UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 00-31109
____________________
IN THE MATTER OF: MICKEY O’CONNOR,
Debtor.
HARRY C. STUMPF,
Appellee,
versus
FRANK W. McGEE,
Appellant,
versus
JOHN F. STUMPF, JR.; LINCOLN T. CASE,
Appellees.
____________________________________________________________
Appeal from the United States District Court
for the Eastern District of Louisiana
____________________________________________________________
July 16, 2001
1
Before GARWOOD, HALL, and BARKSDALE, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
For this Chapter 11 bankruptcy case, the executory partnership
agreement at issue having been neither expressly assumed nor
rejected, of primary concern is whether the Trustee is substituted
for the Debtor as a partner and can maintain an action against the
1
Circuit Judge of the Ninth Circuit, sitting by designation.
other partners for violations of transfer restrictions in the
agreement and for distributions concerning those transfers,
including whether the agreement was assumable under the Bankruptcy
Code and Louisiana law. The bankruptcy court held the agreement
passed through bankruptcy to the Reorganized Debtor, a liquidating
trust managed by the Trustee. The district court reversed, in
part, holding the agreement was not assumable and passed through
bankruptcy unaffected, resulting in the Trustee’s having no right
to assert claims regarding the interest-transfers. The Trustee,
Frank W. McGee, appeals the district court’s judgment in favor of
those claiming to be the Debtor’s partners. AFFIRMED and REMANDED.
I.
The facts are undisputed. In 1982, Mickey O’Connor (the
Debtor), Ronald Case, Auby Smith, and Appellee John Stumpf formed
a Louisiana general partnership, Westbank Inns. The partnership
agreement restricts a partner’s ability to transfer or assign his
interest: (1) he cannot substitute another person as a partner
without the written consent of a majority of the partners; (2) a
majority must give written consent before a partner can assign,
mortgage, or sell his interest in the partnership or its assets;
(3) his sale, exchange, transfer, or assignment of his right to
share in the partnership’s profits or losses shall be valid only if
his interest is first offered to the partnership, and then to the
2
other partners; and (4) any transaction in violation of these
restrictions will be null and void.
Shortly after its formation, Westbank Inns entered into a
joint venture with LaQuinta Motor Inns, with Westbank Inns owning
a 40 percent interest. The joint venture owns and operates a
LaQuinta Inn in Gretna, Louisiana.
In May 1987, approximately five years after formation of
Westbank Inns, O’Connor petitioned for relief under Chapter 11 of
the Bankruptcy Code. O’Connor remained debtor-in-possession for
almost four years; McGee was appointed Chapter 11 Trustee in 1991.
Approximately two years later, the Trustee met with Appellee John
Stumpf and his brother, Appellee Harry Stumpf, informing them that
he was the Trustee of O’Connor’s bankruptcy estate and requesting
that correspondence regarding Westbank Inns be sent to him.2 At
that meeting, the Trustee received a check for $155,000, which
represented the 1991 distributions being held by John Stumpf for
the benefit of O’Connor’s bankruptcy estate for its share of
partnership distributions. Also at that meeting, the Stumpfs
offered to purchase the Debtor’s partnership interest. The Trustee
responded that he could not sell without court approval, and needed
2
As discussed infra, during the pendency of O’Connor’s
bankruptcy, it is claimed changes occurred concerning some of the
partners, with the Debtor and Appellee John Stumpf supposedly being
joined by Appellee Lincoln Case and Appellee Harry Stumpf pursuant
to interest-transfers by John Stumpf and original partners Ronald
Case and Auby Smith.
3
to determine the interest’s value. In mid-1993, John Stumpf
offered $128,000 for the Debtor’s interest.
In early 1994, the Trustee filed a Fourth Amended Disclosure
Statement and a Second Amended Plan of Reorganization; no specific
reference to the Debtor’s partnership interest is included in
either. The Disclosure Statement, in describing the Debtor’s
assets and liabilities, refers to a 1991 accountant’s report. In
that report, the Debtor’s interest is valued at $150,000. The
Disclosure Statement provides: “The Plan provides for the
rejection of executory contracts not previously assumed or
rejected, if any”. (Emphasis added.) The section of the
Disclosure Statement dealing with executory contracts does not
specifically refer to any:
All executory contracts, with or for the
benefit of employees, agents or brokers, not
heretofore assumed or terminated by agreement,
or assured within the time frame set forth in
this plan are heretofore rejected. Debtor
reserves the right to accept or reject
executory contracts between the Effective Date
and 60 days after the Effective Date.
(Emphasis added.) The “Effective Date” is defined as the date on
which the order confirming the Plan becomes final and non-
appealable.
