In Re Woskob

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
9-20-2002
In Re Woskob
Precedential or Non-Precedential: Precedential
Docket No. 01-1482
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PRECEDENTIAL
Filed September 20, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1482
IN RE: LEAH BETH WOSKOB,
Debtor
ALEX WOSKOB; HELEN WOSKOB;
THE ESTATE OF VICTOR WOSKOB
v.
LEAH BETH WOSKOB,
Appellant
On Appeal from the United States District Court
for the Middle District of Pennsylvania
District Court Judge: The Honorable James F. McClure
(D.C. Nos: 00-cv-01264 & 00-cv-01265)
Argued on January 7, 2002
Before: MANSMANN,1 RENDELL, and FUENTES,
Circuit Judges.
(Opinion Filed: September 20, 2002)
_________________________________________________________________
1. The Honorable Carol Los Mansmann participated in the oral
argument, but died before the opinion could be filed.
STEVEN S. HURVITZ (Argued)
McQuaide Blasko Schwartz Fleming
& Faulkner, Inc.
811 University Drive
State College, PA 16801
Counsel for Appellant
DANIEL J. DUGAN (Argued)
BRUCE BELLINGHAM
Spector Gadon & Rosen, PC
1635 Market Street, 7th Floor
Philadelphia, PA 19103
Counsel for Appellees
OPINION OF THE COURT
FUENTES, Circuit Judge:
Leah Woskob, the Debtor in bankruptcy, appeals from an
order of the District Court determining that she did not
timely exercise her option to purchase her late husband
Victor’s interest in their real estate partnership, the Woskob
Legends Partnership (the "Legends Partnership"). Under the
partnership agreement, Leah had 30 days from the date of
an act of dissolution or 90 days from the death of a partner
to exercise the option. She ultimately exercised it about two
weeks after her husband died in an accident.
The Bankruptcy Court held that Leah had properly
exercised the option. On appeal, the District Court reversed
the Bankruptcy Court’s decision, determining that the
partnership had already been dissolved well before Victor’s
death by any one of the following three events: (1) Victor’s
exclusion of Leah from partnership proceeds; (2) Leah’s
exclusion of Victor from management and income during
their pending divorce action; and (3) Victor’s bankruptcy
filing. Accordingly, the District Court held that Leah had
not timely exercised her option to purchase Victor’s
interest.
We conclude that none of the three events cited by the
District Court caused the dissolution of the partnership,
2
and that the partnership was dissolved only upon Victor’s
death. Thus, we will vacate the order of the District Court
and will remand the case so that the District Court can
properly determine, consistent with this opinion, whether
Leah validly exercised her option to purchase Victor’s
interest in the partnership following his death.
I.
Leah and Victor Woskob formed the Legends Partnership
in 1996 for purposes of constructing, owning, and
operating the Legends, an apartment building in State
College, Pennsylvania. Leah and Victor, who were then
married, each held a 50% interest in the partnership under
the terms of the Partnership Agreement. As partners, Leah
and Victor retained A.W. & Sons, a business owned by
Victor’s parents, to construct and later manage the Legends
property.
In January of 1997, Leah and Victor separated, and Leah
filed for divorce. During the divorce proceedings, Victor
prevented Leah from receiving any distributions from the
Legends Partnership. However, on April 15, 1997, the
Pennsylvania Court of Common Pleas of Centre County
granted Leah’s petition for special relief and awarded her
the exclusive right to manage and derive income from the
Legends. On June 20, 1997, Leah terminated the
management agreement with A.W. & Sons and hired
another management company. On that same day, Victor
filed a bankruptcy petition under Chapter 11 of the
Bankruptcy Code. He stated in the petition that he owned
50% of the partnership. Victor voluntarily withdrew the
petition nine months later. The partnership tax returns for
1997 and 1998, both signed and filed by Leah, continued
to list both Victor and Leah as general partners of the
Legends Partnership.
