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

Heading: federal preemption of texas law

Text: 31 While the district court understood Texas law to divest HSP of authority to act on P & P's behalf after he sought Chapter 11 protection, it held that Bankruptcy Rule 1004(a) negates the effect of section 35(3)(b) in this case. FED.BANKR.R. 1004(a) states: A voluntary petition may be filed on behalf of the partnership by one or more general partners if all general partners consent to the petition. The district court cited In re Westover Hills, Ltd., 46 B.R. 300, 305 (Bankr.D.Wyo.1985) in support of its decision that rule 1004(a) preempts section 35(3)(b). The Westover Hills court interpreted rule 1004(a) to mean that, [w]here a limited partnership contains only one general partner, and that general partner files a voluntary petition, then the bankruptcy case is properly commenced. Id. But the sole general partner in Westover Hills was not bankrupt when it filed a voluntary petition on behalf of the partnership, and the Westover Hills court did not address any conflict between federal and state law. Thus, while the Westover Hills court's interpretation of rule 1004(a) is correct on the facts of that case, it is irrelevant to this case. 32 Whether rule 1004(a) preempts section 35(3)(b) depends on whether we find an actual conflict between federal and state law. See California Fed. Sav. & Loan Ass'n v. Guerra, 479 U.S. 272, 280-81, 107 S.Ct. 683, 689, 93 L.Ed.2d 613 (1987); Perry v. Mercedes Benz of North Am., Inc., 957 F.2d 1257, 1261 (5th Cir.1992). 9 An actual conflict occurs either because 'compliance with both federal and state regulations is a physical impossibility,' or because the state law stands 'as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'  Guerra, 479 U.S. at 281, 107 S.Ct. at 689 (citations omitted). 33 We thus examine the operation and purpose of rule 1004(a) and section 35(3)(b) to determine whether they conflict. Rule 1004(a) provides that any general partner may file a voluntary petition on behalf of a partnership. But no federal law defines general partner; this is exclusively the task of state partnership law. See Westover Hills, 46 B.R. at 303-05 (applying Wyoming law to determine whether a partner is a limited or general partner for purposes of rule 1004(a)). Texas defines a general partner as one who has all the rights and powers and [is] subject to all the restrictions and liabilities of a partner in a partnership without limited partners. TEX.CIV.STAT.ANN. art. 6132a § 10(a) (emphasis added). Section 35(3)(b) is one of these restrictions that defines a general partner in Texas. An entity that has all of the rights and responsibilities of a general partner under Texas law, but can also act on behalf of the partnership after filing for bankruptcy protection, is something more than, and therefore different from, a general partner under Texas law. 34 Thus, when rule 1004(a) employs the term general partner, it either imports all authority limitations with the definition of general partner from state law or, pursuant to the Supremacy Clause, it augments the authority of those whom states label general partner. Any such augmentation constitutes a substantive change in the authority of general partners. But when Congress accorded the Supreme Court authority to promulgate the Bankruptcy Rules, it stated, [s]uch rules shall not abridge, enlarge, or modify any substantive right. 28 U.S.C. § 2075 (emphasis added); see also FED.BANKR.R. 1001 (Bankruptcy Rules govern procedure in United States Bankruptcy Courts) (emphasis added); In re Hanover Indus. Mach. Co., 61 B.R. 551, 552 (Bankr.E.D.Pa.1986) (the [Bankruptcy] Code defines the creation, alteration or elimination of substantive rights but the Bankruptcy Rules define the process by which these privileges may be effected). So rule 1004(a), by itself, cannot augment the authority of what states define as general partners. 35 The argument could be made that rule 1004(a) simply implements 11 U.S.C. § 301, 10 in which Congress augmented the authority of general partners by providing: A voluntary case under a chapter of [title 11] is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter. But nothing in section 301 indicates that every entity that may be a debtor under the Bankruptcy Code is entitled to file a voluntary petition; nor does section 301 make any attempt whatsoever to address the countless details that attend questions of authority to act on behalf of a business entity. See H.R. 8200, H.R. REP. No. 598 at 196, reprinted in, 1978 U.S.C.C.A.N. at 6157 (Title 11 does not define 'partner' or 'partnership'; the definitions are left to nonbankruptcy law as construed by the bankruptcy court.) (emphasis added). 