Opinion ID: 584536
Heading Depth: 2
Heading Rank: 1

Heading: HSP's AUTHORITY UNDER TEXAS LAW

Text: 10 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. 11 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-possession 4 of her personal estate necessarily assumes responsibilities to her creditors that conflict with her responsibilities to her co-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-bankrupt partners. 12 HSP presents three arguments in favor of a contrary interpretation of section 35(3)(b). 13
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
25 Next, HSP relies on the title and comments 7 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 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. 26 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. 27 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.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.
28 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. 29 Moreover, HSP was not bankrupt when he received authority to wind up P & P under the Final Judgment. The Texas court that 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. 30 We conclude that, under Texas law, HSP lacked authority to file a voluntary Chapter 11 petition on P & P's behalf.