On January 12, 1999, Victor died in an automobile
accident. In his will, he had named his four children as
beneficiaries of his estate (the "Estate"). He had also named
his parents, Alex and Helen Woskob (the "Woskobs"), as
executors. Within fifteen days of Victor’s death, Leah
notified the Woskobs that she intended to dissolve the
3
Legends Partnership and to purchase Victor’s interest in
the partnership pursuant to Paragraph 19 of the
Partnership Agreement, which states in relevant part:
Buy-Sell on Death of Partner
XIX. The surviving Partner has the option to dissolve
the Partnership on the death of a Partner. The
surviving Partner shall have the right within ninety (90)
days from the date of death of the deceased Partner to
purchase the interest of the deceased Partner in the
Partnership and to pay to the personal representative
of the deceased Partner the value of that interest as
provided in Paragraph 18 of this Agreement. . . . The
estate of the deceased Partner shall be obligated to sell
his or her Partnership interest as provided in this
Agreement. . . . If the surviving Partner does not elect
to purchase the interest of the deceased Partner, the
Partnership shall terminate.
App. at 2:327-28. Based on the written opinion of the
partnership’s accountant, Leah advised the Woskobs that
Victor’s interest was negative in the amount of $33,944
and, thus, that the Estate was not entitled to any payments
for the purchase of Victor’s partnership interest. The
Woskobs opposed the sale of the Legends Partnership to
Leah.
On April 16, 1999, Leah filed a complaint for declaratory
judgment in the Common Pleas Court, seeking an order
declaring that the Estate’s interest in the partnership
terminated because it had been purchased by Leah
pursuant to the terms of the Partnership Agreement. The
Woskobs filed a separate complaint in the same court on
June 11, 1999, alleging that the partnership had been
dissolved in 1997 prior to Victor’s death in 1999.
Accordingly, they requested the appointment of a receiver to
wind up the affairs of the partnership, a complete
accounting of the partnership’s affairs, and the fixing of
damages for amounts alleged to have been wrongfully taken
from the partnership by Leah.
After Leah filed a voluntary petition for bankruptcy under
Chapter 11 of the Bankruptcy Code, both actions were
removed to the United States Bankruptcy Court for the
4
Middle District of Pennsylvania. The Woskobs contended
that Leah’s attempt to purchase Victor’s interest after his
death in 1999 was untimely because the Legends
Partnership had already been dissolved in 1997 by any one
of three events, including (1) Victor’s alleged exclusion of
Leah from partnership after the marital separation, (2) the
order of the Court of Common Pleas granting Leah the
exclusive right to manage and derive income from the
Legends, and (3) Victor’s bankruptcy filing. If the
partnership had been dissolved in 1997, then Leah’s
attempt to purchase Victor’s interest in 1999 would have
been untimely pursuant to Paragraph 17 of the Partnership
Agreement, which reads:
Option to Purchase Terminated Interest
XVII. On dissolution of the Partnership by the
withdrawal or other act of a Partner, the remaining
Partner, on written notice to the other Partner within
thirty (30) days of the dissolution, may continue the
Partnership business by purchasing the interest of the
other Partner in the assets and goodwill of the
Partnership. The remaining Partner shall have the
option to purchase the interest of the withdrawing
Partner by paying to this Partner or the Partner’s
personal representative the value of the interest
determined as provided in Paragraph 18 of this
Agreement.
App. at 2:327 (emphasis added).
On June 14, 2000, the Bankruptcy Court ruled in favor
of Leah, finding that the partnership was dissolved only
upon Victor’s death in 1999, and that Leah properly
exercised her option to purchase Victor’s interest in the
partnership.
The Estate filed notices of appeal in both cases with the
United States District Court for the Middle District of
Pennsylvania. The District Court disagreed with the
Bankruptcy Court as to the date of dissolution, finding that
any one of the three events cited by the Woskobs was
sufficient to cause the dissolution of the partnership in
1997. Accordingly, the District Court held that Leah’s
attempt to exercise her option to purchase Victor’s interest
5
in 1999 was untimely and reversed and remanded the two
cases to the Bankruptcy Court.
Leah now appeals from the decision of the District Court.
II.
