In re Gibson
| Decision Date | 17 December 1986 |
| Docket Number | Bankruptcy No. 85-08266. |
| Citation | 67 BR 957 |
| Parties | In re Thomas R. GIBSON d/b/a The Miller Motel Company, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Sander H. Simen, Flint, Mich., for debtor.
Kittredge R. Klapp, Flint, Mich., for NBD Mortgage Company.
The question is this: may a limited partnership be dissolved and terminated and the business continued by the lone remaining partner, by individually settling with the limited partners and not by liquidating the assets of the partnership? The facts of this case are not in dispute.
On April 1, 1972, a limited partnership, called The Miller Motel Company, was created, consisting of Thomas R. Gibson, the general partner, and Russell and Josephine Gibson, Thomas Gibson's parents, the limited partners. The partnership was duly formed according to law and accorded a 25% interest to each limited partner and a 50% interest to Thomas R. Gibson. The business of the partnership was the operation of a Best Western Motel in Flint, Michigan. The partnership was to run until December 31, 1972 and thereafter from year to year until terminated.1 Although the partnership agreement provided for the continuation of the business upon certain contingencies, nothing therein explicitly authorized the continuation of the business upon the death or withdrawal of all the limited partners.
On September 27, 1976, NBD Mortgage Company's predecessor in interest (hereafter "NBD") loaned $1.1 million to The Miller Motel Company. Security for the loan was a mortgage on partnership real estate, the motel itself. Thereafter, the composition of the partnership began to change. In 1977, Russell Gibson died, leaving his 25% interest to his son, Thomas; as a result, Thomas had a 75% interest in the partnership. In February, 1980, Gibson traded assets he held individually in a McDonald's restaurant franchise to his stepmother, Josephine Gibson, in return for her 25% interest in the partnership. This act left Thomas R. Gibson as 100% owner of the partnership, the fact of which was contemporaneously communicated to NBD. However, no certificate of cancellation of the partnership was ever filed.
The Miller Motel Company defaulted in its mortgage obligations with NBD and so, on December 9, 1985, NBD had a sheriff sell the motel in foreclosure. NBD was also the purchaser of the property. One hour prior to the sale, however, Thomas R. Gibson, attempting to stave off the foreclosure, filed his individual petition for relief under Chapter 11 of the Bankruptcy Code.
NBD filed a "motion to strike assets"2 from the debtor's schedules. The basis of NBD's motion was that the limited partnership was still in existence because it never wound up its business as required by Section 30 of the Uniform Partnership Act, Mich.Comp.Laws § 449.30; Mich.Stat.Ann. § 20.30; therefore the partnership continues to exist and the individual debtor's bankruptcy estate possessed only an interest in the partnership itself and not in its only asset, the motel property. It claims that for a winding up to have occurred, the assets of the partnership should have been sold and the proceeds distributed, first to creditors and only later to partnership interests. Since the property was never property of this estate, it argues, the automatic stay imposed by 11 U.S.C. § 362(a) never prevented the foreclosure sale, and so the sheriff's sale of the property to NBD is final and unavoidable in bankruptcy.3 In essence, NBD says that when Mrs. Gibson decided to withdraw, she and her stepson were powerless to terminate the partnership by mere settlement of their accounts, but were required by law to first satisfy all creditors in cash, even if to do so would require liquidation of the assets of the business.
Although both parties argued its provisions, as all of the material events in this case occurred before its January 1, 1983 effective date, the Michigan Revised Uniform Limited Partnership Act, Mich.Comp. Laws § 449.1101 et. seq.; Mich.Stat.Ann. § 20.1101 et. seq., is inapplicable here. This is despite the fact that § 1105(a) of the revised act states that it applies, with certain exceptions, to any "limited partnership in existence on the effective date of this act," because The Miller Motel Company as a limited partnership was not "in existence" on the effective date of the revised act. Instead, the former Uniform Limited Partnership Act as adopted in Michigan, Mich.Comp.Laws § 449.201 et. seq.; Mich.Stat.Ann. § 20.51 et.seq. (hereafter the "ULPA"), applies. Moreover, the Uniform Partnership Act, Mich.Comp.Laws § 449.1 et. seq.; Mich.Stat.Ann. § 20.1 et. seq. (hereafter the "UPA"), applies "to limited partnerships except in so far as the statutes relating to such partnerships are inconsistent" therewith. UPA § 6(2).
