In re Schick
| Decision Date | 18 June 1999 |
| Docket Number | 96 B 43969(SMB),96 B 46282(SMB) and 96 B 45033(SMB).,Bankruptcy No. 96 B 42902(SMB) |
| Citation | 235 BR 318 |
| Parties | In re David SCHICK, Venture Mortgage Corp., and A & D Trading Group, L.L.C., Debtors. In re Venture Mortgage Fund, L.P., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Parker Chapin Flattau & Klimpl, LLP, New York City, Lee W. Stremba, of counsel, for Aurora Cassirer, as Trustee.
Curtis, Mallet-Prevost, Colt & Mosle, New York City, Steven J. Reisman, of counsel, for John F. Schmutz, as Trustee.
Kramer Levin Naftalis & Frankel, LLP, New York City, Kenneth H. Eckstein, Philip Bentley, Robert T. Schmidt, of counsel, for Objecting Partners.
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Stephen J. Shimshak, Robert D. Drain, Dana S. Safran, of counsel, for Dears Corp.
The estates of David Schick ("Schick") and Venture Mortgage Fund, L.P. ("VMFLP") own a combined 73.5% limited partner interest in 500 West End Avenue Owners, L.P. (the "Partnership"). The trustees of these estates propose to assume and assign their rights and obligations under the partnership agreement (the "Agreement") to Dears Corp. ("Dears"). A condition of the sale requires that Dears be admitted as a limited partner, with or without the other partners' consent. The general partner and remaining limited partners (collectively, the "Objectants") have objected to the condition, and refuse to consent to Dears' admission.
I conclude that the estates may sell their economic interests to Dears. They cannot, however, force the Objectants to admit Dears as a partner, unless the general partner has withheld its consent to Dears' admission in bad faith.1 I do not reach the issue of what specific legal rights and obligations can be assigned and delegated to Dears consistent with New York's version of the Revised Limited Partnership Act, N.Y. Partnership L. §§ 121-101, et seq. (McKinney Supp.1999) (the "Act") and the Bankruptcy Code.
The Partnership was created in March 1994 to acquire an apartment building on Manhattan's Upper West Side. The Agreement was signed by a single general partner and four limited partners, including VMFLP.2 The Agreement sets forth each partner's "Residual Interest," which determines the right to share in profits, losses and distributions. (See Agreement ¶¶ 5(r), 7(a), 8.) The management of the Partnership is vested exclusively in the general partner, (see id., ¶ 9), who may be removed for cause by partners holding 90% of the partnership interests. (See id., ¶ 11.)
The Agreement limits a partner's ability to transfer his interest. It states:
Except as otherwise provided in this Article 12, a Partner shall not assign ... his interest in the Partnership or any part thereof, without both (a) the consent of the General Partner which consent may be granted or withheld in the absolute discretion of the General Partner and (b) the consent of partners holding, in the aggregate, sixty (60%) percent in interest of all partnership interests. Any actual attempt at assignment ... without such consents shall be void and shall not bind the parties.
(Id., ¶ 12(a)(i).) The consent provision presents an obstacle to the trustees' efforts to sell the estates' limited partner interests. Dears has agreed to pay $6.2 million, all cash, but the sale contract imposes the following condition to closing:
the Partnership shall have consented in writing to the Purchaser becoming a limited partner of the Partnership, or the Bankruptcy Court shall have incorporated in the Sale Order ... provisions ... providing that the Purchaser shall upon the Closing become a limited partner of the Partnership and that Purchaser shall be entitled to have and to exercise all of the rights of Sellers in respect of the Partnership Interest.
(Joint Application For: (A) An Order to Show Cause Etc., dated Apr. 9, 1999, Exhibit A, ¶ 7.) The general partner has refused to consent to Dears' admission as a substitute limited partner.