The District Court had jurisdiction over this case
pursuant to 28 U.S.C. S 158(a). We have jurisdiction under
28 U.S.C. SS 158(d) and 1291. Our standard of review over
a district court’s bankruptcy decision is the same as that
exercised by the district court. See In re Continental
Airlines, 125 F.3d 120, 128 (3d Cir. 1997) (citing Brown v.
Pennsylvania State Employees Credit Union, 851 F.2d 81,
84 (3d Cir. 1988)). Accordingly, we review the bankruptcy
court’s factual findings only for clear error, but exercise
plenary review over any legal determinations. See In re
O’Dowd, 233 F.3d 197, 201-02 (3d Cir. 2000). Because
Leah and Victor formed and managed the Legends
Partnership in Pennsylvania, and because Pennsylvania
was the partnership’s principal place of business, we apply
the law of Pennsylvania in determining the partnership’s
date of dissolution. See Restatement (Second) Conflict of
Laws S 294 (1971).
III.
The Uniform Partnership Act (UPA), as adopted by
Pennsylvania, defines the "dissolution" of a partnership as
"the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on, as
distinguished from the winding up, of the business." 15
Pa.C.S. S 8351. The timeliness of Leah’s attempt to exercise
her option to buy Victor’s interest in the Legends
Partnership under the Partnership Agreement depends
upon the partnership’s date of dissolution.
Dissolution can be caused by decree of court or
automatically through operation of law. 15 Pa.C.S.SS 8353
(dissolution by operation of law) and 8354 (dissolution by
decree of court). When dissolution occurs through operation
of law and without the need for a judicial decree, the date
of dissolution is the date of the first effective act of
6
dissolution. See Girard Bank v. Haley, 332 A.2d 443, 447
(Pa. 1975) (holding date of dissolution to be date of
partner’s expression of will to dissolve partnership, not date
of partner’s subsequent death). When a partnership is
dissolved by decree of court, the date of dissolution is
ordinarily the date upon which the court decrees the
dissolution, unless the court specifies otherwise. See
Scheckter v. Rubin, 36 A.2d 315, 315-16 (Pa. 1944).
Although no court ever decreed the dissolution of the
Legends Partnership, there is no doubt that the partnership
was eventually dissolved through operation of law. If the
partnership was not dissolved before Victor’s death, it was
certainly dissolved upon his death under 15 Pa.C.S.S 8353,
which provides that the "death of any partner" causes the
dissolution of a partnership. 15 Pa.C.S. S 8353(4). The
question before us is whether any other events had already
served to dissolve the partnership through operation of law
prior to Victor’s death.
The Estate contends that three separate events, each of
which occurred more than a year and a half before Victor’s
death, were sufficient to dissolve the partnership. The first
event was Victor’s alleged exclusion of Leah from the
partnership after the marital separation. Second was Leah’s
alleged exclusion of Victor after the Court of Common Pleas
granted her petition for special relief. The third partnership-
dissolving event, according to the Estate, was Victor’s filing
for bankruptcy in June 1997. For the reasons set forth
below, we find that none of these three events caused the
dissolution of the Legends Partnership.
A. The Exclusions
In finding that the alleged exclusions or expulsions from
the partnership of Leah and then Victor were each
sufficient to dissolve the Legends Partnership, the District
Court observed that a "dissolution in these circumstances
can be effected before a court ever gets involved, and a
partnership can be immediately dissolved by a wrongful
exclusion." App. at 1:33. In other words, the court found
that a wrongful exclusion can dissolve a partnership
automatically through operation of law.
7
Before it becomes necessary to determine whether the
events described by the Estate constituted wrongful
exclusions from the partnership, we first consider whether
the District Court was correct in finding that such
exclusions are sufficient to dissolve a partnership through
operation of law and without the need for a judicial decree.
In support of its finding, the District Court relied
primarily on In re Crutcher, 209 B.R. 347 (Bankr.E.D.Pa.
