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As has been discussed in prior Legal Intelligencerarticles, bankruptcy law and procedure are constantly intertwined with, and striking against, the law of other disciplines. For example, there are seemingly endless discussions of the effect of bankruptcy law on debtors’ and creditors’ rights under tax, real estate and other areas of the law. In most instances, a major question is whether the U.S. Bankruptcy Code will supersede (or perhaps, more accurately, undercut) the answers provided by non-bankruptcy law. In short, it is usually left to the bankruptcy courts to determine what will be the result of this ongoing interplay. In certain instances, the Bankruptcy Code explicitly alters the non-bankruptcy status quo, such as avoiding ipso facto clauses and providing for extensions of state court statutes of limitations. In most of those cases, the courts are determining the result after applying a “bankruptcy gloss” to non-bankruptcy law. In a decision released on Sept. 22, the 3rd U.S. Circuit Court of Appeals, in In re: Woskob, had to determine whether a Chapter 7 individual debtor had timely exercised an option to purchase a partnership interest from her deceased partner’s estate. BACKGROUND In 1996, Leah and Victor Woskob, then husband and wife, formed the Legends Partnership “for purposes of constructing, owning and operating the Legends, an apartment building in State College, Pennsylvania.” At the time of the formation, Leah and Victor each held a 50 percent interest. After formation of the partnership, Leah and Victor hired A&W Sons to build and manage the partnership property. Not long thereafter, in early 1997, the Woskobs separated and a divorce action in the Philadelphia Court of Common Pleas followed. During the course of the proceedings, Victor barred his estranged wife from receipt of any partnership distributions. However, Leah protested this action and in April 1997, the Court of Common Pleas awarded Leah the “exclusive right to manage and derive income from” the partnership. Thereafter, she terminated A&W and replaced that entity with a different management company. Contemporaneously therewith, Victor filed a Chapter 11 bankruptcy petition, and claimed that he owned 50 percent of the partnership. However, Victor withdrew his bankruptcy petition thereafter. In the tax returns for the partnership filed by Leah, she listed Victor and herself as the general partners. In January 1999, Victor was killed in a car accident, and left a will naming his four children as his beneficiaries and his parents as his executors. Within 15 days after Victor’s death, Leah notified Victor’s parents that she was dissolving the partnership and electing to purchase her late husband’s interest in the partnership, pursuant to the buy/sell provisions of the partnership agreement. Their partnership agreement had buy/sell and dissolution provisions, as follows:
Buy-sell on death of partner: The surviving partner has the option to dissolve the partnership on the death of a partner. The surviving partner shall have the right within 90 days from the date of death of the deceased partner to purchase the interest of the deceased partner in the partnership and to pay to the personal representative of the deceased partner the value of that interest as provided in … this agreement. … The estate of the deceased partner shall be obligated to sell his or her partnership interest as provided in this agreement. … If the surviving partner does not elect to purchase the interest of the deceased partner, the partnership shall terminate. Option to purchase terminated interest: On dissolution of the partnership by the withdrawal or other act of a partner, the remaining partner, on written notice to the other partner within 30 days of the dissolution, may continue the partnership business by purchasing the interest of the other partner in the assets and goodwill of the partnership. The remaining partner shall have the option to purchase the interest of the withdrawing partner by paying to this partner or the partner’s personal representative the value of the interest determined as provided in … this agreement.