36 For many years, courts have consistently looked to state law to determine whether a person has authority to file a voluntary petition on behalf of a corporation. In Grand Lodge, Knights of Pythias v. O'Connor, 95 F.2d 477, 478 (5th Cir.1938) the officers of a corporation that was involved in Louisiana receivership proceedings filed a petition for reorganization under federal bankruptcy law. This court looked exclusively to Louisiana law to determine that the officers were without authority to file the petition. Id. at 479. Moreover, this court relied on Louisiana law concerning the significance and timing of corporate dissolution to determine that the corporation may not be reorganized in bankruptcy. Id. Throughout the many revisions to federal bankruptcy law, courts continue to resolve authority-to-file disputes according to state law. See In re Quarter Moon Livestock Co., 116 B.R. 775, 778 (Bankr.D.Idaho 1990) (the authority to file a bankruptcy petition must be found in the instruments of the corporation and applicable state law) (citing In re Crescent Beach Inn, Inc., 22 B.R. 155 (Bankr.D.Me.1982)); In re Bel-Aire Invest., Inc., 97 B.R. 88, 89-90 (Bankr.M.D.Fla.1989) (It is well established that since the Bankruptcy code itself does not establish the requisites for the initiation of a voluntary corporate bankruptcy case, the validity of all the individuals acting on behalf of the corporation must be determined with reference to the laws of the State in which the corporation was chartered.; recognizing that application of state law would render corporation unable to file a voluntary petition) (citing In re Autumn Press, Inc., 20 B.R. 60 (Bankr.D.Mass.1982); Taylor v. Markus Enterprises, Inc. (In re Markus Enterprises, Inc.), 91 B.R. 459, 460 (M.D.Tenn.1988) (Whether the debtor, in light of its dissolution, retains the capacity to file a petition under the Bankruptcy Code, Chapter 11, is a matter of the law of [Tennessee].); see also In re Sunset Developers, 69 B.R. at 712 (as a matter of Idaho law, partner who filed for Chapter 11 protection lacks authority as a general partner to bind the partnership to an involuntary bankruptcy petition). Without further direction from Congress, we will continue to look to state law to determine which people have authority to seek federal bankruptcy protection on behalf of state-created business entities. 37 HSP cites In re Rittenhouse Carpet, Inc., 56 B.R. 131 (Bankr.E.D.Penn.1985) in arguing that section 35(3)(b) conflicts with federal law. Rittenhouse concerns a conflict of state partnership law with 11 U.S.C. § 365(e), and has nothing to do with rule 1004(a) or section 301. Id. at 132-33. 11 We discuss section 365 because of the possibility that HSP raises it as an alternative ground for finding a conflict with Texas law that the district court did not consider. Section 365 provides, in part: 38 (e)(1) Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on-- 39 (A) the insolvency or financial condition of the debtor at any time before the closing of the case; 40 (B) the commencement of a case under [title 11]; or 41 (C) the appointment of or taking possession by a trustee in a case under [title 11] or a custodian before such commencement. 42 (2) Paragraph (1) of this subsection does not apply to an executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if-- 43 (A)(i) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and 44 (ii) such party does not consent to such assumption or assignment.... 45 11 U.S.C. § 365(e). HSP presents no authority or reasoning to support his implied assertion that the P & P partnership agreement remains an executory contract after the Final Judgment decreed that HSP breached the partnership agreement, awarded MJP damages, and ordered P & P dissolved, and after passage of the Final Judgment's 90-day prescription for winding up P & P. Moreover, section 365(e)(1) by its terms only supersedes conflicting law if that law supports termination or modification of rights in an executory contract solely because of a provision in such contract. Id. No one contends that a contract deprived HSP of authority to act on P & P's behalf after declaring personal bankruptcy; MJP claims that Texas law has this effect. See 2 COLLIER ON BANKRUPTCY § 365.06 at 365-48, -49 (reciting legislative history of section 365(e) indicating its function as an express prohibition against the enforcement of bankruptcy termination clauses). Thus, HSP may not employ section 365 to avoid section 35(3)(b). 46 Accordingly, we recognize no conflict between federal bankruptcy law and section 35(3)(b).