1997), a case in which a debtor was wrongfully expelled
from a partnership, and then, a year later, petitioned the
court for dissolution of the partnership. Id. at 352. The
Crutcher court held that the partnership had dissolved as of
the date of the debtor’s expulsion, and that the filing date
of the debtor’s petition for dissolution was "irrelevant to the
date of dissolution." Id. The court explained:
To determine the date of dissolution, it is necessary
first to consider the cause of dissolution. Under the
Pennsylvania Uniform Partnership Act ("PUPA"),
specifically 15 Pa.C.S. S 8353(1)(iv), dissolution is
caused by the "expulsion of any partner from the
business . . . ."
Id. Regarding the act of expulsion as the cause of
dissolution, the court treated the date of expulsion as the
date of dissolution. Unfortunately, in failing to quote and
consider the second half of S 8353(1)(iv), the court
improperly broadened the scope of that subsection.
In its entirety, S 8353(1)(iv) provides that dissolution is
caused, without violation of the agreement between the
partners, "[b]y the expulsion of any partner from the
business bona fide in accordance with such a power
conferred by the agreement between the partners." 15
Pa.C.S. S 8353(1)(iv) (emphasis added). The full text makes
clear that not all partner expulsions are sufficient to cause
automatic dissolution through operation of law. Only those
expulsions that are in accordance with an expulsion power
conferred by the partnership agreement will cause an
immediate dissolution.
The court in Crutcher failed to differentiate partner
expulsions that automatically cause the dissolution of
partnerships from those that merely serve as potential
8
grounds for dissolution by judicial decree. The latter
category lies within the purview of S 8354(a), which
provides the following general rule:
On application by or for a partner, the court shall
decree a dissolution whenever:
(1) A partner has been declared a lunatic in any
judicial proceeding or is shown to be of unsound
mind.
(2) A partner becomes in any other way incapable of
performing his part of the partnership contract.
(3) A partner has been guilty of such conduct as
tends to affect prejudicially the carrying on of the
business.
(4) A partner willfully or persistently commits a
breach of the partnership agreement or otherwise so
conducts himself in matters relating to the
partnership business that it is not reasonably
practicable to carry on the business in partnership
with him.
(5) The business of the partnership can only be
carried on at a loss.
(6) Other circumstances render a dissolution
equitable.
15 Pa.C.S. S 8354(a). It is not difficult to see how the acts
of one or more partners to exclude another partner from the
partnership could serve as grounds for dissolution under
the broad language of SS 8354(a)(4) or (a)(6). Such acts of
exclusion by a partner would likely tend to make it"not
reasonably practicable to carry on the business in
partnership with him." 15 Pa.C.S. S 8354(a)(4). Further, it
does not seem farfetched that the expulsion of a partner
would constitute a circumstance that "render[s] a
dissolution equitable." 15 Pa.C.S. S 8354(a)(6).
The key point, however, is that when such acts of
exclusion are not committed "in accordance with[an
expulsion] power conferred by the agreement between the
partners," they do not result in the instantaneous
dissolution of the partnership. They merely serve as
9
grounds by which a court can decree a dissolution under
S 8354. See Herman v. Pepper, 166 A. 587, 588 (Pa. 1933)
(noting that "[t]he exclusion of one partner by another . . .
is undoubtedly ground for dissolution by a court of equity")
(emphasis added); see also Potter v. Brown, 195 A. 901,
903-04 (Pa. 1938) (observing that it is "well settled" that the
exclusion of a partner is a ground for dissolution).
In this case, because the alleged acts of exclusion from
the Legends Partnership by Leah and Victor were not in
accordance with an expulsion power explicitly conferred by
the Partnership Agreement, they did not cause the
dissolution of the partnership. At the very most, such
exclusionary acts could have served as grounds for
dissolution if either Leah or Victor had applied for a
dissolution by decree of court pursuant to S 8354. Since
neither of them did so, the claimed exclusions are irrelevant
to the partnership’s date of dissolution. That being the
case, there is no need for us to determine whether Leah or
Victor had ever actually been wrongfully excluded from the
partnership.
