Presenting a live 90-minute webinar with interactive Q&A Partnership and LLC Bankruptcies: Unique Legal Issues Navigating Partner or Entity Insolvency Amid Inconsistent and Confusing Treatment Under the Code WEDNESDAY, JUNE 13, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Rosa J. Evergreen, Attorney, Arnold & Porter , Washington, D.C. Robert N. H. Christmas, Partner, Nixon Peabody , New York Ken Samuelson, Partner, Samuelson Law Offices , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Partnership and LLC Bankruptcies Please download or print the PDF Reference Material document prepared by Mr. Samuelson as his presentation will follow this document. You can also access corresponding pages from the PDF Reference Material during the program on the webinar platform under the handouts tab in the Conference Material section. Ken Samuleson Samuelson Law Offices ksamuelson@samuelson-law.com 202.494.0848
The other Members don’t care about your bad boy guaranty. File the LLC. 6
More than just a charging order. I got it all. 7
Junior “member” without much power: Your time will come! 8
If you do a workout instead, I’ve got a present for you. 9
Partnership and LLC Bankruptcies Unique Legal Issues Stafford Publications CLE Teleconference – June 13, 2012 Rosa J. Evergreen Arnold & Porter LLP 555 Twelfth Street, NW Washington, DC 20004 -1206 Rosa.Evergreen@aporter.com 202-942-5572
Characteristics of a Partnership Relationship governed by state law/agreement. Laws of agency: general partner is an agent for the partnership. “Bundle of rights”: – Rights in specific property of the partnership – Rights in his or her “partnership interest” – Rights to participate in management of the partnership 11
Partner/Member Bankruptcy Issues Generally Not Specifically Addressed in the Bankruptcy Code Bankruptcy law is focused on business/company and individual bankruptcy filings. The Bankruptcy Code generally does not specifically deal with the issues raised when a partner or member files for bankruptcy. Partner/Member issues addressed mostly in case law. 12
Unique Issues Raised by the Bankruptcy Filing of Partner/Member Partner/Member bankruptcy filings raise unique legal issues, including: – What are “estate” interests – Whether the bankruptcy filing leads to the dissolution of the partnership/LLC – Whether the partner/member can retain his or her management rights after the bankruptcy filing – Impact of section 365 on partnership and LLC agreements – Implication of ipso facto provisions – Impact of bankruptcy filing on right of first refusal provisions – Applicability of buy-out provisions in bankruptcy 13
Section 541: Property of the Estate Upon the filing of a petition in bankruptcy, a bankruptcy “estate” is created pursuant to section 541 of the Bankruptcy Code. The bankruptcy “estate” consists of all equitable and legal interests the debtor has, including property and contractual rights. 14
Management of the Estate The estate is managed by the debtor itself, as a “debtor in possession” or by a trustee appointed by the court. “The statutory and decisional authority is clear that a bankruptcy trustee is the successor to property of the debtor’s estate and is the legal representative of the estate. The Trustee succeeds to the property of the debtor’s estate.” In re Modanlo , 412 B.R. 715 (Bankr. D. Md. 2006). The debtor in possession’s/trustee’s duty is to serve the estate for the benefit of creditors. 15
Management Rights When Partner/Member Files Bankruptcy? The status of the management rights is often a contested issue when the partner/member files bankruptcy. The filing of bankruptcy by the partner/manager, if found to result in dissolution or termination of partnership/LLC interest, may preclude trustee from assuming the contractual rights of the partner/manager, including management rights. 16
Effect on Partnership or LLC When Partner/Member Files Bankruptcy? Possible dissolution of partnership or LLC. Under the Uniform Partner Partnership Act (UPA), the bankruptcy of a partner generally dissolves the general partnership. Applicable state laws frequently provide for dissolution of LLC if a member files bankruptcy. Dissolution provisions often conflict with federal bankruptcy law principles. Disagreement among the courts on whether dissolution provisions should be given any effect in bankruptcy. 17
Courts Do Not Agree on Whether Dissolution Provisions Should Apply In re Sawyer , 130 B.R. 384 (Bankr. E.D.N.Y. 1991): finding that under New York law, the filing of a chapter 7 case by the general partner resulted in dissolution of the partnership. In re Modanlo , 412 B.R. 715 (Bankr. D. Md. 2006): finding that the filing of bankruptcy by sole member of LLC dissolved the LLC by operation of law, but chapter 7 trustee “resuscitated” the LLC by filing amendment to operating agreement. In re Clinton Court , 160 B.R. 57 (Bankr. E.D. Pa. 1993): general partner’s prior filing of a bankruptcy petition did not dissolve general partnership and, therefore, did not bar non- debtor general partner from filing subsequent bankruptcy petition on behalf of the partnership. 18
Transferability of Rights to the “Estate” Economic rights/benefits v. management rights: – In re Garrison – Ashburn, L. C ., 253 B.R. 700 (Bankr. E.D. Va. 2000): “[t]here is no question that the economic rights, that is the membership interest, becomes property of the estate.” What becomes property of the estate when a member/partner files bankruptcy depends on the facts and circumstances: – Applicable state law and/or the operating agreement of partnership or LLC may provide that any partner or manager who files for bankruptcy withdraws from the partnership or LLC. – Enforceability of such provisions subject to debate among the courts. 19
Withdrawal Provisions Enforceable? Bargained for rights/personal nature of management agreements. Skeen v. Harms , 10 B.R. 817 (Bankr. D. Colo. 1981): – “A general partner is in a fiduciary relationship with the limited partners. It is important that he have no conflict of interest. Moreover, an agreement among partners is unique in the law. It is not only a legal relationship, but it is also a personal relation or status, somewhat as marriage is a relation or status.” – “When the only general partner in a limited partnership becomes a debtor-in-possession, there is an inherent conflict of interest . . . [h]e is a different entity.” 20
Withdrawal Provisions Enforceable? (cont’d) Withdrawal provisions conditioned on the bankruptcy filing may be unenforceable: – Section 365(e)(1): ipso facto provisions prohibited. – Section 541(c)(1)(B) states in pertinent part that “an interest of the debtor in property becomes property of the estate. . . notwithstanding any provision in an agreement . . . that is conditioned . . . on the commencement of a case . . . .” 21
Public Policy Reasons for Withdrawal After Bankruptcy Filing Partners and members have voluntarily associated in the business. Partnership/LLC may be formed by unique and personal relationships. Partnership/LLC often a closely held entity. Possibility of competing interests of management and the bankruptcy “estate.” 22
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