The Plan establishes a liquidating trust, to which all of the
Debtor’s assets will be transferred, with McGee as Trustee and the
creditors as beneficiaries. Regarding executory contracts, the
Plan contains language essentially identical to that in the
4
Disclosure Statement. No motion to assume or reject the
partnership agreement was filed. The Plan was confirmed in May
1994.
As mentioned in footnote 2 supra, between 1988 and January
1994, during the pendency of the bankruptcy proceedings, O’Connor’s
partners engaged in various interest-transfers. Appellees John
Stumpf and Lincoln Case each acquired one-half of Ronald Case’s;
John Stumpf acquired Smith’s; and John Stumpf transferred a portion
of his to his brother, Appellee Harry Stumpf. In April 1989, prior
to transferring his interest, Ronald Case filed a petition for
relief under Chapter 7 of the Bankruptcy Code. And, in March 1990,
Smith’s interest was seized by one of his creditors, from whom John
Stumpf acquired it. Therefore, as of January 1994, those claiming
partnership in Westbank Inns were O’Connor, and Appellees John and
Harry Stumpf and Lincoln Case.
Following plan-confirmation, the Trustee filed an adversary
complaint in bankruptcy court against John and Harry Stumpf and
Lincoln Case. Of particular importance to this interlocutory
appeal, as discussed infra, Westbank Inns was not sued. Nor did
the Trustee seek to recover the economic value of the Debtor’s
interest. Instead, the complaint concerned only the interest-
transfers. The Trustee sought: (1) a declaration that they were
void for violating the partnership agreement restrictions; (2) a
declaration of the Chapter 11 estate’s proportionate ownership of
5
the terminated interests of Ronald Case and Smith; and (3) an
accounting for partnership distributions Appellees received
attributable to the interest-transfers.
Following a trial, the bankruptcy court held: Ronald Case’s
partnership ceased upon his Chapter 7 filing in April 1989; Smith’s
partnership ceased in March 1990, when his interest was seized by
a creditor and the seizure was not revoked within 30 days; all of
the interest-transfers were void because, contrary to the
agreement, the interests were not first offered to the partnership
and then the other partners; the value of the interests formerly
held by Ronald Case and Smith, as of the time their partnerships
ceased, must be paid to them after determining the value in an
evidentiary hearing; the Trustee did not specifically assume or
reject the agreement; it passed through bankruptcy; O’Connor’s
interest is the property of the Reorganized Debtor’s estate and it
remains a partner; and the Trustee is therefore entitled to
distributions and is probably entitled to purchase the former
partners’ interests. The parties were directed to schedule the
evidentiary hearing to determine the value of the interests of
Ronald Case and Smith at the time their partnerships ceased.
The district court affirmed in part, and reversed in part. It
held the agreement was not assumable under 11 U.S.C. § 365(c)(1)
because, under the applicable non-bankruptcy (Louisiana) law, the
non-debtor partners had not consented to performance by the
6
Trustee. It agreed with the bankruptcy court that the agreement
passed through bankruptcy. But, it held: the bankruptcy court was
incorrect in holding the pass-through resulted in the agreement
becoming part of the Debtor’s estate; instead, the agreement was
unaffected by the bankruptcy proceedings and remains binding on
O’Connor; and O’Connor, not the Trustee, can claim a right under
the agreement to distributions and to determine the validity of
interest-transfers.
II.
The Trustee contends: the district court lacked jurisdiction
because leave to appeal was denied previously or because Appellees’
notices of appeal were not timely; Appellees have no standing
because they failed to challenge the bankruptcy court’s finding
that the transfers were void; the district court erred in holding
that the partnership agreement passed through bankruptcy to the
Debtor rather than to the Reorganized Debtor (liquidating trust);
alternatively, the agreement was assumed; and Appellees did not
raise the theory adopted by the district court.
“We review the decision of the district court by applying the
same standards of review to the bankruptcy court’s findings of fact
and conclusions of law as applied by the district court.” Kennard
v. MBank Waco, N.A. (Matter of Kennard), 970 F.2d 1455, 1457 (5th
Cir. 1992). Those findings of fact are reviewed for clear error;
the conclusions of law, de novo. FED. R. BANKR. P. 8013; Phoenix
7
Exploration, Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.),
15 F.3d 60, 62 (5th Cir. 1994).
A.
The Trustee contends the district court lacked jurisdiction
because leave to appeal had been denied previously or because
Appellees’ notices of, and motions for leave to, appeal were not
timely filed. Although raised in district court, it did not
address this issue.
