Opinion ID: 584536
Heading Depth: 3
Heading Rank: 1

Heading: Texas' Definition of Bankrupt

Text: 14 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. 15 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 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. § 101 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). 16 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. 17 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 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. § 101 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, to have simply ceded to the federal government concurrent authority to define bankrupt for purposes of Texas partnership law. 18 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. 19 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 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. 20 The Safren court also based its decision on its understanding of public policy. The court explained as follows: 21 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. 22 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. 23 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 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.). 24 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),.1983), aff'd, 46 B.R. 222 (S.D.N.Y.1985); In re Harms, 10 B.R. at 821-22. 6