B. The Bankruptcy Filing
The Estate next contends that, even if an exclusion of
Leah or Victor did not cause the dissolution of the Legends
Partnership, the partnership was dissolved when Victor
filed a bankruptcy petition under Chapter 11 of the
Bankruptcy Code. This argument raises the question of
whether the bankruptcy of a general partner results in the
dissolution of the partnership.
At first glance, Pennsylvania law appears to provide a
clear answer. Under S 8353, the bankruptcy of a partner,
unlike the general expulsion of a partner, does in fact cause
the automatic dissolution of the partnership. 15 Pa.C.S.
S 8353(5). Our analysis would end neatly right here if our
concerns extended only to the application of Pennsylvania
law. We must also consider, however, the role of federal
bankruptcy law and the impact of its interplay with state
partnership law. As a survey of the case law reflects, in
attempting to reconcile the Bankruptcy Code with state law
on this issue of partnership dissolution, courts have been
10
largely divided. Compare, e.g., In re Nizny, 175 B.R. 934,
939 (Bankr.S.D.Ohio 1994) (holding that filing of federal
bankruptcy case by partner does not dissolve general
partnership); In re Hawkins, 113 B.R. 315, 316-17
(Bankr.N.D.Tex. 1990) (same); In re Todd, 118 B.R. 432,
435 (Bankr.D.S.C. 1989) (same); In re Corky Foods Corp.,
85 B.R. 903, 904 (Bankr.S.D.Fla. 1988) (same); In re
Safren, 65 B.R. 566, 569-70 (Bankr.C.D.Cal. 1986)(same),
with Phillips v. First City, Texas-Tyler, N.A. (In re Phillips),
966 F.2d 926, 929 (5th Cir. 1992) (holding that partner’s
federal bankruptcy filing causes dissolution of partnership);
In re Burnett, 241 B.R. 438, 439 (Bankr.E.D.Ark. 1999)
(same); In re Sunset Developers, 69 B.R. 710, 712-13
(Bankr.D.Idaho 1987) (same); Finkelstein v. Security
Properties, Inc., 888 P.2d 161, 164 (Wash.Ct.App. 1995)
(same). The contrary holdings of the Bankruptcy Court and
the District Court in this case further reflect the confusion
and controversy that has surrounded this issue. We review
their findings as a starting point for our analysis.
In holding that Victor’s bankruptcy filing did not cause
the dissolution of the Legends Partnership, the Bankruptcy
Court reasoned that the Partnership Agreement constitutes
an executory contract and, as such, cannot be dissolved
pursuant to 11 U.S.C. S 365(e)(1).2 That section of the
Bankruptcy Code states:
Notwithstanding a provision in an executory contract
. . . or in applicable law, an executory contract . . . of
the debtor may not be terminated or modified . . . at
any time after the commencement of the case solely
because of a provision in such contract . . . that is
_________________________________________________________________
2. The District Court agreed with the Bankruptcy Court’s holding that
the Partnership Agreement constitutes an executory contract, which
appears to be consistent with the majority rule. See, e.g., Summit Inv. &
Dev. Corp. v. Leroux, 69 F.3d 608, 610 n.3 (1st Cir. 1995); In re Siegal,
190 B.R. 639, 643 (Bankr.D.Ariz. 1996); Nizny , 175 B.R. at 936; Clinton
Court, 160 B.R. at 60; Corky Foods Corp., 85 B.R. at 904. But cf. In re
Smith, 185 B.R. 285, 293 (Bankr.S.D.Ill. 1995) (finding that limited
partnership agreement should not be considered executory contract if
limited partner is purely passive investor not owing substantial future
performance to limited partnership). In any case, the parties do not
contest this issue on appeal.
11
conditioned on . . . the commencement of a case under
this title.
11 U.S.C. S 365(e)(1)(B). In other words,S 365(e)(1)
invalidates ipso facto provisions, which, in this context, are
provisions of law or contract which specify that"a
bankruptcy filing per se will terminate or modify" an
executory contract. In re Clinton Court, 160 B.R. 57, 59
(Bankr.E.D.Pa. 1993). Because S 8353(5) of Pennsylvania’s
UPA provides for the dissolution (or "modification") of a
partnership agreement upon the bankruptcy of a partner,
the Bankruptcy Court concluded that S8353(5) is an ipso
facto provision and that S 365(e)(1) prevented it from
causing the dissolution of the Legends Partnership.