District courts may hear appeals from interlocutory orders,
such as the bankruptcy court’s partial judgment, “with leave of the
court”, pursuant to 28 U.S.C. § 158(a) (district courts’
jurisdiction to hear appeals from bankruptcy court final judgments,
orders, and decrees, as well as from interlocutory orders and
decrees). To appeal a bankruptcy court’s interlocutory order, a
party must file a notice of appeal, accompanied by a motion for
leave to appeal. FED. R. BANKR. P. 8001(b).
If a required motion for leave to appeal is
not filed, but a notice of appeal is timely
filed, the district court ... may grant leave
to appeal or direct that a motion for leave to
appeal be filed.... Unless an order directing
that a motion for leave to appeal be filed
provides otherwise, the motion shall be filed
within 10 days of entry of the order.
FED. R. BANKR. P. 8003(c) (emphasis added).
The Bankruptcy Rules do not expressly provide the time for
appealing an interlocutory order. Rule 8001(b) states an
interlocutory appeal “shall be taken by filing a notice of appeal,
8
as prescribed in subdivision (a) of this rule”. FED. R. BANKR. P.
8001(b). Subdivision (a), governing the manner for appealing as of
right, provides an appeal “shall be taken by filing a notice of
appeal ... within the time allowed by Rule 8002”. FED. R. BANKR. P.
8001(a). In turn, Rule 8002 provides:
The notice of appeal shall be filed with
the clerk within 10 days of the date of the
entry of the judgment, order, or decree
appealed from. If a timely notice of appeal
is filed by a party, any other party may file
a notice of appeal within 10 days of the date
on which the first notice of appeal was filed,
or within the time otherwise prescribed by
this rule, whichever period last expires.
FED. R. BANKR. P. 8002(a) (emphasis added).
Except in circumstances not at issue here, the bankruptcy
court may extend the time for filing the notice, if the request is
“made by written motion filed before the time for filing a notice
of appeal has expired”. FED. R. BANKR. P. 8002(c)(2). And, a
“motion filed not later than 20 days after the expiration of the
time for filing a notice of appeal may be granted upon a showing of
excusable neglect”. Id. Such an extension “may not exceed 20 days
from the expiration of the time for filing a notice of appeal
otherwise prescribed by this rule or 10 days from the date of entry
of the order granting the motion, whichever is later”. Id.
In short, Rule 8001(b) provides an interlocutory appeal is to
be taken in the manner prescribed in Rule 8001(a); in turn, subpart
(a) requires the notice to be filed within the time allowed by Rule
9
8002. Therefore, Rule 8002’s time limits apply to interlocutory
appeals. This is compelled by the statute. See 28 U.S.C. §
158(c)(2) (appeal authorized by § 158(a) (including interlocutory
appeals) “shall be taken in ... the time provided by Rule 8002 of
the Bankruptcy Rules”); see also Michel v. Fisher, 185 B.R. 259,
261 (N.D. Ill. 1995) (applying Rule 8002(a)’s ten-day deadline for
notice of interlocutory appeal); Am. Freight Sys., Inc. v. W. A.
Walker & Assocs., Inc. (In re Am. Freight Sys., Inc.), 153 B.R.
316, 319 (D. Kan. 1993) (same).
The bankruptcy court’s partial judgment was entered 7 May
1998. John Stumpf filed a timely notice of appeal within ten days,
on 15 May. FED. R. BANKR. P. 8002(a).
On that same day (within the ten-day period), the bankruptcy
court granted Harry Stumpf’s motion for an extension of 20 days to
file his notice. FED. R. BANKR. P. 8002(c)(2). Harry Stumpf filed
it, accompanied by a motion for leave to appeal, on 28 May (within
the extended period).
Also on 15 May, within the time allowed under Rule 8002(c)(2),
Lincoln Case moved for an extension of time to file his notice.
The bankruptcy court granted the motion on 20 May. As discussed,
and pursuant to Rule 8002(c)(2), that court was authorized to
extend the time for filing the notice for a period not to “exceed
20 days from the expiration of the time ... otherwise prescribed by
this rule”. The “time ... otherwise prescribed” for filing the
10
notice from the partial judgment entered on 7 May was Monday, 18
May (because the tenth day was a Sunday). See FED. R. BANKR. P.
9006(a). Accordingly, the bankruptcy court was authorized to grant
an extension for 20 days from that date, or until 7 June. Because
7 June was a Sunday, Lincoln Case’s 8 June notice was timely filed.
See FED. R. BANKR. P. 9006(a).
Therefore, Appellees’ notices of appeal were timely. But,
only Harry Stumpf timely filed the requisite motion for leave to
appeal. Nevertheless, the district court had authority to treat
John Stumpf’s and Lincoln Case’s timely notices as such motions.
