Involuntary Actions by Limited Partners vs. L.P.s

Involuntary Actions by Limited Partners vs. L.P.s

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In In re Paper I Partners L.P., 283 B.R. 661 (Bankr. S.D.N.Y. 2002), Bankruptcy Judge Robert E. Gerber addressed issues relating to involuntary cases filed by former limited partners against limited partnerships. The Paper I partnership was formed to effect a tender offer for shares of a Swiss company. While formed under the laws of Delaware, the partnership agreement listed Luxemburg as the principal place of business and designated a registered office and agent in Delaware. However, the court found that the business of the partnership was conducted in significant part out of the offices of the general partner in New York City. There was also a related case against Papier II, which was also a limited partnership but organized offshore under the laws of Turks and Caicos Islands, B.W.I.

The Papier II partnership agreement listed Luxemburg as its principal place of business and a designated registered office and agent in Turks and Caicos. The court found, however, that the business of Papier II was also conducted in significant part out of offices of the general partner in New York City. The 27 limited partners of Paper I and three of the limited partners of Papier II had indicated an unwillingness to extend the life of the partnership and the general partner in letters faxed from the New York office, notified the limited partners that the general partner had elected to treat each as a withdrawn partner and that each would receive the value of their interest in the partnership within 30 days after the withdrawal date, noting the partnership would be continued after the withdrawal. The partnership agreement had provisions for valuing withdrawing limited partners' interest and the currency with which it could be paid.

However, rather than being paid in cash or with securities held by the partnership, each received a "distribution" in a document denominated as a "promissory security." The court found that this delivery did not satisfy the payment obligation of the partnership agreement, but was instead "a forced extension of credit by the limited partners to the partnership." Certain limited partners filed involuntary petitions against the two partnerships and were subsequently joined by other limited partners. The first issue the court considered was whether, under 11 U.S.C. §109, the involuntary petition should be dismissed on the grounds that the partnerships had neither domiciles nor places of business or property in the United States. The court noted that there were four alternative means for eligibility to be a debtor: (1) a residence in the United States, (2) a domicile in the United States, (3) a place of business in the United States and (4) property in the United States. The court found that §109 does not require that the debtor's principal place of business be in the United States, but only that the debtor have "a place of business in the United States." The court found that the place of business of the partnership's general partner was in New York City, and as such, the court had "no doubt" this requirement had been met for each of the two partnerships. Noting that a place of business or even a principal place of business is a question of fact, the court found that as a matter of fact each partnership had a place of business in the United States. The court also noted that while property in the United States must be real and cannot be "some type of remote or inchoate claim against property in the United States," there was no statutory requirement as to the property's minimum value. Original business documents are property of the estate for purposes of §109. In re Global Ocean Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 2000). As the general partner maintained original documents for each of the partnerships in New York, the court found this was "property in the United States" sufficient to satisfy §109.

Thus dismissing the first attack, the court went on to address the requirements under §303(b) that an involuntary case be commenced only if the petitioning creditors hold "non-contingent, bona fide claims" against the debtor. The court found that this standard was also satisfied. It noted that the partnerships' balance sheets showed their obligations to the former limited partners as a liability that was never presented as disputed or contingent. The court noted that the only issue is whether the unpaid debt was "due." The partnerships asserted that the debts to the former limited partners were not yet due because the partnerships had substituted a new obligation, the "promissory securities," with a later maturity. The court rejected that contention, noting that petitioning creditors did not consent to the substitution, finding that the partnerships had no basis to "pay" their obligations in that fashion or to modify the maturity of the debt to the former limited partner. The court then considered whether the alleged debtor-partnerships were "generally paying their debts as they become due." The court noted that the matured and unpaid debt of Paper I was approximately $4.6 million, and Papier II was more than $1.8 million. For each entity, the debt to the former limited partners was in excess of 60 percent of the total of each partnership's total obligations. Thus, the court found that the alleged debtor-partnerships were not generally paying their debts as they mature. The court also rejected the suggestion that it should abstain or dismiss under §305, relying on standards set forth by the court in In re 801 South Wells Street L.P., 192 B.R. 718, 723 (Bankr. N.D. Ill. 1996).

Local Rules Must Be Consistent with Code and FRBP

In In re Steinacher, 283 B.R. 768 (Bankr. 9th Cir. 2002), the court considered the validity of a local rule. The court noted that since the validity of a court rule is a question of law, a bankruptcy court's conclusions related to that rule that are reviewed de novo and a bankruptcy court's application of a local rule is reviewed for abuse of discretion. Although the district courts and bankruptcy courts have been delegated authority to adopt local rules, that authority is carefully controlled. Any local rules must be consistent with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. The court noted that in the Ninth Circuit, a three-part test exists to determine the validity of a local rule: (1) whether it is consistent with the Acts of Congress and the Federal Rules of Bankruptcy Procedure, (2) whether it is more than merely duplicative of such statutes and rules, and (3) whether it prohibits or limits the use of official forms. The court reviewed the local rule in question and held that it was consistent with §1322 of the Bankruptcy Code as it abridged the debtor's right to cure default under §1322. As such, the court held that the rule was invalid and that the bankruptcy court erred in dismissing the debtor's bankruptcy case because it did not comply with such local rule.


  • In re Empresas Omajede Inc., 283 B.R. 636 (D. P.R. 2002) (director's appeal from confirmation of the bankruptcy reorganization plan dismissed where sole grounds for appeal was that neither the plan nor disclosure statement had been approved by unanimous consent of the board of directors as required by the debtor's articles of incorporation);
  • In re Larocque II, 283 B.R. 640 (Bankr. D. R.I. 2002) (adversary proceedings seeking to enforce and extend right of rescission under the Truth in Lending Act and for determination that the mortgage on the debtor's home was void was a core proceeding, as a resolution would establish whether the lender was a secured or unsecured creditor thereby affecting how creditors would share in the debtor's assets);
  • In re Gantos Inc., 283 B.R. 649 (Bankr. D. Conn. 2002) (amended complaint filed more than two years after order for relief seeking to avoid transfer as a fraudulent conveyance did not relate back to filing of original complaint, which sought to avoid same transfer as preference);
  • In re McCormick, 283 B.R. 680 (Bankr. W.D. Pa. 2002) (indemnity clause whereby debtor agreed that any funds received on a bonded project would be held in trust for payment of subcontractors and materialmen until bond was discharged was sufficient to create an express or technical trust of the kind required by the dischargeability exception in §523(a)(4));
  • In re Transtexas Gas Corp., 303 F.3d 571 (5th Cir. 2002) (when a district court sitting as a court of appeals in bankruptcy remands a case to the bankruptcy court for significant further proceedings, the remand order is not "final" and is therefore not appealable); and
  • In re Lord, 284 B.R. 179 (Bankr. D. Mass. 2002) (automatic stay did not prevent long-term disability insurer that had paid excess benefits pre-petition under group benefit plan from recouping those overpayments post-petition by withholding disability payments that were otherwise owed, as the debts were derived from a single transaction).
Journal Date: 
Tuesday, April 1, 2003