Leah obtained a written opinion from the partnership’s accountant and indicated to Victor’s parents that his interest in the partnership was negative $34,000, and therefore, she would not be making payment to the estate for the interest that she still desired to obtain. Predictably, Victor’s parents opposed the relief. Following that opposition, in April 1999 Leah filed a complaint for declaratory judgment action “seeking an order declaring that the estate’s interest in the partnership terminated because it had been purchased by Leah pursuant to the terms of the partnership agreement.” Victor’s parents filed a similar complaint in that court “alleging that the partnership had been dissolved in 1997 prior to Victor’s death in 1999 … [and therefore] they requested the appointment of a receiver to wind up the affairs of the partnership, a complete accounting of the partnership affairs and the fixing of damages for amounts allegedly to have been wrongfully taken from the partnership by Leah.” CHAPTER 11 FILING Leah then filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Middle District of Pennsylvania and removed the common pleas actions to that court. Victor’s parents contended that Leah’s attempt to purchase Victor’s interest after his death in 1999 was untimely because the Legends Partnership had already been dissolved in 1997 by the partners’ exclusions and expulsions of each other and/or Victor’s bankruptcy filing. If the Woskobs were right that the partnership had been dissolved in 1997, Leah’s attempt to purchase the partnership interest would have been untimely under the option to purchase provisions of the partnership agreement. The bankruptcy court agreed with Leah and found that “the partnership was dissolved only upon Victor’s death in 1999, and that [therefore] Leah properly exercised her option to purchase Victor’s interest in the partnership.” On appeal by the Woskobs, in the District Court for the Middle District of Pennsylvania, Judge James F. McClure reversed the opinion of the bankruptcy court and found that the debtor had not timely exercised her option. The district court disagreed with the bankruptcy court on the date of dissolution issue and found that “any one of the three events cited by the Woskobs was sufficient to cause the dissolution of the partnership in 1997 [and] accordingly … Leah’s attempt to exercise her option to purchase Victor’s interest in 1999 was untimely.” Leah appealed that decision to the 3rd Circuit. 3RD CIRCUIT REVIEW The 3rd Circuit observed that it was “review[ing] the bankruptcy court’s factual findings only for clear error, but exercis[ing] plenary review over any legal determinations.” Of course, the court was applying Pennsylvania partnership law. The appeals court looked to the Uniform Partnership Act and its definition of “dissolution” as “the change in relation of the partners caused by any partner ceasing to be associated and the carrying on, as distinguished from the winding up, of the business.” Therefore, the court found that “the timeliness of Leah’s attempt to exercise her option to buy Victor’s interest in the Legends Partnership under the partnership agreement depends upon the partnership’s date of dissolution.” The court went on to find that “dissolution can be caused by the decree of court or automatically through operation of law.” “When dissolution occurs through operation of law and without the need for a judicial decree, the date of dissolution is the date of the first effective act of dissolution. … When a partnership is dissolved by decree of court, the date of dissolution is ordinarily the date upon which the court decrees the dissolution, unless the court specifies otherwise.” The court found that “there is no doubt that the partnership was eventually dissolved through operation of law. If the partnership was not dissolved before Victor’s death, it was certainly dissolved upon his death” pursuant to the Uniform Partnership Act provision “that the ‘death of any partner’ causes the dissolution of a partnership.” Therefore, the court had to determine if the partnership had been dissolved prior to Victor’s death. The appeals court then reviewed the Woskobs’ three alleged pre-death termination events, and rejected each as a viable cause of dissolution. EXCLUSIONS AND EXPULSIONS The court rejected this as a basis for dissolution, based on the Uniform Partnership Act which “makes clear that not all partner expulsions are sufficient to cause automatic dissolution through operation of law. Only those expulsions that are in accordance with an expulsion power confirmed by the partnership agreement will cause an immediate dissolution.” Thus, in applying the facts and analyzing the facts of this case, the court found that “because of the alleged acts of exclusion from the Legends Partnership by Leah and Victor were not in accordance with an expulsion power explicitly confirmed by the Partnership Agreement, they did not cause the dissolution of the partnership. At the very most, such exclusionary acts could have served as grounds for dissolution if either Leah or Victor had applied for a dissolution by decree of court.” BANKRUPTCY FILING As one might predict, the appeals court rejected Victor’s bankruptcy filing as a basis for dissolution of the partnership, but not without some analysis of the provisions of the Bankruptcy Code. Under this argument, the Woskobs argued that “even if an exclusion of Leah or Victor did not cause the dissolution of the Legends Partnership, the partnership was dissolved when Victor filed a bankruptcy petition.” The court observed that “Pennsylvania law appears to provide a clear answer [in that � 8353 of the partnership statute provides that] the bankruptcy of a partner … does in fact cause the automatic dissolution of the partnership.” As the court indicated, it “must also consider … the role of federal bankruptcy law and the impact of its interplay with state partnership law.” The court looked at Section 365(e)(1) of the Bankruptcy Code, which provides that: “Notwithstanding a provision in an executory contract … or in applicable law, an executory contract … of the debtor may not be terminated or modified … at any time after the commencement of the case solely because of a provision in such contract … that is conditioned on … the commencement of a case under this title.” In fact, the court found that there was “no evidence whatsoever that Leah objected to having Victor remain as her general partner after he had filed his bankruptcy petition … and that Leah, with full knowledge that Victor had filed for bankruptcy, continued to regard Victor as her general partner.” The court found that 365(e)(1) was applicable to the case, and that the state law provision regarding the effect of a bankruptcy filing was of no effect. Therefore, the court rejected Victor’s parents’ contentions and found that the partnership was dissolved when Victor died on Jan. 12, 1999. Thus, the only question was whether Leah had timely exercised her option to purchase Victor’s partnership interest from his estate. That issue is now back before the bankruptcy court. Paul J. Brenman is a Partner in the Corporate Department of Wolf, Block, Schorr and Solis-Cohen LLP (www.wolfblock.com)in Philadelphia and head of the firm’s Bankruptcy Practice Group. If you are interested in submitting an article to law.com, please click herefor our submission guidelines.

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