment the
authority of what states define as "general partners."
The argument could be made that rule 1004(a) simply
17
implements 11 U.S.C. § 301,10 in which Congress augmented the
authority of general partners by providing: "A voluntary case
under a chapter of [title 11] is commenced by the filing with the
bankruptcy court of a petition under such chapter by an entity
that may be a debtor under such chapter." But nothing in section
301 indicates that every entity that may be a debtor under the
Bankruptcy Code is entitled to file a voluntary petition; nor
does section 301 make any attempt whatsoever to address the
countless details that attend questions of authority to act on
behalf of a business entity. See H.R. 8200, H.R. REP. NO. 598 at
196, reprinted in, 1978 U.S.C.C.A.N. at 6157 ("Title 11 does not
define 'partner' or 'partnership'; the definitions are left to
nonbankruptcy law as construed by the bankruptcy court.")
(emphasis added).
For many years, courts have consistently looked to state
law to determine whether a person has authority to file a
voluntary petition on behalf of a corporation. In Grand Lodge,
Knights of Pythias v. O'Connor, 95 F.2d 477, 478 (5th Cir. 1938)
the officers of a corporation that was involved in Louisiana
receivership proceedings filed a petition for reorganization
under federal bankruptcy law. This court looked exclusively to
Louisiana law to determine that the officers were without
authority to file the petition. Id. at 479. Moreover, this
court relied on Louisiana law concerning the significance and
10
See Advisory Committee Note to FED. BANKR. R. 1004 in 11
U.S.C.A. (West 1984) (rule 1004(a) "complements" § 301).
18
timing of corporate dissolution to determine that the corporation
"may not be reorganized in bankruptcy." Id. Throughout the many
revisions to federal bankruptcy law, courts continue to resolve
authority-to-file disputes according to state law. See In re
Quarter Moon Livestock Co., 116 B.R. 775, 778 (Bankr. D. Idaho
1990) ("the authority to file a bankruptcy petition must be found
in the instruments of the corporation and applicable state law")
(citing In re Crescent Beach Inn, Inc., 22 B.R. 155 (Bankr. D.
Me. 1982)); In re Bel-Aire Invest., Inc., 97 B.R. 88, 89-90
(Bankr. M.D. Fla. 1989) ("It is well established that since the
Bankruptcy code itself does not establish the requisites for the
initiation of a voluntary corporate bankruptcy case, the validity
of all the individuals acting on behalf of the corporation must
be determined with reference to the laws of the State in which
the corporation was chartered."; recognizing that application of
state law would render corporation unable to file a voluntary
petition) (citing In re Autumn Press, Inc., 20 B.R. 60 (Bankr. D.
Mass. 1982); Taylor v. Markus Enterprises, Inc. (In re Markus
Enterprises, Inc.), 91 B.R. 459, 460 (M.D. Tenn 1988) ("Whether
the debtor, in light of its dissolution, retains the capacity to
file a petition under the Bankruptcy Code, Chapter 11, is a
matter of the law of [Tennessee]."); see also In re Sunset
Developers, 69 B.R. at 712 (as a matter of Idaho law, partner who
filed for Chapter 11 protection lacks "authority as a general
partner to bind the partnership to an involuntary bankruptcy
petition"). Without further direction from Congress, we will
19
continue to look to state law to determine which people have
authority to seek federal bankruptcy protection on behalf of
state-created business entities.
HSP cites In re Rittenhouse Carpet, Inc., 56 B.R. 131
(Bankr. E.D. Penn. 1985) in arguing that section 35(3)(b)
conflicts with federal law. Rittenhouse concerns a conflict of
state partnership law with 11 U.S.C. § 365(e), and has nothing to
do with rule 1004(a) or section 301. Id. at 132-33.11 We
discuss section 365 because of the possibility that HSP raises it
as an alternative ground for finding a conflict with Texas law
that the district court did not consider.
Section 365 provides, in part:
(e)(1) Notwithstanding a provision in an
executory contract or unexpired lease, or in
applicable law, an executory contract or
unexpired lease of the debtor may not be
terminated or modified, and any right or
obligation under such contract or lease may
not be terminated or modified, at any time
11
By addressing HSP's argument that is based on
Rittenhouse, we do not imply that we agree with that case's
outcome or rationale. In Rittenhouse and at least two other
cases, courts have applied section 365(e)(1) to permit the sole
general partner of a limited partnership to retain her general
partner status despite statements in the partnership agreement
and state law that deprived her of general partner status when
she filed a Chapter 11 petition on her own behalf. Rittenhouse,
56 B.R. at 132-33; In re Fidelity Am. Mortg. Co., 10 B.R. 781
(Bankr. E.D. Pa. 1981); Corky Foods, 85 B.R. at 904. But none of
these courts considered the significance of section 365(e)(2), or
the then virtually identical 11 U.S.C. § 365(c), which several
courts have relied upon to reach the exact opposite conclusion
than that reached by the courts in Rittenhouse et al. See Sunset
Developers, 65 B.R. at 712-13; Harms, 10 B.R. at 821-22; see also
Minton, 27 B.R. at 390-91 (following Harms); cf. In re Fryar, 99
B.R. 747, 750 (Bankr. W.D. Tex. 1989) (Congress precluded Harms'
reading of section 365(c)(1) without changing the parallel
personal-service provision of section 365(e)(2)).
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after the commencement of the case solely
because of a provision in such contract or
lease that is conditioned on))
(A) the insolvency or financial
condition of the debtor at any time
before the closing of the case;
(B) the commencement of a case under
[title 11]; or
(C) the appointment of or taking
possession by a trustee in a case under
[title 11] or a custodian before such
commencement.
(2) Paragraph (1) of this subsection does not
apply to an executory contract or unexpired
lease of the debtor, whether or not such
contract or lease prohibits or restricts
assignment of rights or delegation of duties,
if))
(A)(i) applicable law excuses a
party, other than the debtor, to
such contract or lease from
accepting performance from or
rendering performance to the
trustee or to an assignee of such
contract or lease, whether or not
such contract or lease prohibits or
restricts assignment of rights or
delegation of duties; and
(ii) such party does not consent to such
assumption or assignment ....
11 U.S.C. § 365(e). HSP presents no authority or reasoning to
support his implied assertion that the P&P partnership agreement
remains an executory contract after the Final Judgment decreed
that HSP breached the partnership agreement, awarded MJP damages,
and ordered P&P dissolved, and after passage of the Final
Judgment's 90-day prescription for winding up P&P. Moreover,
section 365(e)(1) by its terms only supersedes conflicting law if
that law supports termination or modification of rights in an
executory contract "solely because of a provision in such
contract." Id. No one contends that a contract deprived HSP of
authority to act on P&P's behalf after declaring personal
21
bankruptcy; MJP claims that Texas law has this effect. See 2
COLLIER ON BANKRUPTCY § 365.06 at 365-48, -49 (reciting legislative
history of section 365(e) indicating its function as an "express
prohibition against the enforcement of bankruptcy termination
clauses"). Thus, HSP may not employ section 365 to avoid section
35(3)(b).
Accordingly, we recognize no conflict between federal
bankruptcy law and section 35(3)(b).
III. CONCLUSION
Because HSP had no authority to institute Chapter 11
proceedings on P&P's behalf, we REVERSE the district court's
order that affirms the bankruptcy court's confirmation of P&P's
plan of reorganization. Because HSP's plan of reorganization is
wholly dependent on the existence of P&P's plan, we also REVERSE
the district court's order affirming the bankruptcy court's
confirmation of HSP's plan. We REMAND this case for further
proceedings consistent with this opinion.
REVERSED and REMANDED.
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