See FED. R. BANKR. P. 8003(c).
In bankruptcy court in July 1998, Case moved, inter alia, to
amend the partial judgment. Because the motion was filed more than
ten days after entry of that judgment, the motion did not affect
the previously filed notices. See FED. R. BANKR. P. 8002(b) (certain
specified motions, if filed within ten days of entry of the
judgment, order, or decree, toll the time for filing a notice of
appeal until “entry of the order disposing of the last such motion
outstanding”).
That October, the district court dismissed all of the appeals
without prejudice, stating that, because Case’s motion was pending
in bankruptcy court, it was premature to grant leave to appeal.
The district court noted that, if the pending motion was denied,
11
“the parties will be entitled to file motions for leave to appeal
from an interlocutory judgment”.
On 16 April 1999, the bankruptcy court entered an order
denying Case’s motion. He filed his notice and motion on 26 April
1999, within ten days of entry of that order. John Stumpf filed
his notice and motion on 30 April, within ten days of the date on
which Case’s notice was filed. See FED. R. BANKR. P. 8002(a). But,
Harry Stumpf’s notice and motion were not filed until 11 May, more
than ten days after entry of the order, and more than ten days
after Case filed his notice. Nevertheless, the district court
granted all three motions for leave to appeal.
The Bankruptcy Rules do not provide guidance as to the time
for appealing under such circumstances. Appellees are not
appealing the bankruptcy court’s April 1999 denial of Case’s
motion. They are, instead, appealing the May 1998 partial
judgment, which they initially timely appealed. But, the district
court dismissed their appeals without prejudice, stating they would
be entitled to seek leave to appeal if the bankruptcy court denied
Case’s then pending motion. The Rules do not answer the question
whether the notices of appeal filed after the order denying Case’s
motion must be filed within ten days when, as here, Appellees are
not appealing that order. If the ten-day rule applies, John
Stumpf’s and Case’s appeals were timely; Harry Stumpf’s was not.
12
“In order to obtain prompt appellate review, often important
to the administration of a case under the [Bankruptcy Code]”, the
time to appeal bankruptcy orders is shorter than that provided for
other civil appeals. See FED. R. BANKR. P. 8002, advisory committee
note. But, because the Rules do not specifically address
circumstances such as these, and because the issues raised by Harry
Stumpf’s appeal are identical to those raised in the timely appeals
by John Stumpf and Case, we hold the district court had
jurisdiction to grant Harry Stumpf’s motion for leave to appeal.
This conclusion is consistent with the interpretive policy
expressed in Bankruptcy Rule 1001: “These rules shall be construed
to secure the just, speedy, and inexpensive determination of every
case and proceeding”. FED. R. BANKR. P. 1001. Harry Stumpf’s notice
of, and motion for leave to, appeal were filed within 30 days of
the bankruptcy court’s order denying Case’s motion, and thus were
within the time the district court might have granted an extension
for filing a notice of appeal on grounds of excusable neglect, had
an extension been requested. See FED. R. BANKR. P. 8002(c)(2).
Obviously, the interests in efficiency and judicial economy
underlying Rule 1001 would not be served by holding Harry Stumpf’s
appeal untimely, thereby giving him the opportunity to raise on
appeal, after final judgment, the very issues timely raised in the
appeals by John Stumpf and Case. See In re Rambo, 209 B.R. 527,
529 (10th Cir. B.A.P.) (fact that appellant “tried unsuccessfully
13
to obtain an interlocutory appeal does not bar him from appealing
the same order after entry of a final decision” (emphasis added)),
aff’d, 132 F.3d 43 (10th Cir. 1997).
Contrary to the Trustee’s assertion, nothing in the Bankruptcy
Rules prohibits the district court from denying leave to appeal
without prejudice and concomitantly authorizing the parties to move
for leave to appeal after the bankruptcy court has ruled on the
pending motion that prompted the dismissals. The decision to grant
or deny leave to appeal a bankruptcy court’s interlocutory order is
committed to the district court’s discretion. See In re Am.
Freight Sys., Inc., 153 B.R. at 318.
B.
The Trustee maintains Appellees (except as to John Stumpf’s
original interest) lack standing to contend the Trustee is not a
partner because they did not challenge the bankruptcy court’s
ruling that the interest-transfers to them, in violation of the
partnership agreement restrictions, were void. In their appeals to
the district court, each Appellee contended that, because the
Trustee never acquired the status and rights of a partner, he had
no right to assert any claims against them regarding distributions
and interest-transfers.