In stark disagreement with the Bankruptcy Court, the
District Court held that Victor’s bankruptcy did, in fact,
constitute an event sufficient to cause the dissolution of the
partnership. In doing so, the court relied heavily on the
following language in a footnote in Crutcher:
While this court held, in In re Clinton Court , 160 B.R.
57, 58-60 (Bankr.E.D.Pa. 1993), that a bankruptcy
filing by a partner should not preclude a partnership
from filing a bankruptcy case, on the grounds that this
result would violate 11 U.S.C. S 365(e)(1), the
partnership is not a debtor here. Thus, S 365(e)(1) does
not come into play. It therefore appears that . . . the
partnership would necessarily have to be held to have
been dissolved as of [the date the partner filed
individually for bankruptcy].
Crutcher, 209 B.R at 352 n.2. Noting that the partnership
is not a debtor in this case, the District Court similarly
concluded that S 365(e)(1) does not apply and, thus, that
Victor’s bankruptcy filing resulted in the dissolution of the
partnership under S 8353(5).
In considering the applicability of S 365(e)(1), we find that
the District Court’s reliance on Crutcher is misplaced. As
the District Court explained, Crutcher does appear to
suggest that "S 365(e)(1) does not come into play" when "the
partnership is not a debtor." 209 B.R. at 352 n.2. However,
we see no support outside of Crutcher for that proposition.
12
In fact, such a holding appears contrary to Clinton Court,
the case to which Crutcher cites on this point.
In Clinton Court, more than two years after one of two
partners of a general partnership filed for bankruptcy, the
partnership itself filed for bankruptcy. 160 B.R. at 58.
Citing to S 8353(5), a secured creditor of the partnership
claimed that the partnership had been dissolved upon the
individual partner’s bankruptcy filing. Id. Clinton Court
rejected that argument, finding that S 365(e)(1) prevented
the partner’s bankruptcy from causing the dissolution of
the partnership. Id. at 60. While it is true that the
partnership was a debtor in Clinton Court, there is no
reason to believe that the applicability of S 365(e)(1)
depended upon the partnership’s debtor status. Indeed, the
facts underlying Clinton Court show otherwise. If S 365(e)(1)
were to come into play only when the partnership is a
debtor, then the individual partner’s bankruptcy filing,
which occurred over two years prior to the partnership’s
bankruptcy, would have caused the partnership to dissolve
as a matter of law under S 8353(5). Because the court in
Clinton Court held that the individual partner’s bankruptcy
filing did not dissolve the partnership at a time when the
partnership was not a debtor, it would be entirely
inconsistent for the court to have regarded a partnership’s
debtor status as a necessary condition for the applicability
of S 365(e)(1).
Thus, we reject the District Court’s conclusion that, as a
result of the partnership’s non-debtor status, S 365(e)(1) is
inapplicable to this case. We see no reason why the
statute’s applicability should hinge upon whether the
partnership itself has filed for bankruptcy. This is not to
say, however, that we have now settled the question of
whether S 365(e)(1) prevented the dissolution of the Legends
Partnership. Courts have held that, under certain
circumstances, other subsections of the Bankruptcy Code,
namely SS 365(e)(2)(A) and 365(c), precludeS 365(e)(1) from
invalidating ipso facto provisions that would dissolve a
partnership.3 See, e.g., Sunset Developers, 69 B.R. at 712-
_________________________________________________________________
3. We note that this position is in contrast with the recommendation of
the National Bankruptcy Review Commission, an independent
13
13 (holding that S 365(c) prevented S 365(e) from applying to
partnership agreement); Finkelstein, 888 P.2d at 165 n.3
(holding that "[s]ection 365(e)(2) clarifies Congress’ intention
to prevent only private contracts from counteracting the
Bankruptcy Code, not to prevent state law, such as
partnership law, from determining the status of a
partnership"); cf. In re Harms, 10 B.R. 817, 821-22
(Bankr.D.Colo. 1981) (holding that limited partnership
dissolved on day of general partner’s bankruptcy filing
because, "[u]nder Section 365(c) of the Bankruptcy Code,
executory [limited] partnership agreements cannot be
assumed by a debtor-in-possession without the consent of
all the limited partners"). We now consider the impact of
these subsections in this case.