The trustees have filed an application to approve this transaction under 11 U.S.C. § 363. The Objectants initially point out that the application should have been filed under section 365, which, they next argue, precludes the assumption and assignment of the type of interest that the trustees are attempting to transfer. The Objectants concede that the estates can sell their "economic interests" in the Partnership. (See Reply of West Ventures Inc. Etc., dated June 2, 1999 ("Objectants' Reply"), at 3.) They argue, however, that they cannot use section 365 to force the Objectants to accept Dears as a substitute limited partner in accordance with the condition stated in the sale contract.
The parties agree that the partnership agreement is an executory contract. (Compare Joint Memorandum of Law in Further Support of the Trustees' Joint Application Etc., dated May 21, 1999, at 13 ("Joint Mem.") with Objection of West Ventures, Inc. Etc., dated May 5, 1999, at 6.) Accordingly, they focus on the limitations on assumption and assignment contained in 11 U.S.C. § 365, and in particular, the interplay between sections 365(c)(1) and 365(f).
In order to assign the Agreement, the trustees must first assume it. 11 U.S.C. § 365(f)(2)(A).3 Section 365(f)(1) states the general rule regarding restrictions on assignment:
Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection....
Under section 365(f), therefore, the trustees may assume and assign the Agreement, notwithstanding a restriction on assignment contained in the partnership agreement or applicable law, unless section 365(c) precludes it. The latter section states in relevant part:
The use of "applicable law" in both provisions yields an apparent inconsistency — section 365(f) seems to give what section 365(c) then takes away. The courts have resolved this dilemma by ascribing different meanings to the phrase "applicable law" appearing in each subparagraph. Under section 365(f), "applicable law" refers to general restrictions on assignment, whereas the same phrase, appearing in section 365(c)(1), refers more specifically to nonbankruptcy law that excuses the nondebtor from accepting performance from or rendering performance to anyone other than the debtor. See, e.g., In re Catapult Entertainment, Inc., 165 F.3d 747, 752 (9th Cir.), petition for cert. filed, 67 U.S.L.W. 3749 (No. 98-1915); City of Jamestown, Tenn. v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 538 (11th Cir.1994); Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d 689, 695-96 (6th Cir.1992).4
In other words, section 365(c)(1) is concerned with non-assignable rights and non-delegable duties under non-bankruptcy law. See In re Magness, 972 F.2d at 699 (Guy, J., concurring). Generally, a right is not assignable if assignment would materially change the duty of the obligor, increase his burden or risk or impair the chance of receiving a return performance or reduce its value. John D. Calamari & Joseph M. Perillo, The Law of Contracts § 18-10, at 735 (3rd ed. 1987) ("Calamari & Perillo"); Restatement (Second) of Contracts § 317(2)(a) (1981); U.C.C. § 2-210(2). A duty is not delegable if the obligee has relied on the obligor's "personality" (i.e., his honesty, skill, reputation, character, ability, wisdom or taste), the duty is based upon a close personal relationship or the obligor has promised to act in good faith or use his best efforts. Calamari & Perillo § 18-28, at 760-61; see U.C.C. § 2-210 (). Faced with a state law restricting assignment (contractual restrictions are immaterial under § 365(c)), a court must inquire into its rationale and uphold the restriction under section 365(c) if the identity of the contracting party is material to the agreement. In re Catapult Entertainment, Inc., 165 F.3d at 752.
As this case concerns statutory restrictions on the assignment5 of limited partnership interests, we turn to the relevant partnership law. Section 121-101(m) of the Act defines a "partnership interest" to mean the partner's share of profits and losses and his right to receive distributions. Subject to contrary contractual restrictions (which are immaterial under section 365(c)), a partnership interest is assignable. Act, § 121-702(a)(1). An assignment does not, however, entitle the assignee to become or to exercise the rights of a partner. Id., § 121-702(a)(2); see id., § 121-704(a) ().6 Rather, it only entitles the assignee to receive distributions and allocations of profits and losses. Id. § 121-702(a)(3); a...
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