Therefore, although Appellees did not specifically challenge
the bankruptcy court’s interpretation of the agreement and its
ruling that the transfers were void, they contended that the
14
bankruptcy court had no basis for so ruling, because the Trustee,
as a non-partner, lacked standing to assert any claims against
them. The district court agreed with Appellees’ assertions in that
respect. As prevailing parties in district court, Appellees have
standing to defend the district court’s judgment.
C.
Subject to various conditions, “the trustee, subject to the
court’s approval, may assume or reject any executory contract ...
of the debtor”. 11 U.S.C. § 365(a) (emphasis added).
Notwithstanding “whether ... [the] contract prohibits or restricts
assignment of rights or delegation of duties”, it may not be
assumed if, inter alia, “applicable law excuses a party, other than
the debtor, to such contract ... from accepting performance from or
rendering performance to an entity other than the debtor ... and
... such party does not consent” to the assumption. 11 U.S.C. §
365(c)(1)(A), (B) (emphasis added).
In a Chapter 11 case, the trustee may assume or reject an
executory contract at any time before plan-confirmation, 11 U.S.C.
§ 365(d)(2), or, subject to § 365, the plan may provide for the
assumption or rejection of any executory contract not previously
rejected. 11 U.S.C. § 1123(b)(2). The requisite bankruptcy court
approval for assumption or rejection must appear either in an order
or as part of the plan-confirmation. 11 U.S.C. § 365(a).
15
1.
The bankruptcy court held the agreement an executory contract.
The district court also treated it as one, noting that the parties
did not dispute that characterization. Likewise, because the
parties do not dispute that here, we will assume the partnership
agreement was executory at the time of O’Connor’s bankruptcy
filing.3
2.
Before addressing whether, under 11 U.S.C. § 365(c)(1), the
agreement was assumable, we consider the Trustee’s alternative, res
judicata contention that, irrespective of § 365(c)(1), the
agreement was assumed in the confirmed Plan and Appellees consented
to the assumption by failing to object to the Plan. Appellees
counter that the Plan’s boilerplate language did not provide for
such assumption and, in any event, they and the partnership did not
receive notice of the proposed assumption adequate to satisfy due
process.
John Stumpf was a creditor, was listed on the mailing matrix,
and received notices regarding O’Connor’s bankruptcy, but he had
settled his claim against the estate prior to plan-confirmation.
3
Other courts have likewise treated partnership agreements as
executory contracts when the issue was not disputed. See, e.g.,
Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 610 n.3 (1st Cir.
1995); see also Breeden v. Catron (In re Catron), 158 B.R. 624, 626
(Bankr. E.D. Va. 1992) (holding partnership agreement is executory
contract), aff’d, 158 B.R. 629 (E.D. Va. 1993), aff’d, 25 F.3d 1038
(4th Cir. 1994).
16
Neither Westbank Inns nor the other partners’ names appeared on the
matrix, and they did not receive notices regarding the bankruptcy.
The bankruptcy court held Appellees’ pre-plan-confirmation actual
knowledge of the bankruptcy satisfied due process.
Although a plan may provide for the assumption of an executory
contract, that authorization is “subject to section 365”. 11
U.S.C. § 1123(b)(2). As discussed infra, under § 365(c)(1), the
agreement is not assumable.
In any event, notwithstanding § 365(c)(1), the bankruptcy
court, interpreting the Plan, held it neither assumed nor rejected
the agreement. That interpretation is entitled to deference. See
Matter of Weber, 25 F.3d 413, 416 (7th Cir. 1994) (“In reviewing a
bankruptcy court’s interpretation of a confirmed plan, ... the
reviewing court should extend to that interpretation the same
deference that is otherwise paid to a court’s interpretation of its
own order.”); Terex Corp. v. Metro. Life Ins. Co. (In re Terex
Corp.), 984 F.2d 170, 172 (6th Cir. 1993) (court reviews bankruptcy
court’s interpretation of plan with “full deference”).
Neither the Disclosure Statement nor the Plan made any
specific reference to the agreement. The former states that “[t]he
Plan provides for the rejection of executory contracts not
previously assumed or rejected, if any”; and reserves the right to
accept or reject executory contracts for 60 days after the order
confirming the Plan becomes final. Consistent with language in the
17
Disclosure Statement, the Plan provides that executory contracts
“with or for the benefit of employees, agents or brokers ... are
hereby rejected”, and that “[a]ll ... executory contracts, other
than contracts with or for the benefit of employees, agent[s] or
brokers, not rejected prior to time [sic] set forth herein will be
assumed”. (Emphasis added.)