As we discussed above, S 365(e)(1)(B) provides that an
executory contract of a debtor cannot be terminated or
modified by a provision of law or contract that is
conditioned upon the commencement of the debtor’s case
under the Bankruptcy Code. The scope of this anti-ipso
facto provision is limited, however, by S 365(e)(2), which
reads, in relevant part:
(2) Paragraph (1) of this subsection does not apply to
an executory contract . . . of the debtor, whether or not
such contract . . . prohibits or restricts assignment of
rights or delegation of duties, if--
_________________________________________________________________
commission established through the Bankruptcy Reform Act of 1994,
Pub. L. No. 103-394, 108 Stat. 4106 (1994). In its Final Report, filed in
1997, the Commission recommended that "[i]pso facto provisions relating
to partnerships, LLCs, and the rights or interests of partners or LLC
members should not be enforceable under the Bankruptcy Code."
National Bankruptcy Review Commission, Bankruptcy: The Next Twenty
Years S 2.3.22, at 432 (1997). The Commission went on to explain:
This position is consistent with the Bankruptcy Code treatment of
ipso facto provisions in other types of property interests. [Footnote
omitted.] Just because a partner or LLC member has sought relief
under the Bankruptcy Code, there is no compelling interest served
by mandating an automatic dissolution of the partnership or buyout
of the debtor partner’s interest.
Id. S 2.3.22, at 435.
14
(A)(i) applicable law excuses a party, other than the
debtor, to such contract . . . from accepting
performance from or rendering performance to the
trustee or to an assignee of such contract . . . ,
whether or not such contract . . . 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. S 365(e)(2)(A) (emphasis added). In interpreting
this limitation on S 365(e)(1), we must also consider the
impact of S 365(c), which closely tracks the language of
S 365(e)(2). In relevant part, S 365(c)(1) states:
(c) The trustee may not assume or assign any
executory contract . . . of the debtor, whether or not
such contract . . . prohibits or restricts assignment of
rights or delegation of duties, if--
(1)(A) 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 or the debtor in
possession, whether or not such contract . . . prohibits
or restricts assignment of rights or delegation of duties;
and
(B) such party does not consent to such assumption or
assignment . . . .
11 U.S.C. S 365(c)(1) (emphasis added).
As the Ninth Circuit noted in In re Catapult
Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999), "the
proper interpretation of S 365(c)(1) has been the subject of
considerable disagreement among courts and
commentators." Id. at 749; see generally William J. Norton,
Jr., Norton Bankruptcy Law and PracticeS 155:2 (2d ed.
2001); Lawrence D. Cherkis et al., Collier Real Estate
Transactions and the Bankruptcy Code P 4.07[2] (2001);
Daniel J. Bussel & Edward A. Friedler, The Limits on
Assuming and Assigning Executory Contracts, 74 Am.
Bankr. L.J. 321 (2000). We find that it is not necessary in
this case, however, to delve into the complex issues of
statutory interpretation that have arisen from the contours
15
of S 365. Because there is no evidence that Leah did not
consent to remaining partners with Victor during the period
in which he had become a debtor, we hold that neither
SS 365(c)(1) nor 365(e)(2)(A) precluded or limited the
application of S 365(e)(1).