Because a limited partnership is defined in § 1 of the ULPA as "a partnership formed by 2 or more persons . . . having as members 1 or more general partners and 1 or more limited partners. . . .", when Mrs. Gibson withdrew in 1980, after her husband's death, the partnership was dissolved as a matter of law, something which both parties concede.
As properly noted by NBD, though, dissolution of a limited partnership does not terminate it; instead, the limited partnership continues to exist for the purpose of winding up its affairs. UPA § 30.4 However, it goes further, arguing that "in order to wind up the partnership, the creditors would first have to be paid," citing for this proposition the UPA § 40. NBD's Brief in Support of Motion, p. 5.
Section 40 of the UPA, in pertinent part, reads as follows:
(Emphasis added). Two important things must be said about § 40 of the Uniform Partnership Act. First, § 40(b) would apply only if the partnership were to be discontinued and liquidated, for if the partners agreed otherwise, (something the preamble to the section clearly contemplates), no need for "payment" exists. Thus, where, as here, the withdrawing partner has agreed with the remaining partners to a winding up different from the rules set out in the statute, the rules in § 40 are inapplicable, and the business can be continued. In re Streck's Estate, 35 Ill.App.2d 473, 183 N.E.2d 26 (1962); Medd v. Medd, 291 N.W.2d 29 (Iowa 1980); Gibson v. Deuth, 270 N.W.2d 632, 635 (Iowa 1978); Gianakos v. Magiros, 238 Md. 178, 208 A.2d 718 (1965); Maras v. Stilinovich, 268 N.W.2d 541 (Minn.1978); Wallner v. Schmitz, 239 Minn. 93, 57 N.W.2d 821 (1953); M. & C. Creditors Corp. v. Pratt, 172 Misc.2d 695, 17 N.Y.S.2d 240 (1938); Lonning v. Kurtz, 291 N.W.2d 438 (N.D. 1980); Wathen v. Brown, 200 Pa.Super. 620, 189 A.2d 900 (1963); Cauble v. Handler, 503 S.W.2d 362, 366 (Tex.Civ.App. 1973); Stroh v. Dumas, 117 Vt. 13, 84 A.2d 408 (1951); In re Trust Estate of Schaefer, 91 Wis.2d 360, 283 N.W.2d 410 (1979).5
The second, and more obvious difficulty with applying § 40 of the UPA is that the ULPA has its own sections which control. Section 16 of the ULPA provides that a limited partner may receive from the general partner or out of the partnership property the return of his or her capital contribution if:
(Emphasis added). Thus the ULPA contemplates the payment of cash to a withdrawing limited partner so long as the other parties consent, the partnership is solvent notwithstanding the withdrawal of the capital and the certificate of limited partnership reflects the fact of the withdrawal.6 Here, all prerequisites are met, except for the cancellation of the certificate.
Gibson claims, and NBD does not contest, that when Mrs. Gibson withdrew, there were sufficient assets in the partnership to pay all partnership liabilities.7 Likewise, it is uncontested that all partners consented to her withdrawal and receipt of the payment from Mr. Gibson, the general partner. Of what effect then is the failure to cancel the certificate of limited partnership?
If the certificate is not executed by a person required to do so, a person desiring it may petition the appropriate circuit court to direct its cancellation. ULPA § 25(3). We assume that the purpose behind filing a certificate of cancellation is to provide notice that the limited partnership no longer exists, and could be for no one's benefit other than the former partners.8 Although we are dubious of the proposition that an outsider has rights out of a partnership's failure to file a certificate of cancellation of limited partnership, we need not decide the question, for in this case, NBD clearly had notice that Gibson was acting as a sole proprietor for many years before the foreclosure was...
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