By using the phrase “will be” to refer to assumption of
executory contracts, as contrasted with the phrase “are hereby
rejected” to refer to rejected executory contracts, the Plan
implies that something more than plan-confirmation is necessary for
assumption. Moreover, interpreting the Plan’s boilerplate language
as providing for assumption of the agreement would be inconsistent
with § 365(a), which requires court approval.
The bankruptcy court’s interpretation is consistent with the
conclusions by other courts that an executory contract may not be
assumed either by implication or through the use of boilerplate
plan language. See In re Swallen’s, Inc., 210 B.R. 120, 122
(Bankr. S.D. Ohio 1997) (because assumption of executory contract
requires court approval, executory contract “can only be expressly
assumed”); In re Cole, 189 B.R. 40, 46-47 (Bankr. S.D.N.Y. 1995)
(boilerplate plan language purporting to assume all executory
contracts not expressly rejected prior to confirmation ineffective
to assume leases because it would allow circumvention of § 365’s
requirement of judicial approval); In re Parkwood Realty Corp., 157
18
B.R. 687, 689, 690-91 (Bankr. W.D. Wash. 1993) (catch-all plan
boilerplate language stating all other executory contracts not
previously rejected shall be deemed rejected was insufficient to
reject contract).
3.
The bankruptcy court did not consider whether the agreement
was assumable. The district court held it was not.
As stated, 11 U.S.C. § 365(c)(1) provides:
The trustee may not assume or assign any
executory contract ... of the debtor, whether
or not such contract ... prohibits or
restricts assignment of rights or delegation
of duties, if ... applicable law excuses a
party, other than the debtor, to such contract
... from accepting performance from or
rendering performance to an entity other than
the debtor ... and ... such party does not
consent to such assumption.
11 U.S.C. § 365(c)(1)(A), (B) (emphasis added). Accordingly,
although the agreement restricts a partner’s ability to transfer
his interest, the focus for determining whether the agreement is
not subject to assumption under § 365(c)(1) is, instead,
“applicable law”.
Under Louisiana law, a partner cannot make a third person a
member of the partnership without his partners’ consent. LA. CIV.
CODE art. 2812. Appellees did not consent to substituting the
Trustee for the Debtor. Accordingly, the district court correctly
held the agreement was not assumable under § 365(c)(1). See Tonry
19
v. Hebert (Matter of Tonry), 724 F.2d 467, 468-69 (5th Cir. 1984)
(where debtor-attorney’s clients had right, under Louisiana law, to
terminate executory contingent fee contracts at will and to decline
performance by trustee or trustee’s attorney, contracts were not
assumable under § 365(c)(1)); Turner v. Avery, 947 F.2d 772, 774
(5th Cir. 1991) (same).4
4.
The bankruptcy court held: the agreement passed through
bankruptcy; the Debtor’s interest was property of the Reorganized
Debtor (liquidating trust established by the Plan and administered
by the Trustee for the benefit of the creditors); the estate
remained a partner in Westbank Inns; and the Trustee was entitled
to distributions on account of the estate’s interest and was
probably entitled to purchase the interests of former partners
Ronald Case and Smith.
The district court agreed that the agreement passed through
bankruptcy, but held that, rather than the pass-through resulting
4
To the extent the Trustee maintains § 365(c)(1) should be
limited to personal service contracts or attorney contingent fee
contracts, we reject that contention. “[T]he express language of
§ 365(c) ... belies any limitation to personal service contracts”.
Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff
Airways, Inc.), 700 F.2d 935, 943 (5th Cir. 1983). Braniff held
that, under § 365(c), the district court had no authority to order
Braniff’s (debtor-in-possession) assumption of its defaulted lease
and its subsequent assignment of the lease to a third party without
the approval of the lessor, the Federal Aviation Administration
(FAA), because applicable law excused the FAA from accepting
performance from the assignee. Id.
20
in the agreement’s becoming part of the estate, the agreement was
unaffected by the bankruptcy proceedings and remained binding on
the Debtor, who alone was entitled both to claim rights to his
share of the distributions and to determine the validity of the
interest-transfers.5 At first blush, it obviously seems quite
contrary to the purpose of the Bankruptcy Code for the Debtor, not
his estate, to have the right to those distributions. That issue,
however, was not before the district court, and, as discussed
infra, is not before us, because the Trustee did not seek to
recover the economic value of the Debtor’s interest, including by
not suing the partnership.
a.
The Trustee contends that, even if he could not become a
partner, Louisiana partnership law permits a partner, without his
partners’ consent, to share his economic interest in the
partnership with a third person. Therefore, according to the
Trustee, the district court erred by holding: O’Connor’s economic
interest in the partnership is not property of the estate; and only
O’Connor can claim a right to the distributions. Appellees
acknowledged at oral argument that, for the estate, the Trustee may
be entitled to recover the value of the Debtor’s interest. On the
5
Contrary to the Trustee’s contention, the pass-through theory
adopted by the district court was raised by Appellees in district
court.