By their own terms, S 365(c)(1) and S 365(e)(2)(A) are
applicable to executory contracts only when the non-debtor
party "does not consent to [the] assumption or assignment"
at issue. 11 U.S.C. S 365(c)(1)(B) and S 365(e)(2)(A)(ii). In the
partnership context, at issue is whether a partner who
becomes a debtor after filing for bankruptcy will assume
the same partnership role that he had prior to becoming a
debtor. When a partner files for bankruptcy, a co-partner
may not want to continue in the partnership with the
debtor because, "upon securing bankruptcy-court
protection, a general partner who becomes a debtor-in-
possession of her personal estate necessarily assumes
responsibilities to her creditors that conflict with her
responsibilities to her co-partners." Phillips, 966 F.2d at
929 (citing Harms, 10 B.R. at 822). Subsections 365(c) and
365(e)(2) will prevent a debtor in bankruptcy from
continuing to serve as a partner, however, only when a
non-debtor partner does not consent to continue in the
partnership with the debtor.
In this case, there is no evidence whatsoever that Leah
objected to having Victor remain as her general partner
after he had filed his bankruptcy petition. In fact, the
record demonstrates that Leah, with full knowledge that
Victor had filed for bankruptcy, continued to regard Victor
as her general partner. The partnership tax returns for
1997 and 1998, both of which were signed and filed by
Leah, continued to list Victor as a general partner despite
his debtor status. Although she had ample opportunity,
Leah took no steps indicating that she did not consent to
Victor’s continuing status as a general partner after he filed
his bankruptcy petition. In light of these facts, we find that
Leah effectively consented to remain partners with Victor
despite his debtor status and, thus, that S 365(c)(1) and
S 365(e)(2)(A) do not apply. That being the case, we
conclude that S 365(e)(1) is fully applicable here and,
therefore, Victor’s bankruptcy filing did not result in the
dissolution of the Legends Partnership.
16
IV.
Because we find that the acts of exclusion and the
bankruptcy filing discussed above did not result in the
dissolution of the Legends Partnership, we conclude,
pursuant to 15 Pa.C.S. S 8353(4), that the event which
actually caused the dissolution of the partnership was
Victor’s death on January 12, 1999. Having improperly
concluded that the partnership was dissolved prior to
Victor’s death, the District Court did not reach the question
of whether Leah properly exercised her option to purchase
Victor’s partnership interest in accordance with Paragraphs
18 and 19 of the Partnership Agreement. Thus, we will
vacate the District Court’s order and will remand the case
for the District Court to determine whether Leah validly
exercised her option to purchase Victor’s interest.
17
RENDELL, Circuit Judge, Concurring:
I agree with Judge Fuentes that the events relied upon
did not cause a dissolution of the partnership. I write
separately merely to note that my agreement with the result
we reach -- by way of a complex path -- is based not only
on the statutes and case law, but also on the context
presented to us and the facts of this case, as well as the
further support I find in the applicable provisions of the
partnership agreement at issue.
Surprisingly, there is a paucity of case law on the issue
of when a dissolution occurs as a matter of law. None of the
cases we rely upon have answered the precise question
before us. I fear that the lack of direction from the case law
makes the analysis seem a bit torturous, but I think that
it becomes somewhat smoother when the facts, especially
the agreement itself, are considered.
The task actually presented to the District Court, and to
us, is the construction of the parties’ agreement. It seems
clear that the parties’ intention, as reflected in the language
they chose and in their conduct, compels the result we
reach. See McClimans v. Barrett, 419 A.2d 598, 600 (Pa.
Super. Ct. 1980) ("A partnership agreement as a contract
must be interpreted in accordance with the intent of the
parties . . . ."). For one thing, the parties’ agreement gives
the other party, in the event of "dissolution by withdrawal
or other act of one partner," the ability to"continue the
Partnership business" by purchasing the other’s interest.
This anticipates an act of dissolution that would result in
a winding up or discontinuance of the business. Here, there
is no hint that either of the events asserted impacted the
continued existence of the partnership or its business. And,
after each of the relevant events, the parties themselves
demonstrated an intent that the partnership continue as an
ongoing entity, with Victor himself listing his partnership
interest as an asset in his bankruptcy proceeding and tax
returns’ having been filed listing both Victor and Leah as
partners.
Accordingly, I agree with Judge Fuentes that a triggering
"dissolution" did not occur here.
18
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
19