21
other hand, they contend: the Trustee did not seek such relief;
and, in any event, the partnership is the entity against whom such
an action must be brought.
The Trustee is correct that, under Louisiana law, “[a] partner
may share his interest in the partnership with a third person
without the consent of his partners”. LA. CIV. CODE art. 2812
(emphasis added). First Federal Savings & Loan Association of
Warner Robins v. Delta Towers, Ltd., 544 So. 2d 1331, 1342 (La.
App. 4th Cir.), writ denied, 548 So. 2d 1250 (La. 1989), states
that a partner’s “interest” in the partnership “usually means a
partners’ share of the partnership, not the assets of the
partnership”. In this regard, a partner’s sharing his interest
with a third person “cannot confer partner status upon the third
party. Unless he is a partner such third party has no right to
assert a claim against the remaining partners, or the partnership”.
Salsul Co. v. Kohlmeyer & Co., 354 So. 2d 711, 714 (La. App. 4th
Cir.) (emphasis added), rev’d on other grounds, 356 So. 2d 431 (La.
1978).
In any event, the Trustee’s contention ignores his not having
sued to recover the economic value of O’Connor’s interest. Again,
he sought only: (1) a declaration that the interest-transfers to
Appellees were void because they violated the agreement’s
restrictions; (2) a declaration of the Chapter 11 estate’s
proportionate ownership of the terminated interests of Ronald Case
22
and Smith; and (3) an accounting of the distributions Appellees
received as a result of their acquisitions of those interests.
Moreover, the Trustee did not sue the partnership. “A
partnership is a juridical person, distinct from its partners.”
LA. CIV. CODE art. 2801 (emphasis added). As such, it can be sued.
LA. CODE CIV. P. art. 737 (“A partnership has the procedural capacity
to be sued in its partnership name.”); see also Peck & Vantine v.
Hebert, 589 So. 2d 57, 59 (La. App. 1st Cir. 1991). Under
Louisiana law, the partnership would be an indispensable party in
any action by the Trustee to recover the value of O’Connor’s
interest. See LA. CODE CIV. P. art. 737 (“The partners of an
existing partnership may not be sued on a partnership obligation
unless the partnership is joined as a defendant.” (emphasis
added)); see also Brackley & Voelkel Const., Inc. v. 3421 Causeway,
Ltd., 712 So. 2d 716, 719 (La. App. 5th Cir. 1998).
The “partnership ... is primarily liable for its debts”. LA.
CIV. CODE art. 2817. Thus, regarding a partnership obligation, a
partnership creditor must first exhaust his rights against the
partnership before he can recover from the partners. See Brackley
& Voelkel, 712 So. 2d at 719; Koppers Co., Inc. v. Mackie Roofing
& Sheet Metal Works, 544 So. 2d 25, 26 (La. App. 4th Cir. 1989);
see also Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc.,
37 F.3d 193, 195-96 (5th Cir. 1994) (prior action in which
liability imposed on limited partnership not res judicata in
23
subsequent action against general partner to collect judgment
against partnership, even though general partner was party in prior
action, because general partner not sued in prior action for its
secondary liability as general partner), cert. denied, 514 U.S.
1065 (1995).
Again, the Trustee did not seek the value of O’Connor’s
interest, and did not sue the partnership. Therefore, whether
O’Connor’s economic interest is property of the bankruptcy estate
was not at issue, and the district court did not address it.
Instead, the district court held: the partnership agreement (as
opposed to O’Connor’s economic interest in the partnership) was not
assumable and, therefore, was not part of the Debtor’s estate; and,
because it was not, the Trustee had no rights under that agreement
to challenge the validity of the interest-transfers or to claim a
right to distributions made pursuant to them. Restated, the
district court addressed only the Trustee’s claimed right to
proceed as a partner under the partnership agreement, and did not
address the Trustee’s authority, under the Bankruptcy Code, to
proceed against the partnership to recover the value of the
Debtor’s interest in it. Accordingly, and contrary to the
Trustee’s assertion, the district court’s ruling does not create a
new category of exempt property or deprive the Chapter 11 estate of
valuable property rights.
24
b.
As discussed supra, the partnership agreement is not
assumable. The Bankruptcy Code does not address what happens to an
unassumable executory contract after a plan is confirmed in a
Chapter 11 case (or, for that matter, an assumable executory
contract which is neither assumed nor rejected in a Chapter 11
case). Under the former Bankruptcy Act, the Fourth Circuit held an
“executory contract ... remains in force ... until it is rejected,
and unless rejected, it passes with other property of the debtor to
the reorganized corporation”. Consol. Gas Elec. Light & Power Co.
of Baltimore v. United Rys. & Elec. Co. of Baltimore, 85 F.2d 799,
805 (4th Cir. 1936) (emphasis added), cert. denied, 300 U.S. 663
(1937).
There appears to be general agreement that the “pass-through”
theory continues to apply in Chapter 11 cases governed by the Code,
at least where an assumable executory contract is neither assumed
nor rejected, and the Reorganized Debtor continues to operate the
debtor’s pre-bankruptcy business. See, e.g., In re Day, 208 B.R.
358, 368 (Bankr. E.D. Pa. 1997) (“It has long been the rule in
bankruptcy that an executory contract that is neither assumed nor
rejected continues in place between the parties, passing through
the bankruptcy to the reorganized debtor.” (emphasis added));
Polysat, Inc. v. Union Tank Car Co. (In re Polysat, Inc.), 152 B.R.
886, 890 (Bankr. E.D. Pa. 1993) (“In a chapter 11 case, where a
25
debtor has failed to expressly assume or reject a[n] ... executory
contract, that ... contract will be unaffected by the bankruptcy
filing”. (emphasis added)); see also 3 COLLIER ON BANKRUPTCY, ¶
365.04[2][d] (15th ed. rev. 2001) (“If the debtor fails either to
assume or reject a contract by separate order or in its plan, it
appears that the contract would continue in existence.... [I]f the
debtor continues operating, arguably the contract passes through
the bankruptcy and remains a liability of the reorganized entity.”
(emphasis added)); 7 COLLIER ON BANKRUPTCY, ¶ 1123.02[2] (plan may
provide for assumption of executory contract, or “the contract may
‘ride through’ the plan without being affected” (emphasis added)).
In a case arising under the Code, our court has noted: “If an
executory contract is neither assumed nor rejected, it will ‘ride
through’ the proceedings and be binding on the debtor even after a
discharge is granted”. Century Indem. Co. v. Nat’l Gypsum Co.
Settlement Trust (Matter of Nat’l Gypsum Co.), 208 F.3d 498, 504
n.4 (5th Cir.) (emphasis added), cert. denied, ___ U.S. ___, 121 S.
Ct. 172 (2000).
The parties did not cite, nor did we find, any cases applying
the pass-through theory when, under § 365(c)(1), the executory
contract was not assumable. But, we see no reason why the theory
should not apply. This is because there is no difference between
a contract that, under § 365(c)(1), cannot be assumed, and one
26
which is neither assumed nor rejected. Each is simply unaffected
by the bankruptcy proceedings.
The Trustee contends that, under the pass-through theory, the
contract passes to the Reorganized Debtor, rather than to the pre-
bankruptcy Debtor (O’Connor). But here, the Reorganized Debtor is
a liquidating trust and the executory contract is a partnership
agreement; the contract could not pass through bankruptcy
unaffected if it passed to the Reorganized Debtor. It would be
affected: the Trustee would become a partner without the consent
of the non-debtor partners, constituting a de facto assumption
prohibited by § 365(c)(1). Cf. In re Cajun Elec. Power Coop.,
Inc., 230 B.R. 715 (Bankr. M.D. La. 1999). In that case, the
debtor, an electric power cooperative, had requirements contracts
with its members, by which it was to supply power to them. Id. at
724. Those contracts were neither assumed nor rejected in a
proposed plan. Id. at 734. Because the plan was for liquidation,
rather than reorganization, the bankruptcy court concluded that the
contracts could not pass through bankruptcy unaffected, because the
members would be without a source of electricity. Id. at 735.
Therefore, it held there was a de facto rejection. Id.
Accordingly, the district court correctly held that the
partnership agreement did not pass through bankruptcy to the
27
Reorganized Debtor. Instead, it passed through to the pre-
bankruptcy Debtor, unaffected by the bankruptcy proceedings.6
III.
For the foregoing reasons, the judgment of the district court
dismissing the Trustee’s claims is AFFIRMED. This case is REMANDED
to the district court with instructions to remand it to the
bankruptcy court for such further proceedings, if any, as may be
appropriate, consistent with this opinion.
AFFIRMED and REMANDED
6
It is not necessary to address Appellee Lincoln Case’s
alternative grounds for affirmance (acquisitive prescription and
good faith possession).
28
Stumpf v. McGee (In Re O'Connor)
Court: Court of Appeals for the Fifth Circuit
Date filed: 2001-07-16
Citations: 258 F.3d 392
Copy CitationsCombined Opinion